U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES
EXCHANGE ACT OF 1934
Fauquier Bankshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1288193
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10 Court House Square, Warrenton, Virginia 20186
(Address of principal executive offices) (Zip Code)
(540) 347-2700
(Registrant's telephone number)
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, par value $3.13 per share
(Title of Class)
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TABLE OF CONTENTS
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ITEM 1. BUSINESS.............................................................................................3
ITEM 2. FINANCIAL INFORMATION...............................................................................11
ITEM 3. PROPERTIES..........................................................................................39
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................39
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS....................................................................41
ITEM 6. EXECUTIVE COMPENSATION..............................................................................45
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................50
ITEM 8. LEGAL PROCEEDINGS...................................................................................51
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON BANKSHARES'COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................................51
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.............................................................52
ITEM 11. DESCRIPTION OF BANKSHARES'SECURITIES TO BE REGISTERED...............................................52
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS...........................................................55
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................F-1
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE .........................................................................................56
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS...................................................................57
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ITEM 1. BUSINESS
GENERAL
Fauquier Bankshares, Inc. ("Bankshares") was incorporated under the laws of the
Commonwealth of Virginia on January 13, 1984. Bankshares is a registered bank
holding company and owns all of the voting shares of The Fauquier Bank ("TFB").
Bankshares engages in its business through TFB, a Virginia state-chartered bank
that commenced operations in 1902. Bankshares has no significant operations
other than owning the stock of TFB. Bankshares has issued and outstanding
1,823,129 shares of common stock, par value $3.13 per share, held by 430 holders
of record on March 11, 1999.
TFB has six full service branch offices located in the Virginia communities of
Warrenton, Catlett, The Plains, Manassas and New Baltimore, in addition to the
main office branch located in Warrenton, Virginia. The executive offices of
Bankshares and the main office of TFB are located at 10 Court House Square,
Warrenton, Virginia 20186.
THE FAUQUIER BANK
TFB's general market area principally includes Fauquier County and neighboring
communities and is located approximately sixty (60) miles southwest of
Washington, D.C.
TFB provides a range of consumer and commercial banking services to individuals,
businesses and industries. The deposits of TFB are insured up to applicable
limits by the Bank Insurance Fund of the Federal Deposit Insurance Fund. The
basic services offered by TFB include: demand interest bearing and non-interest
bearing accounts, money market deposit accounts, NOW accounts, time deposits,
safe deposit services, credit cards, cash management, direct deposits, notary
services, money orders, night depository, traveler's checks, cashier's checks,
domestic collections, savings bonds, bank drafts, automated teller services,
drive-in tellers, and banking by mail. In addition, TFB makes secured and
unsecured commercial and real estate loans, issues stand-by letters of credit
and grants available credit for installment, unsecured and secured personal
loans, residential mortgages and home equity loans, as well as automobile and
other consumer financing. TFB provides automated teller machine (ATM) cards, as
a part of the Honor and Plus ATM networks, thereby permitting customers to
utilize the convenience of larger ATM networks.
TFB operates an Investments and Trust Services Division that was established in
1919. It is staffed with nine professionals that provide personalized services
that include investment management, trust, estate settlement, retirement, and
brokerage services. During 1998, managed assets increased by $ 9.3 million to
$122,141,252 or 8.2%. Similarly, revenue grew by $33,500 to $555,650 or 6.4%.
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,
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and borrowings from the Federal Home Loan Bank of Atlanta. The principal
expenses of TFB are the interest paid on deposits, and operating and general
administrative expenses.
As is the case with banking institutions generally, TFB's operations are
materially and significantly influenced by general economic conditions and by
related monetary and fiscal policies of financial institution regulatory
agencies, including the Board of Governors of the Federal Reserve System
("Federal Reserve"). As a Virginia-chartered bank and a member of the Federal
Reserve, TFB is supervised and examined by the Federal Reserve and the State
Corporation Commission ("SCC"). Interest rates on competing investments and
general market rates of interest influence deposit flows and costs of funds.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financing may be offered and other factors affecting local demand and
availability of funds. TFB faces strong competition in the attraction of
deposits (its primary source of lendable funds) and in the origination of loans.
See "Competition."
As of December 31, 1998, Bankshares had total consolidated assets of $220
million, total consolidated deposits of $179.2 million, and total consolidated
shareholders' equity of $21.2 million.
LENDING ACTIVITIES
TFB offers a range of lending services, including real estate, consumer and
commercial loans, to individuals as well as small to medium sized businesses and
other organizations that are located in or conduct a substantial portion of
their business in TFB's market area. TFB's total loans at December 31, 1998 were
$164.5 million, or 74.8% of total assets. The interest rates charged on loans
vary with the degree of risk, maturity, and amount of the loan, and are further
subject to competitive pressures, money market rates, availability of funds, and
government regulations. TFB has no foreign loans or loans for highly leveraged
transactions.
TFB's primary market area consists of Fauquier and Prince William Counties
Virginia and the surrounding communities. There is no assurance that this area
will experience economic growth. Adverse conditions in any one or more of the
industries operating in Fauquier or Prince William Counties or a slow-down in
general economic conditions could have an adverse effect on Bankshares (and
TFB).
TFB's loans are concentrated in three major areas: commercial loans, real estate
loans, and consumer loans. Approximately 10.3% of TFB's loan portfolio at
December 31, 1998 consisted of commercial loans. The majority of TFB's loans are
made on a secured basis. As of December 31, 1998, approximately 68.5% of the
loan portfolio consisted of loans secured by mortgages on real estate.
TFB's commercial loans include loans to individuals and small-to-medium sized
businesses located primarily in Fauquier and Prince William Counties for working
capital, equipment purchases, and various other business purposes. Equipment or
similar assets secure a majority of TFB's commercial loans, but these loans may
also be made on an unsecured basis. Commercial loans may be made at variable or
fixed rates of interest. Commercial lines of credit are typically
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granted on a one-year basis, with loan covenants and monetary thresholds. Other
commercial loans with terms or amortization schedules of longer than one year
will normally carry interest rates which vary with the prime lending rate and
other financial indexes and will become payable in full and are generally
refinanced in three to five years.
TFB's real estate loans are secured by mortgages and consist primarily of loans
to individuals and businesses for the purchase, improvement of or investment in
real estate and for the construction of single-family residential units or the
development of single-family residential building lots. These real estate loans
may be made at fixed or variable interest rates. TFB generally does not make
fixed-rate commercial real estate loans for terms exceeding five years. Loans in
excess of three years are generally adjustable. TFB's residential real estate
loans generally are repayable in monthly installments based on up to a 30-year
amortization schedule with variable and fixed interest rates. However, all
fixed-rate residential mortgages with a final maturity greater than ten years
are immediately sold into the secondary market.
TFB's consumer loan portfolio consists primarily of loans to individuals for
various consumer purposes, but includes some business purpose loans which are
payable on an installment basis. The majority of these loans are for terms of
less than five years and are secured by liens on various personal assets of the
borrowers, but consumer loans may also be made on an unsecured basis. Consumer
loans are made at fixed and variable interest rates, and are often based on up
to a five-year amortization schedule. For additional information regarding TFB's
loan portfolio, see "Financial Information."
Loan originations are derived from a number of sources, including direct
solicitation by TFB's loan officers, existing customers and borrowers,
advertising and walk-in customers.
Certain credit risks are inherent in making loans. These include prepayment
risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers. In particular, longer maturities
increase the risk that economic conditions will change and adversely affect our
ability to collect. TFB attempts to minimize loan losses through various means.
In particular, on larger credits, TFB generally relies on the cash flow of a
debtor as the source of repayment and secondarily on the value of the underlying
collateral. In addition, TFB attempts to utilize shorter loan terms in order to
reduce the risk of a decline in the value of such collateral.
DEPOSIT ACTIVITIES
Deposits are the major source of TFB's funds for lending and other investment
activities. TFB considers the majority of its regular savings, demand, NOW and
money market deposit accounts to be core deposits. These accounts comprised
approximately 76.2% of TFB's total deposits at December 31, 1998. Approximately
23.8% of TFB's deposits as of December 31, 1998 were certificates of deposit.
Generally, TFB attempts to maintain the rates paid on its deposits at a
competitive level. Time deposits of $100,000 and over made up approximately 6.0%
of TFB's total deposits as of December 31, 1998 and pay interest at the same
rates as certificates of less than $100,000. The majority of the deposits of TFB
are generated from Fauquier and Prince
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William Counties. TFB does not accept brokered deposits. For additional
information regarding TFB's deposit accounts, see "Financial Information."
INVESTMENTS
TFB invests a portion of its assets in U.S. Treasury and U.S. Government
corporation and agency obligations, state, county and municipal obligations,
mutual funds, FHLB stock, and equity securities. TFB's investments are managed
in relation to loan demand and deposit growth, and are generally used to provide
for the investment of excess funds at reduced yields and risks relative to
yields and risks of the loan portfolio, while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits. For additional
information relating to TFB's investments, see "Financial Information."
GOVERNMENT SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION. Bankshares is a one-bank holding company,
registered with the Federal Reserve under the Bank Holding Company Act of 1956
("BHC Act"). As such, Bankshares is subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve. Bankshares is required to furnish to the Federal Reserve an annual
report of its operations at the end of each fiscal year, and such additional
information as the Federal Reserve may require pursuant to the BHC Act.
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
total voting shares of the bank, (ii) it or any of its subsidiaries, other than
a bank, may acquire all or substantially all of the assets of the bank, or (iii)
it may merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anti-competitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy and consideration of convenience and needs issues including the
parties' performance under the Community Reinvestment Act of 1977 (the "CRA"),
both of which are discussed below.
The BHC Act generally prohibits Bankshares from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities
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determined by the Federal Reserve to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In determining
whether a particular activity is permissible, the Federal Reserve must consider
whether the performance of such an activity reasonably can be expected to
produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interests, or unsound banking practices. For example, factoring
accounts receivable, acquiring or servicing loans, leasing personal property,
conducting discount securities brokerage activities, performing certain data
processing services, acting as agent or broker in selling credit life insurance
and certain other types of insurance in connection with credit transactions, and
performing certain insurance underwriting activities all have been determined by
the Federal Reserve to be permissible activities of bank holding companies.
Despite prior approval, the Federal Reserve has the power to order a bank
holding company or its subsidiaries to terminate any activity or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
Banks are subject to the provisions of the CRA. Under the terms of the CRA, the
appropriate federal bank regulatory agency is required, in connection with its
examination of a bank, to assess such bank's record in meeting the credit needs
of the community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office, or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.
BANK REGULATION. TFB is chartered under the laws of the Commonwealth of
Virginia. The Federal Deposit Insurance Corporation (the "FDIC") insures its
deposits to the extent provided by law. TFB is subject to comprehensive
regulation, examination and supervision by the Federal Reserve and to other laws
and regulations applicable to banks. Such regulations include limitations on
loans to a single borrower and to its directors, officers and employees;
restrictions on the opening and closing of branch offices; the maintenance of
required capital and liquidity ratios; the granting of credit under equal and
fair conditions; and the disclosure of the costs and terms of such credit. State
regulatory authorities also have broad enforcement powers over TFB, including
the power to impose fines and other civil or criminal penalties and to appoint a
receiver in order to conserve the assets of any such institution for the benefit
of depositors and other creditors.
Under federal law, federally insured banks are subject, with certain exceptions,
to certain restrictions on any extension of credit to their parent holding
companies or other affiliates, on investment in the stock or other securities of
affiliates, and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging
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in certain tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted. FIRREA contains major regulatory reforms, stronger
capital standards for savings and loan associations and stronger civil and
criminal enforcement provisions. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC insured institution in danger of default.
In 1991, the FDIC Improvement Act of 1991 ("FDICIA") was enacted. FDICIA made a
number of reforms addressing the safety and soundness of deposit insurance
funds, supervision, accounting, and prompt regulatory action, and also
implements other regulatory improvements. Annual full-scope, on-site
examinations are required of all insured depository institutions. The cost for
conducting an examination of an institution may be assessed to that institution,
with special consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks also are precluded
from engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. FDICIA also re-codified current law restricting extensions of
credit to insiders under the Federal Reserve Act.
DIVIDENDS. Dividends from TFB constitute the primary source of funds for
dividends to be paid by Bankshares. There are various statutory and contractual
limitations on the ability of TFB to pay dividends, extend credit, or otherwise
supply funds to Bankshares, including the requirement under Virginia banking
laws that cash dividends only be paid out of undivided profits and only if such
dividends would not impair the paid-in capital of TFB. The Federal Reserve also
has the general authority to limit the dividends paid by bank holding companies
and state member banks, if such payment may be deemed to constitute an unsafe
and unsound practice. The Federal Reserve Board has indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fund fully the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition. TFB does not expect any of these laws, regulations
or policies to materially impact its ability to pay dividends.
EFFECT OF GOVERNMENTAL POLICIES. The earnings and business of Bankshares and TFB
are effected by the policies of various regulatory authorities of the United
States, especially the Federal Reserve. The Federal Reserve, among other things,
regulates the supply of credit and deals with general economic conditions within
the United States. The instruments of monetary policy employed by the Federal
Reserve for those purposes influence in various ways the overall level of
investments, loans, other extensions of credits, and deposits, and the interest
rates paid on liabilities and received on assets.
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ENFORCEMENT POWERS. Congress has provided the Federal Reserve and the FDIC with
an array of powers to enforce laws, rules, regulations and orders. Among other
things, the agencies may require that institutions cease and desist from certain
activities, may preclude persons from participating in the affairs of insured
depository institutions, may suspend or remove deposit insurance, and may impose
civil money penalties against institution-affiliated parties for certain
violations.
MAXIMUM LEGAL INTEREST RATES. Like the laws of many states, Virginia law
contains provisions on interest rates that may be charged by banks and other
lenders on certain types of loans. Numerous exceptions exist to the general
interest limitations imposed by Virginia law. The relative importance of these
interest limitation laws to the financial operations of TFB will vary from time
to time, depending on a number of factors, including conditions in the money
markets, the costs and availability of funds, and prevailing interest rates.
CHANGE OF CONTROL. Federal law restricts the amount of voting stock of a bank
holding company and a bank that a person may acquire without the prior approval
of banking regulators. The overall effect of such laws is to make it more
difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of Bankshares may be less likely to
benefit from the rapid increases in stock prices that may result from tender
offers or similar efforts to acquire control of other companies. Federal law
also imposes restrictions on acquisitions of stock in a bank holding company and
a state bank. Under the federal Change in Bank Control Act and the regulations
thereunder, a person or group must give advance notice to the Federal Reserve
before acquiring control of any bank holding company. Upon receipt of such
notice, the Federal Reserve and the OCC, as the case may be, may approve or
disapprove the acquisition. The Change in Bank Control Act creates a rebuttable
presumption of control if a member or group acquires a certain percentage or
more of a bank holding company's or bank's voting stock, or if one or more other
control factors set forth in the act are present.
INSURANCE OF DEPOSITS. TFB's deposit accounts are insured by the FDIC up to a
maximum of $100,000 per insured depositor. The FDIC issues regulations, conducts
periodic examinations, requires the filing of reports and generally supervises
the operations of its insured banks. Any insured bank that is not operated in
accordance with or does not conform to FDIC regulations, policies and directives
may be sanctioned for non-compliance. Proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank engaging in
unsafe and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate insurance of accounts
pursuant to procedures established for that purpose.
CAPITAL REQUIREMENTS. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should
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maintain all ratios well in excess of the minimums. The current guidelines
require all bank holding companies and federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common stockholders' equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
excludes the allowance for loan and lease losses. Tier 2 capital includes the
excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets. As of December 31, 1998 (i)
Bankshares' Tier 1 and total risk-based capital ratios were 13.1% and 14.3%,
respectively, and (ii) TFB's Tier 1 and total risk-based capital ratios were
13.2% and 14.3%, respectively.
FDICIA contains "prompt corrective action" provisions pursuant to which banks
are to be classified into one of five categories based upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require (subject to certain exceptions) the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"significantly undercapitalized" or "critically undercapitalized".
The FDIC has issued regulations to implement the "prompt corrective action"
provisions of FDICIA. In general, the regulations define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level for any capital measures; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The FDIC also, after an opportunity for
a hearing, has authority to downgrade an institution from "well capitalized" to
"adequately capitalized" or to subject an "adequately capitalized" or
"under-capitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. As of December 31, 1998, TFB had
a total risk-based capital ratio of 14.3%, a Tier 1 risk-based capital ratio of
13.2%, and a leverage ratio of 9.8%.
Additionally, FDICIA requires, among other things, that (i) only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and (ii) the appropriate federal 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.
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COMPETITION
Bankshares encounters strong competition both in making loans and in attracting
deposits. The deregulation of the banking industry and the widespread enactment
of state laws which permit multi-bank holding companies as well as an increasing
level of interstate banking have created a highly competitive environment for
commercial banking. In one or more aspects of its business, TFB competes with
other commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries. Most of these competitors, some
of which are affiliated with bank holding companies, have substantially greater
resources and lending limits, and may offer certain services that TFB does not
currently provide. In addition, many of TFB's non-bank competitors are not
subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks. Recent federal and state legislation has
heightened the competitive environment in which financial institutions must
conduct their business, and the potential for competition among financial
institutions of all types has increased significantly.
To compete, TFB relies upon specialized services, responsive handling of
customer needs, and personal contacts by its officers, directors, and staff.
Large multi-branch banking competitors tend to compete primarily by rate and the
number and location of branches while smaller, independent financial
institutions tend to compete primarily by rate and personal service.
EMPLOYEES
As of December 31, 1998, Bankshares and TFB employed 72 full-time employees and
26 part-time employees. A collective bargaining unit does not represent the
employees. Bankshares and TFB consider relations with employees to be good.
ITEM 2. FINANCIAL INFORMATION
The following discussion is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Form 10. In addition to the historical information contained herein, the
discussion in this Form 10 contains certain forward-looking statements that
involve risks and uncertainties, such as statements of Bankshares' plans,
objectives, expectations and intentions, including, among other statements,
statements involving net interest income, TFB branching, costs for TFB
expansion, liquidity, loan loss allowances, loan collateral values,
collectability of loans, and the Year 2000 issue. The cautionary statements made
in this Form 10 should be read as being applicable to all related
forward-looking statements wherever they appear in this Form 10. Bankshares'
actual results could differ materially from those discussed herein.
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INTRODUCTION
This discussion is intended to focus on certain financial information regarding
Bankshares and TFB. The purpose of this discussion is to provide the reader with
a more thorough understanding of the financial statements. This discussion
should be read in conjunction with the financial statements and accompanying
notes contained elsewhere herein.
Management is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations. Also, management is not aware of any current
recommendations by its regulatory authorities that would have a material effect
on liquidity, capital resources or operations.
SELECTED FINANCIAL DATA
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1998 1997 1996 1995 1994
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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INCOME STATEMENT DATA:
Interest income $ 14,839 $ 13,448 $ 12,547 $ 11,969 $ 11,325
Interest expense 5,519 4,751 4,699 4,511 3,762
Net interest income 9,320 8,697 7,848 7,458 7,563
Provision for (recovery of) loan loss 535 465 578 430 (38)
Net interest income after
provision for loan loss 8,785 8,232 7,270 7,028 7,601
Noninterest income 2,387 2,344 2,204 2,055 1,644
Securities gains (losses) 17 10 78 (108) (20)
Noninterest expense 7,709 7,354 6,965 7,066 7,778
Income before income taxes 3,480 3,232 2,590 1,909 1,447
Income taxes 1,039 981 748 568 412
Net income 2,441 2,251 1,842 1,341 1,035
PER SHARE DATA: (1)
Net income per share, basic $ 1.31 $ 1.18 $ 0.96 $ 0.70 $ 0.54
Net income per share, diluted 1.30 1.17 0.96 0.70 0.54
Cash dividends 0.45 0.35 0.26 0.21 0.19
Book value at period end 11.52 10.97 10.08 9.37 8.36
Tangible book value 11.52 10.97 10.08 9.37 8.36
Average basic shares outstanding 1,857,282 1,913,008 1,912,328 1,911,648 1,911,648
Average diluted shares outstanding 1,875,641 1,921,073 1,916,513 1,911,648 1,911,648
BALANCE SHEET DATA:
Assets $ 220,026 $ 184,442 $ 173,416 $ 167,239 $ 166,219
Loans, net 162,272 128,153 114,280 98,814 89,159
Securities 22,791 27,946 41,705 49,604 62,806
Deposits 179,217 161,869 152,938 148,283 145,536
Shareholders equity 21,177 20,978 19,270 17,921 15,989
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets 1.21% 1.27% 1.09% 0.82% 0.63%
Return on average equity 11.60% 11.62% 9.86% 7.63% 6.40%
Dividend Payout 34.1% 29.7% 27.0% 29.9% 35.1%
Efficiency 65.9% 65.8% 68.3% 73.0% 82.9%
ASSET QUALITY RATIOS:
Allowance for loan loss to
period end loans, net 1.13% 1.27% 1.27% 1.18% 1.16%
Allowance for loan loss to
nonaccrual loans 278.2% 300.4% 199.9% 190.2% 63.5%
Net charge-offs to average loans 0.23% 0.22% 0.27% 0.31% 0.43%
CAPITAL AND LIQUIDITY RATIOS:
Tier-1 capital to average assets 9.7% 11.9% 11.1% 10.9% 10.5%
Risk-based capital ratios:
Tier-1 capital 13.1% 16.4% 16.5% 16.7% 16.9%
Total capital 14.3% 17.7% 17.7% 17.8% 17.9%
</TABLE>
(1) Per share data adjusted to reflect 2 for 1 stock split during 1998 and a 4
for 1 stock split during 1996.
OVERVIEW
The reported results of the Bank are dependent on a variety of factors,
including the general interest rate environment, competitive conditions in the
industry, governmental policies and regulations and conditions in the markets
for financial assets. Net interest income is the largest component of net
income, and consists of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is primarily affected by the volume, interest
rates and composition of interest-earning assets and interest-bearing
liabilities.
AVERAGE BALANCES AND YIELDS
The following tables present for the periods indicated, the total amount of
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates, and the net interest margin. Net interest
margin refers to the net interest income divided by total interest-earning
assets and is influenced by the level and relative mix of interest-earning
assets and interest-bearing liabilities.
13
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1998 1997
---------------------------------------- -------------------------------------
Average Interest Average Average Interest Average
Balance (1) Income/ Rate Balance (1) Income/ Rate
Expense Expense
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans $ 144,283 $ 12,580 8.72% $122,628 $11,153 9.09%
Securities
Taxable 24,250 1,464 6.04% 32,274 1,881 5.83%
Nontaxable(2) 4,435 213 7.28% 4,662 249 8.09%
Interest-bearing deposits at other banks 1,791 89 4.97% 181 10 5.52%
Federal Funds sold 9,126 493 5.40% 2,849 155 5.44%
--------- -------- ------- -----
Total interest-earning assets 183,885 $14,839 8.13% 162,594 $13,448 8.35%
Cash and due from banks 9,593 7,417
Other assets 8,302 8,714
Total noninterest-earning assets 17,895 16,131
--------- --------
Total $ 201,780 $178,725
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing and money market $ 71,144 $ 2,170 3.05% $61,268 $1,688 2.76%
Other savings deposits 29,920 1,038 3.47% 29,738 1,020 3.43%
Time deposits 40,266 1,970 4.89% 36,237 1,788 4.93%
Federal funds purchased 3 -- 0.00% 401 17 4.24%
Short-term borrowings 6,726 341 5.07% 4,155 238 5.73%
--------- -------- ------- -----
Total interest-bearing liabilities $ 148,059 $ 5,519 3.73% 131,799 4,751 3.60%
--------- -------- ------- -----
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 30,721 25,325
Other 1,967 1,546
--------- --------
Total noninterest-bearing liabilities 32,688 26,871
--------- --------
Shareholders' equity 21,033 20,055
--------- --------
Total $ 201,780 $ 178,725
========= ========
Interest rate spread 4.40% 4.75%
Net interest income and interest margin $9,320 5.13% $8,697 5.43%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996
-------------------------------------
Average Interest Average
Balance (1) Income/ Rate
Expense
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans $106,237 $9,796 9.22%
Securities
Taxable 40,517 2,318 5.72%
Nontaxable(2) 5,197 282 8.22%
Interest-bearing deposits at other banks -- -- --
Federal Funds sold 2,882 151 5.24%
------- -----
Total interest-earning assets 154,833 $12,547 8.20%
Cash and due from banks 6,551
Other assets 8,761
Total noninterest-earning assets 15,312
--------
Total $170,145
========
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing and money market $57,003 $1,729 3.03%
Other savings deposits 30,492 1,048 3.44%
Time deposits 37,366 1,917 5.13%
Federal funds purchased 209 5 2.39%
Short-term borrowings -- -- --
------- -----
Total interest-bearing liabilities 125,070 4,699 3.76%
------- -----
NONINTEREST-BEARING LIABILITIES AND
SHAREHOLDERS' EQUITY
Demand deposits 25,081
Other 1,540
--------
Total noninterest-bearing liabilities 26,621
--------
Shareholders' equity 18,454
--------
Total $ 170,145
========
Interest rate spread 4.44%
Net interest income and interest margin $7,848 5.16%
</TABLE>
(1) NON-ACCRUAL LOANS ARE INCLUDED IN THE
AVERAGE BALANCE
(2) NONTAXABLE SECURITIES YIELDS ARE CALCULATED ON A TAX-EQUIVALENT BASIS.
TAX-EQUIVALENT CALCULATIONS USE A 34% TAX RATE.
14
<PAGE>
RATE/VOLUME ANALYSIS
Net interest income is affected by changes in the level of interest-earning
assets and interest-bearing liabilities and changes in yields earned on assets
and rates paid on liabilities. The following table sets forth, for the periods
indicated, a summary of the impact on interest income and interest expense of
changes in average assets and liability balances and changes in average rates.
For each category of interest-earning assets and interest-bearing liabilities
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------- ---------------------------------------
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ------------ ---------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Loans $ 1,854 $ (427) $ 1,427 $ 1,517 $ (160) $ 1,357
Investments
Taxable (488) 71 (417) (517) 80 (437)
Nontaxable (12) (24) (36) (37) 4 (33)
Federal funds sold 306 32 338 5 (1) 4
Cash & due from banks 73 6 79 5 5 10
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 1,733 $ (342) $ 1,391 $ 973 $ (72) $ 901
------- ------- ------- ------- ------- -------
INTEREST PAID ON
Deposits
Interest-bearing demand deposits $ 292 $ 190 $ 482 $ 264 $ (111) $ 153
Savings 6 12 18 (161) (59) (220)
Time deposits 170 12 182 (103) (28) (131)
Federal funds purchased (8) (9) (17) 13 (1) 12
Short-term borrowings 127 (24) 103 119 119 238
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 587 $ 181 $ 768 $ 132 $ (80) $ 52
------- ------- ------- ------- ------- -------
Net change in interest income $ 1,146 $ (523) $ 623 $ 841 $ 8 $ 849
======= ======= ======= ======= ======= =======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
NET INCOME. Net income for the year ended December 31, 1998 increased 8.5% to
$2.4 million from $2.3 million for the year ended December 31, 1997. The
increase in net income was due primarily to increases in net interest income and
other income which more than offset increases in other expense and the provision
for loan losses.
NET INTEREST INCOME. Net interest income increased $623,000 or 7.2% to $9.3
million for the year ended December 31, 1998 compared to $8.7 million for the
year ended December 31, 1997. The increase was primarily due to growth in
earning assets of $36.3 million or 21.9%.
15
<PAGE>
INTEREST INCOME. Total interest income grew $1.4 million or 10.3% to $14.8
million for the year ended December 31, 1998 compared to $13.4 million for the
year ended December 31, 1997. The increase was a result of high loan growth.
Loan receivables grew 26.6% or $34.1 million from December 31, 1997 to December
31, 1998. An increase in deposits of $17.3 million and an increase of $18
million in long-term fixed rate Federal Home Loan Bank Advances primarily funded
this growth.
INTEREST EXPENSE. Total interest expense increased $768,000 or 16.2% to $5.5
million for the year ended December 31, 1998 from $4.8 million for the year
ended December 31, 1997. This was primarily due to a net increase in interest
bearing liabilities. The average balance of interest-bearing liabilities
increased by $16.2 million, or 12.3%, from the year ended December 31, 1997 to
the year ended December 31, 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $535,000 for 1998
and $465,000 for 1997. The amount of the provision for loan loss for 1998 and
1997 was determined based upon management's continual evaluation of the adequacy
of the allowance for loan losses, which encompasses the overall risk
characteristics of the loan portfolio, trends in TFB's delinquent and
non-performing loans, and the impact of economic conditions on borrowers. There
can be no assurances, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
OTHER INCOME. Total other income increased by $51,000 or 2.2% from $2.3 million
for 1997 to $2.4 million for 1998. Other income is primarily derived from
non-interest fee income, which is typically divided into three major categories:
fiduciary, service charges, and other fee income. For 1998, fiduciary and other
fee income increased while service charge fee income decreased. The bulk of the
increase was from fiduciary activity, which contributed $33,470 of the $51,000,
increase. The remaining increase of $17,530 was other fee income from loan
related products.
OTHER EXPENSES. Other expense increased 4.8% or $355,000 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. During the same
periods salaries and benefits increased $122,000, while all other expenses
increased $233,000.
INCOME TAXES. Income tax expense increased by $248,525 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The effective
tax rates were 29.9% for December 31, 1998 and 30.4% for December 31, 1997. The
effective tax rate is less than the statutory federal income tax rate of 34% due
mainly to TFB's investment in tax-exempt securities.
YEAR 2000 COMPLIANCE. A great deal of information has been disseminated about
the global computer crash that may occur in the Year 2000. Many computer
programs that can only distinguish the final two digits of the year entered (a
common programming practice in earlier years) are expected to read entries for
the Year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date or are expected to be unable to compute payment,
interest or delinquency. Rapid and accurate data processing is essential to the
operation of TFB. TFB has initiated a Year 2000 plan and has closely monitored
the situation by thoroughly assessing systems and programs that may be date
sensitive.
16
<PAGE>
In early 1997, TFB began planning its strategy to address the issue. In June
1998 a cross-functional project team was formed to assess and address both
internal and external risks associated with Y2K. A readiness plan was developed
consisting of six phases:
In the first phase, the Board adopted policies, procedures, and schedules to
address the issue. The Board and senior managers have been updated on their
implementation since June. Officers and associates have been provided an
internal newsletter outlining TFB's progress and containing information to
assist them in responding to customers' questions.
In the second phase, a complete inventory, including all hardware, software,
networks and other equipment that may have imbedded computer chips, such as
heating and air conditioning, security systems, vaults and elevators, was
developed and each item identified as either mission critical, mission
necessary, mission desirable or non-critical. The team continues to meet
regularly to update the status of each item on the inventory.
Vendors and correspondent organizations' readiness has been assessed and
evaluations will continue until readiness is assured. Every new vendor's
readiness is evaluated before contracting.
TFB's credit risk related to current commercial customers has been assessed.
Organizations with relationships of $100,000 or more with TFB have been
contacted and their compliance status evaluated. Their progress will be
evaluated on an on-going basis to insure compliance. All new commercial
customers are evaluated as a regular part of the lending process.
Customers are being kept informed of TFB's progress by way of the Internet web
site, communications in statements mailed to the customers, updates at branch
offices, teller receipts, messages on telephone voice systems and seminars. TFB
plans to place advertisements in the local newspapers beginning in June 1999.
The impact of the Year 2000 issue on TFB depends not only on TFB's corrective
action, but also on the corrective action of governmental agencies, utilities,
businesses and other third parties that provide services or data to, or receive
services or data from TFB, or whose financial condition or operational
capability is important to TFB. To reduce this exposure, TFB has identified, and
continues to contact these significant parties to determine their Year 2000
plans and target dates.
In the third phase, upgrades and replacement systems for all hardware and
software were ordered. Ninety-eight percent are in place and operational. The
remainder will be put into service prior to June 30, 1999.
Through December 31, 1998, approximately $175,000 was spent on Y2K remediation
efforts. It is expected that an additional $75,000 will be required to complete
this project.
Contingency plans for all critical applications were developed to prepare for
unforeseen situations. TFB used the same contingency formula on the data
processing systems as has been used successfully in previous major system
conversions.
17
<PAGE>
In the fourth phase, in-house testing on the upgrades to the data processing
systems was completed successfully in the current environment. M&I Data
Services, TFB's outsource service provider, has completed proxy testing under
the Y2K environment. Specific testing of transmittals between TFB and M&I Data
Services using the Y2K simulated environment is scheduled. Sungard, TFB's Trust
Services outsource partner, has assured TFB that it is Y2K compliant and has
provided proxy-testing results.
Integration testing has been successfully completed on TFB's electronic funds
and reporting systems. The testing of networking system upgrades and
replacements has been substantially accomplished, and will be totally in-place
by June 30, 1999. Other non-critical applications have been substantially tested
and found to be compliant. TFB continues to monitor its vendors' testing and
compliance status.
In the fifth phase, TFB was reviewed by regulatory authorities to ensure that it
has been proceeding with a prudent plan of action for Year 2000 readiness. TFB
is on schedule in accordance with regulatory guidelines.
In the sixth phase, which is being implemented throughout 1999, systems,
contingency plans, and business resumption plans will be re-tested and refined.
Liquidity alternatives are being evaluated, and applications will be made prior
to May 31, 1999 to outside sources to insure alternative funding for a
worst-case scenario of funds shortage. Insurance risks have been evaluated, and
TFB will contract with legal counsel prior to June 30, 1999 for an outside legal
assessment of the Y2K readiness plans.
Notwithstanding TFB's efforts, there can be no assurance that mission critical
third-party vendors or other significant third parties will adequately address
their Year 2000 issues. Until the Year 2000 event actually occurs and for a
period of time thereafter, there can be no assurance that there will be no
problems related to Year 2000. The Year 2000 technology challenge is an
unprecedented event, and if the issues are not adequately addressed, TFB could
face business disruptions, operational problems, financial losses, legal
liability and similar risks, and TFB's business, results of operations, and
financial position could be materially adversely affected.
TFB's credit risk associated with borrowers may increase to the extent borrowers
fail to adequately address Year 2000 issues. As a result, there may be increases
in TFB's problem loans and credit losses in future years. In addition, TFB may
be subject to increased liquidity risks associated with deposit withdrawals. It
is not, however, possible to quantify the potential impact of any such risks or
losses at this time.
TFB has prepared alternate solutions through a business resumption contingency
plan to mitigate potential risks on January 1, 2000. The contingency plans were
developed for the critical core business functions and supporting information
technology systems. Core business risks have been prioritized based upon
greatest risk posed to TFB. The plans identify financial and human resources
necessary for their execution. The plans are being enhanced to include a
business risk assessment that identifies potential disruptions on TFB's
operations, the minimum acceptable
18
<PAGE>
level of services, the strategies and resources available to restore system or
business operations, and the processes and equipment needed for TFB to function
at an adequate level.
The risk of failure is not limited to TFB's internal information systems. TFB
depends on data provided by its business partners, correspondent banks, Federal
Reserve Bank, and other third parties. TFB also depends on vendors from which
telecommunications, software, and other services are provided. Additionally, TFB
depends on services provided by the public infrastructure including power,
water, transportation, and voice and data telecommunications.
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
NET INCOME. Net income for the year ended December 31, 1997 increased 22.2% to
$2.3 million from $1.8 million for the year ended December 31, 1996. The
increase in net income was primarily due to increases in net interest income
that more than offset increases in other expenses and the provision for loan
losses.
NET INTEREST INCOME. Net interest income increased 10.8% to $8.7 million from
$7.8 million for the year ended December 31, 1996. The increase in net interest
income was due primarily to an increase in the average balance of loans held by
TFB. A net decrease in the securities portfolio of $8.8 million and an $7.0
million increase in deposits and borrowings primarily funded this increase in
loan volume of $16.4 million. This increase in loan volume more than offset the
effects of decreases in the average interest rate earned on loans due to
declining market rates and an increase in interest expense due to short term
borrowings in 1997.
INTEREST INCOME. Total interest income grew $901,000 or 7.2% to $13.4 million
for the year ended December 31, 1997 compared to $12.5 million for the year
ended December 31, 1996. The increase was a result of an increase in the
interest and fees received on loans due to an increase in average loan
receivables of 15.4% or $16.4 million from December 31, 1996 to December 31,
1997.
INTEREST EXPENSE. Total interest expense increased $52,000 or 1.1% to $4.8
million from $4.7 million for the year ended December 31, 1996. A $200,000
decrease in expenses for interest on deposits fueled primarily by a decrease in
interest rates was partially offset by an increase in interest expenses on
short-term borrowing. The average balance of interest-bearing liabilities
increased by $6.7 million, or 5.4%, from the year ended December 31, 1996 to the
year ended December 31, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $465,000 for 1997
and $578,000 for 1996. The amount of the provision for loan loss for 1997 and
1996 was determined based upon management's continual evaluation of the adequacy
of the allowance for loan losses, which encompasses the overall risk
characteristics of the loan portfolio, trends in TFB's delinquent and
non-performing loans, and the impact of economic conditions on borrowers. There
can be no assurances, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
19
<PAGE>
OTHER INCOME. Total other income increased by $69,000 or 3.0% from $2.3 million
for 1996 to $2.4 million for 1997. Other income is primarily derived from
non-interest fee income, which is typically divided into three major categories:
fiduciary, service charges and other fee income. For 1997, Trust Department
income, service charges on deposit accounts, other service charges, commissions
and fees, and other operating income increased, while gains on securities
available for sale decreased. The majority of the increase was generated by
fiduciary activity that increased other service charges, commissions and fees
$54,000 and increased other operating income $45,000.
OTHER EXPENSES. Total other expenses increased 5.6% or $389,000 for the year
ended December 31, 1997 compared to the year ended December 31, 1996 due to
increases in the same salaries and employees' benefits of $208,000, and
increases in other operating expenses of $112,000.
INCOME TAXES. Income tax expense increased by $233,000 for the year ended
December 31, 1997 compared to the year ended December 31, 1996. The effective
tax rates were 30.4% for December 31, 1997 and 28.9% for December 31, 1996. The
effective tax rate is less than the statutory federal tax rate of 34% due
primarily to TFB's investment in tax-exempt securities.
ASSET QUALITY
Non-performing loans, in most cases, consist of loans for which the accrual of
interest has been discontinued. Management evaluates loans that are 90 days or
more past due in addition to loans that have suffered financial distress to
determine if they should be placed on non-accrual status. Factors considered by
management include the estimated value of collateral, if any, and other
resources of the borrower that may be available to satisfy the delinquency.
Nonaccrual loans totaled approximately $666,000 or .41% of total loans at
December 31, 1998, as compared to $553,000 or .43% of total loans at December
31, 1997. Non-performing loans as a percentage of the Allowance for Loan Losses
were 36% and 33.4% at December 31, 1998 and 1997, respectively.
20
<PAGE>
The following table summarizes TFB's loans accounted for on a non-accrual basis
for the years ended December 31, 1998, 1997, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- --------------- ------------- -------------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $666 $551 $733 $621 $1,654
Restructured loans -- -- -- -- --
Foreclosed assets 57 199 477 778 469
---------------- --------------- ------------- -------------- ------------
Total non-performing assets $723 $750 $1,210 $1,399 $2,123
================ =============== ============= ============== ============
Loans past due 90 days or more
and
accruing interest $951 $491 $21 $195 $268
================ =============== ============= ============== ============
Non-performing loans to total
loans,
at period end 0.41% 0.43% 0.59% 0.62% 1.82%
================ =============== ============= ============== ============
Non-performing assets to period
end assets 0.33% 0.41% 0.67% 1.51% 1.28%
================ =============== ============= ============== ============
</TABLE>
There are no loans as of December 31, 1998, 1997, 1996, 1995, or 1994 other than
those disclosed above as either non-performing or impaired where known
information about the borrower caused management to have serious doubts about
the borrower's ability to comply with the contractual repayment obligations.
There are also no other interest-bearing assets that would be subject to
disclosure as either non-performing or impaired if such interest-bearing assets
were loans. There are no concentrations of loans to borrowers engaged in similar
activities that exceed 10% of total loans of which management is aware.
COMPARISON OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 FINANCIAL CONDITION
Total assets were $220 million at December 31, 1998, an increase of 19.3% or
$35.6 million from $184.4 million at December 31, 1997. Balance sheet categories
reflecting significant changes included investment securities, total loans,
deposits, and Federal Home Loan Bank advances. Each of these categories is
discussed below.
INVESTMENT SECURITIES. Total investment securities amounted to $22.8 million at
December 31, 1998, reflecting a decrease of $5.2 million from $27.9 million at
December 31, 1997. The decrease was primarily reinvested into loans. At December
31,1998, the investment securities portfolio was segregated into available for
sale of $15.8 million and held to maturity of $6.9 million. The valuation
allowance for the available for sale portfolio as of December 31, 1998 had an
unrealized gain of $2,500 and an unrealized loss of $144,000 as of December 31,
1997.
LOANS. Total net loan balance after allowance for loan losses was $162.3 million
at December 31, 1998, which represents an increase of $34.1 million or 26.6%
from $128.2 million as of
21
<PAGE>
December 31, 1997. The majority of this increase was reflected in the real
estate ($27.6 million) and consumer installment ($5.9 million) loan categories.
The bulk of growth in real estate loans was split between commercial ($15.3
million) and 1-4 family residential ($11.3 million) loans. The majority of
consumer installment loans were comprised of automobile loans. TFB's loans are
made primarily to customers located within its local trade area.
DEPOSITS. For the year ended December 31, 1998, total deposits grew $17.3
million or 10.7%. The majority of the growth was in savings and interest-bearing
demand deposits that increased by $8.5 million while non-interest bearing demand
deposits and time deposits grew $5.2 million and $3.6 million, respectively.
FHLB ADVANCES. Amounts borrowed from the FHLB of Atlanta increased from none to
$18 million or 8.9% of earning assets at December 31, 1998. The increased
borrowing from the FHLB was to support high loan growth and extend liabilities.
The term structure of the advances borrowed was 10 years with a 5 year call
option for $13 million and the remaining $5 million has a 10 year maturity with
a 1-year call option.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity totaled $21.2 million at December 31, 1998. Equity growth
since December 31, 1997 was less than 1%, ($199,000), reflecting management's
desire to increase shareholders' return on equity by minimizing growth in
equity. Therefore, during the first quarter of 1998, the company initiated a
Dutch Auction self-tender offer to buy back shares directly from shareholders.
As a result of this action, Bankshares bought back 60,238 shares, as adjusted
for the two for one stock split, (3.2% of shares outstanding on December 31,
1997) for $1.2 million. Exclusive of the Dutch Auction, Bankshares initiated an
open market buyback program in 1998, through which it has bought back an
additional 15,000 shares (0.8% of shares outstanding on December 31, 1997) at a
cost of $300,000. Moreover, the securities portfolio valuation account reduced
its unrealized loss after tax by 92.2% to $7,000 at December 31, 1998 compared
to an unrealized loss of $95,000 at December 31, 1997.
Banking regulations have established minimum capital requirements for financial
institutions including risk-based capital ratios and leveraged ratios. As of
December 31, 1998 the appropriate regulatory authorities have categorized
Bankshares and TFB as well capitalized under the regulatory framework for prompt
corrective action.
The primary sources of funds are deposits, repayment of loans, maturities of
investments, funds provided from operations and advances from the FHLB of
Atlanta. While scheduled repayments of loans and maturities of investment
securities are predictable sources of funds, deposit flows and loan repayments
are greatly influenced by the general level of interest rates, economic
conditions and competition. TFB uses its sources of funds to fund existing and
future loan commitments, to fund maturing certificates of deposit and demand
deposit withdrawals, to invest in other interest-earning assets, to maintain
liquidity, and to meet operating expenses. Management monitors projected
liquidity needs and determines the desirable level based in part on TFB's
commitments to make loans and management's assessment of TFB's ability to
generate funds.
22
<PAGE>
Cash and amounts due from depository institutions and federal funds sold totaled
$26.7 million at December 31, 1998. These assets provide the primary source of
liquidity for TFB. In addition, management has designated a substantial portion
of the investment portfolio, ($15.8 million) as available for sale and has an
available line of credit with the Federal Home Loan Bank of Atlanta with a
borrowing limit of approximately $31 million at December 31, 1998 to provide
additional sources of liquidity.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
An important component of both earnings performance and liquidity is management
of interest rate sensitivity. Interest rate sensitivity reflects the potential
effect on net interest income of a movement in market interest rates. TFB is
subject to interest rate sensitivity to the degree that its interest-earning
assets mature or reprice at a different time interval from that of its
interest-bearing liabilities. However, TFB is not subject to any of the other
major categories of market risk such as foreign currency exchange rate risk or
commodity price risk.
TFB uses a number of tools to manage its interest rate risk, including
simulating net interest income under various scenarios, monitoring the present
value change in equity under the same scenarios, and monitoring the difference
or gap between rate sensitive assets and rate sensitive liabilities over various
time periods. Management believes that rate risk is best measured by simulation
modeling.
The earnings simulation model forecasts annual net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effect on net interest income and
present value equity under varying market rate assumptions.
TFB monitors exposure to gradual change in rates of up to 200 basis points up or
down over a rolling 12-month period. TFB's policy limit for the maximum negative
impact on net interest income and change in equity from gradual changes in
interest rates of 200 basis points over 12 months is 15%. Management has
maintained a risk position well within these guideline levels during 1998.
23
<PAGE>
The following tables present TFB's present value changes in equity under various
rate scenarios as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1998 Percentage Market Minus CURRENT Plus Market Percentage
(Dollars in thousands) Change Value Change 200 pts FAIR VALUE 200 pts Value Change Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities 4.09% 936 23,802 22,866 21,915 (951) -4.16%
Loans receivable 5.07% 8,233 170,720 162,487 155,040 (7,447) -4.58%
Total rate sensitive assets 4.95% 9,169 194,522 185,353 176,955 (8,398) -4.53%
Other assets 0.00% 0 34,964 34,964 34,964 0 0.00%
Total assets 4.16% 9,169 229,486 220,317 211,919 (8,398) -3.81%
Rate sensitive deposits 3.45% 5,902 177,059 171,157 166,406 (4,751) -2.78%
Borrowed funds 14.14% 2,589 20,898 18,309 17,148 (1,161) -6.34%
Other Liabilities 0.00% 0 1,632 1,632 1,632 0 0.00%
Total liabilities 4.44% 8,491 199,589 191,098 185,186 (5,912) -3.09%
- ---------------------------------------------------------------------------------------------------------------------------------
Present Value Equity 2.32% $ 678 $29,897 $ 29,219 $26,733 $ (2,486) -8.51%
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 Percentage Market Minus CURRENT Plus Market Percentage
(Dollars in thousands) Change Value Change 200 pts FAIR VALUE 200 pts Value Change Change
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities 4.57% 1,278 29,239 27,961 26,980 (981) -3.51%
Loans receivable 4.38% 5,618 133,836 128,218 124,841 (3,377) -2.63%
Total rate sensitive assets 4.42% 6,896 163,075 156,179 151,821 (4,358) -2.79%
Other assets 0.00% 0 28,343 28,343 28,343 0 0.00%
Total assets 3.74% 6,896 191,418 184,522 180,164 (4,358) -2.36%
Rate sensitive deposits 2.97% 4,602 159,472 154,870 150,703 (4,167) -2.69%
Other Liabilities 0.00% 0 1,595 1,595 1,595 0 0.00%
Total liabilities 2.94% 4,602 161,067 156,465 152,298 (4,167) -2.66%
- ---------------------------------------------------------------------------------------------------------------------------------
Present Value Equity 8.18% $ 2,294 $30,351 $ 28,057 $27,886 $ (191) -0.68%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities are monetary in nature. The impact of inflation is reflected in the
increased cost of operations. As a result, interest rates have a greater impact
on performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years
24
<PAGE>
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. TFB has not determined
whether to adopt the new statement early. The Statement will require TFB to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
Because TFB does not use derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on the Bank's
earnings or financial position.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." FASB No. 65, as amended, requires that, after securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security. This
Statement further amends Statement No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
This Statement is effective beginning in 1999.
25
<PAGE>
CERTAIN STATISTICAL INFORMATION
The following schedules present, for the period indicated, certain financial and
statistical information, or a specific reference as to the location of the
required disclosures elsewhere herein.
26
<PAGE>
INVESTMENT PORTFOLIO
At December 31, 1996, 1997 and 1998, the carrying values of the major
classifications of securities were as follows:
<TABLE>
<CAPTION>
Available for sale(1) Held to maturity(1)
-------------------------------------------------- --------------------------------------------
1998 1997 1996 1998 1997 1996
-------------- ---------------- ---------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government agencies and
Corporations $ 12,682,483 $ 14,722,755 $ 25,787,714 $ 4,229,829 $ 6,665,399 $ 9,598,686
States and political subdivisions 688,412 689,046 888,983 2,738,025 3,240,764 3,772,584
Mutual funds 875,852 1,038,986 1,031,728 -- -- --
Restricted investment - Federal
Home Loan Bank stock 966,700 966,700 -- -- -- --
Other securities 609,500 622,000 625,000 -- -- --
-------------- ---------------- ---------------- -------------- ------------- --------------
Total $ 15,822,947 $ 18,039,487 $ 28,333,425 $ 6,967,854 $ 9,906,163 $ 13,371,270
============= =============== =============== ============= ============ ==============
</TABLE>
(1) Amounts for held-to-maturity securities are based on amortized cost; amounts
for available-for-sale securities are based on fair value.
27
<PAGE>
MATURITY OR NEXT RATE ADJUSTMENT DATE
The following is a schedule of maturities or next rate adjustment date and
related weighted average yields of securities at December 31, 1998:
<TABLE>
<CAPTION>
Maturing
Maturing Maturing After After Five
Within One One but Within but Within
Year Five Years Ten Years
------------ ---------------- ------------
Amount(2) Yield Amount(2) Yield Amount(2) Yield
------------ ------- ---------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and other U.S. gov't
Agencies and corporations 795,918 6.51 6,717,258 6.08 3,975,197 6.05
States and political subdivisions - 475,000 7.10 -
Mutual funds - - -
Restricted investment - FHLB Stock - - -
Other securities - - -
Total AFS 795,918 6.51 7,192,258 6.14 3,975,197 6.05
HELD TO MATURITY
U.S. Treasury and other U.S. gov't
Agencies and corporations 1,730,216 5.76 2,499,613 6.41 -
States and political subdivisions 247,181 3.65 2,490,845 4.32 -
Mutual funds - - -
Restricted investment - FHLB Stock - - -
Other securities - - -
Total HTM 1,977,396 5.49 4,990,458 5.37 -
TOTAL SECURITIES 2,773,314 5.78 12,182,716 5.83 3,975,197 6.05
</TABLE>
<TABLE>
<CAPTION>
Maturing
After Ten
Years
------------- Total
Amount(1)(2) Yield Amount(2) Yield
------------ ----- ---------- ------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. Treasury and other U.S. gov't
Agencies and corporations 1,194,110 6.77 12,682,483 6.16
States and political subdivisions 213,412 6.25 688,412 6.84
Mutual funds 875,852 7.23 875,852 7.23
Restricted investment - FHLB Stock 966,700 7.40 966,700 7.40
Other securities 609,500 6.74 609,500 6.74
Total AFS 3,859,574 7.00 15,822,947 6.35
HELD TO MATURITY
U.S. Treasury and other U.S. gov't
Agencies and corporations - 4,229,829 6.15
States and political subdivisions - 2,738,025 4.26
Mutual funds - -
Restricted investment - FHLB Stock - -
Other securities - -
Total HTM - 6,967,854 5.40
TOTAL SECURITIES 3,859,574 7.00 22,790,801 6.06
</TABLE>
(1) Securities that do not have stated maturity dates and are included in the
"After Ten Years" column.
(2) All security amounts are based on book value with available for sale
securities reflected at fair market value and held to maturity securities at
amortized cost
28
<PAGE>
LOAN PORTFOLIO
At December 31, 1998 and 1997 net loans accounted for 73.8% and 69.5%,
respectively, of total assets.
Loans are shown on the balance sheets net of unearned discounts and the
allowance for loan losses. Interest is computed by methods that result in level
rates of return on principal. Loans are charged-off when deemed by management to
be uncollectible after taking into consideration such factors as the current
financial condition of the customer and the underlying collateral and
guarantees.
Bankshares adopted FASB No. 114, "Accounting by Creditors for Impairment of a
Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." Statement 114,
as amended, requires that the impairment of loans that have been separately
identified for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market price of the
loans or the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected to be
provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment is to be based on
the fair value of the collateral. Statement 114, as amended also requires
certain disclosures about investments in impaired loans and the allowance for
loan losses and interest income recognized on loans.
Bankshares considers all consumer installment loans and residential mortgage
loans to be homogenous loans. These loans are not subject to impairment under
FASB 114. A loan is considered impaired when it is probable that TFB will be
unable to collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in determining
impairment include, but are not limited to, expected future cash flows,
financial condition of the borrower, and the current economic conditions. A
performing loan may be considered impaired if the factors above indicate a need
for impairment. A loan on non-accrual status may not be impaired if in the
process of collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less than 5% of the
required principal and interest payment generally does not indicate an
impairment situation, if in management's judgement the loan will be paid in
full. Loans that meet the regulatory definitions of doubtful or loss generally
will be paid in full. Loans that meet the regulatory definitions of doubtful or
loss generally qualify as an impaired loan under FASB 114. Charge-offs for
impaired loans occur when the loan or portion of the loan is determined to be
uncollectible, as is the case for all loans.
Loans are placed on non-accrual status when a loan is specifically determined to
be impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other non-accrual loans is recognized only to the extent of interest payments
received.
29
<PAGE>
Total loans on the balance sheet are comprised of the following classifications
as of December 31, 1998, 1997, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- -------------- ------------- -------------
Real estate loans (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Construction and land $8,297 $6,998 $9,617 $8,058 $4,814
development
Secured by farmland 1,163 1,449 1,345 700 866
1-4 family residential 53,430 42,120 34,145 27,547 26,872
Other real estate loans 49,814 34,513 36,354 32,421 27,788
Agricultural (except secured by - - 51 63 198
farmland)
Commercial and industrial (except
those secured by real estate) 16,933 15,844 12,689 12,810 12,565
Loans to individuals 30,284 24,417 21,119 18,586 17,027
All other loans 4,620 5,176 1,147 486 592
-------------- ------------- -------------- ------------- -------------
Total loans $164,541 $130,517 $116,467 $100,671 $90,722
-------------- ------------- -------------- ------------- -------------
Less: unearned income (416) (709) (722) (675) (513)
Allowance for loan losses (1853) (1655) (1465) (1182) (1050)
============== ============= ============== ============= =============
Net loans $162,272 $128,153 $114,280 $98,814 $89,159
============== ============= ============== ============= =============
</TABLE>
30
<PAGE>
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following is a schedule of maturities and sensitivities of loans subject to
changes in interest rates as of December 31, 1998:
<TABLE>
<CAPTION>
Maturing After One but Within
Maturing Within One Year Five Years Maturing After Five Years
------------------------------ ------------------------------- --------------------------
Fixed Rate Variable Fixed Rate Variable Fixed Rate Variable
--------------- ------------- -------------- ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial Loans $ 2,824 $ 4,477 $ 8,484 $ 331 $ 134 $ 683
Construction Loans 4,401 856 2,087 - 953 -
Total $ 7,225 $ 5,333 $ 10,571 $ 331 $ 1,087 $ 683
</TABLE>
<TABLE>
<CAPTION>
Totals
---------------------------------------------
Total Fixed Total Variable Grand Total
--------------- -------------- -------------
<S> <C> <C> <C>
Commercial Loans $ 11,442 $ 5,491 $ 16,933
Construction Loans 7,441 856 8,297
Total $ 18,883 $ 6,347 $ 25,230
</TABLE>
31
<PAGE>
RISK ELEMENTS
The information required under this section is set forth under the heading
"Asset Quality" in Financial Information.
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF LOAN LOSS EXPERIENCE. The allowance for loan losses is maintained at
a level which, in management's judgement, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, credit
concentration, trends in historical loss experience, specific impaired loans,
and economic conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowances
relating to impaired loans are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Additions to the allowance for loan losses, which are recorded as the provision
for loan losses on Bankshares' statements of earnings, are made monthly to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. The amount of the provision is a
function of the level of loans outstanding, the level of non-performing loans,
historical loan-loss experience, the amount of loan losses actually charged off
or recovered during a given period and current and anticipated economic
conditions. TFB believes that it is conservative in the identification and
charge-off of problems and in certain instances, TFB has received recoveries on
loans that were previously charged-off.
At December 31, 1998, 1997, 1996, 1995 and 1994 the allowance for loan losses
was $1,853,000, $1,655,000, $1,465,000, $1,181,000 and $1,050,000 respectively.
32
<PAGE>
The following table summarizes TFB's loan loss experience for each of the last
five years ended December 31:
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses (Dollars in thousands)
at the beginning of the year $ 1,655 $ 1,465 $ 1,181 $ 1,050 $ 1,456
CHARGE-OFFS
Real estate loans
Construction and land development
Secured by farmland
1-4 family residential 40 40 116 52
Other real estate loans
Agricultural (except secured by
farmland)
Commercial and industrial (except 108 176 128 176 114
those secured by real estate)
Loans to individuals 223 187 225 97 267
All other loans
Total loan losses charged-off 371 363 393 389 433
RECOVERIES
Real estate loans
Construction and land development
Secured by farmland
1-4 family residential 1 7 9
Other real estate loans
Agricultural (except secured by
farmland)
Commercial and industrial (except 6 6 51 6 19
those secured by real estate)
Loans to individuals 29 81 47 77 37
All other loans
Total recoveries added to allowance 35 87 99 90 65
NET RECOVERIES (CHARGE-OFFS) (336) (276) (294) (299) (368)
Provision charged (credited) to
operating expense 535 465 578 430 (38)
=============== ============= ============= ============== =============
Balance at end of year $ 1,854 $ 1,654 $ 1,465 $ 1,181 $ 1,050
=============== ============= ============= ============== =============
Ratio of net charge-offs during period
to average loans outstanding during period 0.23% 0.22% 0.27% 0.31% 0.43%
</TABLE>
33
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table allocates the
allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and 1994 to
each loan category. The allowance has been allocated according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories of loans at the dates indicated,
although the entire allowance balance is available to absorb any actual
charge-offs that may occur.
34
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1998 1997
---------------------------- --------------------------------
% of loans to % of loans to
Allowance total loans Allowance total loans
---------------------------- --------------------------------
Real estate loans (Dollars in thousands)
<S> <C> <C> <C> <C>
Construction and land development $ 93,399 5.04% $ 88,704 5.36%
Secured by farmland 13,157 0.71% 18,370 1.11%
1-4 family residential 601,717 32.47% 534,042 32.27%
Other real estate loans 560,949 30.27% 437,560 26.44%
Agricultural (except secured by
farmland) - 0.00% - 0.00%
Commercial and industrial (except -
those secured by real estate) 190,689 10.29% 200,907 12.14%
Loans to individuals 341,165 18.41% 309,635 18.71%
All other loans 52,074 2.81% 65,700 3.97%
Unallocated - 0.00% - 0.00%
---------------------------- --------------------------------
$1,853,150 100.00% $1,654,918 100.00%
============================ ================================
</TABLE>
<TABLE>
<CAPTION>
-As of December 31,
-------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ---------------------------
% of loans to % of loans to % of loans to
Allowance total loans Allowance total loans Allowance total loans
------------------------------ ------------------------------ ---------------------------
Real estate loans
<S> <C> <C> <C> <C> <C> <C>
Construction and land development $ 121,041 8.26% $ 95,000 8.01% $ 56,000 5.31%
Secured by farmland 16,852 1.15% 8,000 0.70% 10,000 0.95%
1-4 family residential 429,652 29.32% 322,000 27.36% 311,000 29.62%
Other real estate loans 457,348 31.21% 381,000 32.20% 322,000 30.63%
Agricultural (except secured by
farmland) 586 0.04% 1,000 0.06% 2,000 0.22%
Commercial and industrial (except -
those secured by real estate) 159,582 10.89% 150,000 12.73% 145,000 13.85%
Loans to individuals 265,675 18.13% 218,000 18.46% 197,000 18.77%
All other loans 14,654 1.00% 6,000 0.48% 7,000 0.65%
Unallocated - 0.00% - 0.00% - 0.00%
------------------------------ ------------------------------ ---------------------------
$1,465,390 100.00% $1,182,000 100.00% $1,050,000 100.00%
============================== ============================== ===========================
</TABLE>
35
<PAGE>
DEPOSITS
The average daily amounts of deposits and rates paid on savings deposits is
summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
-------------------------- ------------------------ --------------------------
Amount(1) Rate Amount(1) Rate Amount(1) Rate
--------------- --------- ------------- --------- ----------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing and money market $ 71,144 3.05% $ 61,268 2.76% $ 57,003 3.03%
Other savings deposits 29,920 3.47% 29,738 3.43% 30,492 3.44%
Time deposits 40,266 4.89% 36,237 4.93% 37,366 5.13%
--------------- ------------- ---------------
Total interest-bearing deposits 141,330 127,243 124,861
Noninterest-bearing deposits 30,721 25,325 25,081
--------------- ------------- ---------------
Total deposits $ 172,051 $ 152,568 $ 149,942
=============== ============= ===============
</TABLE>
(1) Amounts are based on daily average balances.
36
<PAGE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1998:
Three months or less $ 1,648,027
Three through six months 1,543,204
Six through twelve months 3,489,907
One through Two Years 3,765,649
More than Two Years 309,347
======================
Total $ 10,756,134
======================
SIGNIFICANT FINANCIAL RATIOS
The ratio of net income to daily average total assets and average shareholders'
equity, and certain other ratios are, are as follows:
Certain Financial Ratios
At December 31
------------------------------
1998 1997
------------- -------------
Percentage of net income to:
Average total assets 1.21% 1.27%
Average shareholders' equity 11.60% 11.62%
Percentage of dividends declared per common
share to basic earnings per share 34.35% 29.66%
Percentage of average shareholders' equity
to average total assets 10.42% 11.22%
BORROWED FUNDS
LONG-TERM BORROWINGS. Amounts and weighted average rates for long-term
borrowings for 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
As of December 31
---------------------------------------------------------------------------
1998 1997 1996
---------------- ------------ -------------
Amount Rate Amount Rate Amount Rate
---------------- ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
FHLB Advances $ 18,000,000 5.19% -- -- -- --
</TABLE>
SHORT-TERM BORROWINGS. This information is not required, as the average amount
of borrowings during the period did not exceed 30% of shareholders' equity.
37
<PAGE>
CAPITAL
Bankshares and TFB are subject to various regulatory capital requirements
administered by banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
Bankshares' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Bankshares and TFB must meet
specific capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Bankshares' and TFB's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and TFB to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I Capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998 that
Bankshares and TFB meet all capital adequacy requirements to which they are
subject.
Bankshares and TFB exceeded their regulatory capital ratios, as set forth in the
following table:
<TABLE>
<CAPTION>
To be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
----------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------ -------- -------------- ------- -------------- --------
(Dollars in
Thousands)
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted
Assets):
<S> <C> <C> <C> <C>
Consolidated $ 22,975 14.3% >$ 12,884 >8.0% N/A
- -
The Fauquier Bank 23,058 14.3% 12,884 >8.0% >$ 16,106 >10.0%
- - -
Tier I Capital (to Risk Weighted
Assets):
Consolidated $ 21,122 13.1% >$ 6,442 >4.0% N/A
- -
The Fauquier Bank 21,205 13.2% 6,442 >4.0% >$ 9,663 > 6.0%
- - -
Tier I Capital (to Average Assets):
Consolidated $ 21,122 9.7% >$ 8,676 >4.0% N/A
- -
The Fauquier Bank 21,205 9.8% 8,676 >4.0% >$ 10,845 > 5.0%
- - -
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted
Assets):
Consolidated $ 22,604 17.7% >$ 10,251 >8.0% N/A
- -
The Fauquier Bank 22,617 17.7% 10,251 >8.0% >$ 12,814 >10.0%
- - -
Tier I Capital (to Risk Weighted
Assets):
Consolidated $ 21,003 16.4% >$ 5,126 >4.0% N/A
- -
The Fauquier Bank 21,015 16.4% 5,126 >4.0% >$ 7,688 > 6.0%
- - -
Tier I Capital (to Average Assets):
Consolidated $ 21,003 11.9% >$ 7,065 >4.0% N/A
- -
The Fauquier Bank 21,015 11.9% 7,065 >4.0% >$ 8,831 > 5.0%
- - -
</TABLE>
38
<PAGE>
ITEM 3. PROPERTIES
TFB owns property and operates branches at the following locations:
<TABLE>
<CAPTION>
LOCATION BOOK VALUE LEASE/OWN RENT (ANNUAL) EXPIRATION RENEWAL
OPTIONS
- ---------------------------------------------------------------------------------------------------------
Main Office *
<S> <C> <C> <C> <C> <C>
P.O. Box 561 $1.2 M Own N/A N/A N/A
10 Courthouse Square
Warrenton, VA 20186
Catlett Branch Office
Rt. 28 and 806 $65,000 Own N/A N/A N/A
Catlett, VA 20119
Manassas Branch Office
8091 Sudley Rd. N/A Lease $38,500 2004 Additional 5 yrs.
Manassas, VA
New Baltimore Office
5119 Lee Highway $570,000 Own N/A N/A N/A
Warrenton, VA 20187
The Plains Office
Main Street $10,000 Own N/A N/A N/A
The Plains, VA 20198
View Tree Office
216 Broadview Avenue $218,000 Own N/A N/A N/A
Warrenton, VA
</TABLE>
- --------------------------------------------------------------------------------
* TFB and Bankshares
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or entity is known to Bankshares to be the beneficial owner of more
than five percent (5%) of Bankshares common stock.
The following table sets forth as of December 31, 1998, the number and
percentage of shares of Bankshares common stock held by each director and
nominee of Bankshares, the executive officers named in the Summary Compensation
Table, and all directors and executive officers of Bankshares and TFB as a group
who are the beneficial owners of any Bankshares common stock.
39
<PAGE>
<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER(S) * BENEFICIAL OWNERSHIP ** OF CLASS
<S> <C> <C>
Randy K. Ferrell 14,100 .77%
Alexander G. Green, Jr. 69,680 (1) 3.82%
Stanley C. Haworth 41,620 (2) 2.28%
John J. Norman, Jr. 500 .03%
Douglas C. Larson 4,920 (3) .27%
C. H. Lawrence, Jr. 20,523 1.13%
D. Harcourt Lees, Jr. 15,680 (4) .86%
Randolph T. Minter 4,160 .23%
B. S. Montgomery 13,512 (5) .74%
H. P. Neale 24,704 (6) 1.36%
Pat H. Nevill 13,920 (7) .76%
Henry M. Ross 11,680 (8) .64%
Gary R. Shook 1,230 (9) .07%
C. Hunton Tiffany 20,406 (10) 1.12%
All directors and executive
officers as a group: 265,371 14.56%
</TABLE>
* The address or each beneficial owner listed above shall be Bankshares'
address: 10 Courthouse Square, Warrenton, Virginia 20186.
** Includes 4,480 shares that could be issued within 60 days to each
non-employee director, other than Mr. Larson and Mr. Minter, pursuant to the
Bank's Non-Employee Director Stock Option Plan, and 3,360 shares each that could
be issued within 60 days to Mr. Larson and Mr. Minter under such plan.
(1) Includes 2,720 shares held jointly with Alexander G. Green,
III, his son; 2,720 shares held jointly with Courtenay G.
Mullen, his daughter; and 2,720 shares held jointly with Mary
Blake Green, his daughter.
(2) Includes 32,740 shares held jointly with Mildred W. Haworth,
his wife.
(3) Includes 1,000 shares held jointly with Edith J. Larson, his
mother.
(4) Includes 1,600 shares owned by Eleanor T. Lees, his wife.
(5) Includes 4,888 shares held jointly with Patty M. Montgomery,
his wife.
(6) Includes 9,608 shares owned by Fontaine G. Neale, his wife.
(7) Includes 800 shares owned jointly with H.T.A. Nevill, her
husband; 6,000 shares owned by H. T. A. Nevill, and 2,200
shares for which Mr. Nevill has voting power.
(8) Includes 800 shares held jointly with Lois B. Ross, his wife.
(9) Includes 140 shares held by Ann Rodman Shook, his wife, as
Custodian for their children.
40
<PAGE>
(10) Includes 14,006 shares owned by Susanne J. Tiffany, his wife.
Bankshares is not aware of any definitive arrangement that may operate at a
subsequent date to effect a change in control of Bankshares.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Bankshares' Articles of Incorporation provide that the Board of Directors of
Bankshares is classified into three classes.
The Class I directors serve until 2000, the Class II directors serve until 2001,
and the Class III directors serve until 1999.
<TABLE>
<CAPTION>
Name Age Principal Occupation Title Director
- ------------------------ ------- ------------------------------------------ ---------------------- -----------
CLASS I
<S> <C> <C> <C>
C.H. Lawrence, Jr. 54 Independent Contractor (Business Bankshares Director 1984
Development); Former Owner & General TFB Director
Manager; Country Chevrolet, Inc.
Henry M. Ross 71 President, Ross Industrial Development Bankshares Director 1984
Corp.; President, Greenwich Corp.; TFB Director
Founder & Former CEO, Ross Industries,
Inc. (Engineer)
C. Hunton Tiffany 59 Chairman of the Board, Fauquier Bankshares Director 1984
Bankshares, Inc.; President, TFB Director
Fauquier Bankshares, Inc.;
President of The Fauquier Bank
John J. Norman, Jr. 36 Vice President, Associate Bankshares Director 1998
Broker, Norman Realty, Inc.; (Commercial RE) TFB Director
Director of the Bank since 1998
CLASS II
Stanley C. Haworth 74 Auctioneer; Owner & General Manager, Bankshares Director 1984
Warrenton Nurseries TFB Director
(Nurseyman/Auctioneer)
H.P. Neale 77 Farming Bankshares Director 1984
TFB Director
Brian S. Montgomery 46 President, Warrenton Foreign Car, Inc. Bankshares Director 1990
President, Montgomery Auto Parts, Inc. TFB Director
(Sales/Service and Parts)
Pat H. Nevill 52 Director & Secretary-Treasurer, The Bankshares Director 1993
Stable Door, Ltd. (Retail Clothing & TFB Director
Tack Sales)
CLASS III
Alexander G. Green, Jr. 82 Retired Postmaster, Merchant Bankshares Director 1984
and Farmer TFB Director
Douglas C. Larson 52 Executive Director, Airlie Foundation; Bankshares Director 1996
Director, International Academy of TFB Director
Preventative Medicine (Conference Center
and Research)
D. Harcourt Lees, Jr. 77 Chairman, D.H. Lees & Co., Inc.; Bankshares Director 1984
President, D.H. Lees Real Estate (Real TFB Director
Estate and Insurance Sales)
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C> <C>
Randolph T. Minter 39 President, Moser Funeral Home; Bankshares Director 1996
President, Bright View Cemetery, Inc. TFB Director
OFFICERS
Diane B. Coppage Treasurer/Senior Vice President, Fauquier Bankshares Officer
Bankshares; Treasurer/Senior Vice TFB Executive Officer
President
Controller, The Fauquier Bank See Principal Occup.
(Accounting, Data Processing,
Bookkeeping)
Randy K. Ferrell Senior Vice President, Fauquier Bankshares Officer
Bankshares; Senior Vice President, TFB Executive Officer
Commercial Banking, The Fauquier Bank See Principal Occup.
(Lending Division)
David G. Koehler Senior Vice President, Fauquier Bankshares Officer
Bankshares; Senior Vice President, TFB Executive Officer
Corporate Finance, The Fauquier Bank See Principal Occup.
(Finance, Investments, Technology)
Gary R. Shook Senior Vice President, Fauquier Bankshares Officer
Bankshares; Senior Vice President, TFB Executive Officer
Investments & Trust Services, Retail See Principal Occup.
Banking, The Fauquier Bank (Branch
Banking, Trust Services and Investment
Sales)
H. Frances Stringfellow Senior Vice President, Secretary, Bankshares Officer
Fauquier
Bankshares; Senior Vice President, TFB Executive Officer
Administrative Services, The Fauquier See Principal Occup.
Bank
(Administration, Human Resources,
Property)
</TABLE>
C. H. "Buddy" Lawrence, Jr. was elected to TFB's Board in 1980 and to
Bankshares' Board in 1984. He was the owner and general manager of Country
Chevrolet, Inc., for many years, until he sold the business in late 1997. In
February 1998 he entered into a contract with TFB as an Independent Contractor
in a marketing, new business development, customer relations role. Mr. Lawrence
serves on the Executive, Long Range Planning, and Trust Committees.
Henry M. "Bud" Ross was elected to TFB's Board in 1976 and to Bankshares' Board
in 1984. Mr. Ross serves on the Audit, Executive, and Long Range Planning
Committees. In 1991 Mr. Ross sold his company, Ross Industries, Inc.
(large-scale food processing and freezing machinery) and became an independent
contractor and consultant to them until 1996. Currently Mr. Ross is President
and owner of Ross Industrial Development (real estate development) and The
Greenwich Corporation (research).
C. Hunton Tiffany has been an employee of TFB since 1965. He was elected to
TFB's Board in 1974 and to Bankshares' Board in 1984. He has served as President
of TFB since 1982 and Bankshares since 1984, and is currently Chairman of both
Boards of Directors. Mr. Tiffany is President and a Director of Fauquier Bank
Services, Inc., a subsidiary of TFB. Mr. Tiffany serves on the Executive,
Investment, Long Range Planning Committee and Trust Committees.
John J. Norman, Jr. is the newest member of the Board of Directors of TFB and
Bankshares, having been elected to both Boards in December 1998. He is Vice
President and Associate Broker of Norman Realty, Inc., a commercial real estate
brokerage. Prior to 1989, he was employed for First Union Bank in North Carolina
for several years.
42
<PAGE>
Stanley C. Haworth was elected to TFB's Board in 1971 and to Bankshares' Board
in 1984. For many years, Mr. Haworth has owned and managed Warrenton Nurseries,
growing and selling shrubbery and trees. He is also a licensed Auctioneer. Mr.
Haworth serves on the Audit, Compensation and Benefits, and Executive
Committees.
H. Paul Neale was elected to TFB's Board in 1971 and to Bankshares' Board in
1984. For many years, he has owned and managed a family dairy farming operation
in Fauquier County. Mr. Neale serves on the Audit and Executive Committees.
Brian S. Montgomery was elected to TFB and Bankshares' Boards in 1990. For many
years, he has owned and managed Warrenton Foreign Car, Inc. and Montgomery Auto
Parts (automotive sales and service). Mr. Montgomery serves on the Compensation,
Executive, Long Range Planning and Trust Committees.
Pat H. Nevill was elected to TFB and Bankshares' Boards in 1993. For many years,
she has been co-owner and manager of The Stable Door, Inc. a local clothing and
tack retail store. Mrs. Nevill serves on the Compensation and Benefits, Long
Range Planning, Investments and Trust Committees.
Alexander G. Green, Jr. was elected to TFB's Board in 1950 and to Bankshares'
Board in 1984. Mr. Green is a retired Postmaster, merchant and farmer. Mr. Green
serves on the Investment and Trust Committees.
Douglas C. Larson was elected to TFB's Board and to Bankshares' Board in 1996.
He has been employed for many years as Executive Director of the Airlie
Conference Center, and as Director of the International Academy of Preventive
Medicine, a research organization. Mr. Larson serves on the Audit and
Compensation and Benefits Committees.
D. Harcourt Lees, Jr. was elected to TFB's Board in 1954 and to Bankshares'
Board in 1984. For many years, Mr. Lees has owned and managed D. H. Lees Real
Estate, a local realty sales organization. Mr. Lees serves on the Long Range
Planning and Trust Committees.
Randolph T. Minter was elected to TFB and Bankshares' Boards in 1996. For more
than five years he has owned and managed Moser Funeral Home and Bright View
Cemetery, Inc. Mr. Minter serves on the Audit, Compensation and Benefits, and
Investment Committees.
Diane B. Coppage joined TFB in 1972. She serves as Senior Vice President,
Controller, and Treasurer of TFB and Senior Vice President and Treasurer of
Bankshares. As head of Support Services, she directs the activities of the
Accounting, Data Processing and Bookkeeping departments and is responsible for
the integrity of the financial systems of the organization. Mrs. Coppage is a
member of Senior Management, and also serves on the Technology, Human Resources,
Asset/Liability Management and Strategic Planning Committees of TFB. She
participates in presentations to the Boards of TFB and Bankshares.
Randy K. Ferrell joined TFB in September 1994. He serves as Senior Vice
President, and heads the Commercial Banking Division, and as Senior Vice
President of Bankshares. From 1972 to September 1994, Mr. Ferrell was employed
by NationsBank and its predecessors, ending his
43
<PAGE>
career there as Senior Vice President, responsible for all corporate banking
activities for Northern Virginia and Washington, D. C. Mr. Ferrell is a member
of Senior Management, and also serves on the Asset/Liability Management
Committee of TFB. Mr. Ferrell is a Senior Vice President and Director of
Fauquier Bank Services, Inc., a subsidiary of TFB. He participates in
presentations to the Boards of TFB and Bankshares, and leads the presentation of
new loans and analysis of the loan portfolio at the Executive Committee
meetings. Mr. Ferrell is a member of Senior Management, and serves on the
Asset/Liability Management and Strategic Planning Committees of TFB.
David G. Koehler joined TFB in November 1994. He serves as Senior Vice
President, and heads the Corporate Finance, Technology and Strategic Support
areas, and as Senior Vice President of Bankshares. From 1990 to November 1994,
he was employed by Crestar Securities Corporation, as Vice President, Portfolio
Advisory Services, and as Investment Banker, in Mergers and Acquisitions. Mr.
Koehler manages TFB's investment portfolio and is responsible for financial
reporting to the shareholders. He oversees the technology program and provides
strategic support related to profitability of TFB's products and services. He is
a Senior Vice President, Treasurer and Director of Fauquier Bank Services, Inc.,
a subsidiary of TFB. David participates in presentations to the Boards of TFB
and Bankshares, and reports to the Investment Committee of the Board of
Directors regarding TFB's program. Mr. Koehler is a member of Senior Management,
chairs the Asset/Liability Management Committee and serves on the Technology and
Strategic Planning Committees.
Gary R. Shook joined TFB in January 1995. He serves as Senior Vice President,
and heads the Retail Branch operations, Investment Sales and Trust Services
areas, and Senior Vice President of Bankshares. From 1988 to January 1995, Mr.
Shook was employed at Jefferson National Bank, as Vice President, Sales and
Marketing in the Trust and Investments Group. He oversees all aspects of the
branching system, third party investment sales, and the Trust Division products
and services of TFB. Mr. Shook serves as a Senior Vice President and Director of
Fauquier Bank Services, Inc., a subsidiary of TFB. Mr. Shook participates in
presentations to the Boards of TFB and Bankshares, and reports to the Trust
Committee of the Board of Directors on all trust activities. He is a member of
Senior Management and serves on the Asset/Liability Management and Strategic
Planning Committees of TFB.
H. Frances Stringfellow joined TFB in 1986. She serves as Senior Vice President
and Secretary of TFB, and Senior Vice President and Corporate Secretary of the
Bankshares. She oversees the operations of the Administrative Services Division,
property management and TFB's purchasing program, and serves as Human Resources
Manager. Mrs. Stringfellow manages the outsource relationship with our auditors
for Internal Auditing and coordinates the efforts of the internal Compliance
Committee of TFB. Currently, she is coordinating the efforts of the Year 2000
Readiness Committee within TFB. She serves as Senior Vice President, Secretary
and a Director of Fauquier Bank Services, Inc., a subsidiary of TFB. She
participates in presentations to the Board of Directors, reports to the Audit
Committee on Internal Auditing and Compliance, and assists the Compensation and
Benefits Committee. She is a member of Senior Management and serves on the
Asset/Liability Management, Human Resources and Strategic Planning Committees of
TFB.
44
<PAGE>
COMMITTEES OF THE BOARD
Bankshares does not have any established committees. During the year ended
December 31, 1998 the Board of Directors acted as a Committee of the whole as to
all matters.
MEETINGS OF BOARD OF DIRECTORS
During the year ended December 31, 1998, the Board of Directors of Bankshares
held eight meetings. All directors were in attendance at each meeting.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the remuneration accrued or paid by Bankshares or
TFB during the calendar years 1998, 1997, and 1996 for the TFB's Officers who
received more than $100,000 during the year.
45
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Annual Compensation Long term compensation
------------------------------------------------------------------
Name and principal Year Awards All other
position ------------------------ Compensation(5)
Other
Salary(1) Bonus(2) annual Restricted Options/ Payouts-- ($)
($) ($) compensa- Stock SARs(4) LTIP
tion(3) Awards (#) Payouts--
($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
C. Hunton Tiffany 1998 156,400 37,195 4,619 6,422 4,800
President & CEO 1997 148,631 37,195 4,428 4,442
1996 146,653 20,815 4,226 4,476
Randy K. Ferrell 1998 90,863 18,000 135 2,557 8,987
SVP, Commercial Banking 1997 88,863 18,000 135 8,846
1996 87,550 14,350 132 8,740
Gary R. Shook 1998 89,775 18,000 48 2,493 3,203
SVP,Retail/Investments & 1997 86,275 14,675 48 2,588
Trust Services
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes Director's Fees of $14,800 earned by the President in 1996.
(2) Reflects Incentive Compensation.
(3) Represents automobile allowance of $1,362 for the President in 1998, $1,241
in 1997, and $1,189 in 1996; group life insurance in excess of $50,000
premiums of $3,257 for the President in 1998, $3,187 in 1997, and $3,037 in
1996; same insurance premiums for Mr. Ferrell in 1998 of $135; in 1997 of
$135, and in 1996 of $132; and same insurance premiums for Mr. Shook in
1998 of $48, and in 1997 of $48.
(4) Represents the number of Incentive Stock Options granted by the Board of
Directors in 1998. 74% of the President's shares vest in the year 2001 and
26% vest in 2002; Mr. Ferrell's and Mr. Shook's shares vest in 2001. When
vested, the shares may be purchased by the employee at the fair market
value of $21.00 per share. The Options generally expire ten years after the
date of grant.
(5) Represents 401(k) Match paid TFB for the President in 1998, 1997, and 1996;
represents the portion of split dollar life insurance premiums paid by TFB
on Mr. Ferrell's behalf of $5,711 in 1998, $5,787 in 1997, and $5,764 in
1996, 401(k) Match paid by TFB for Mr. Ferrell of $3,276 in 1998, $3,059 in
1997 and $2,976 in 1996; and represents 401(k) Match paid by TFB for Mr.
Shook in 1998 and in 1997.
DIRECTORS' COMPENSATION
MEETING FEES. Non-Employee Directors of Bankshares receive a fee of $200 for
each Board meeting attended. Non-Employee Directors of TFB receive a fee of $400
for each Board meeting
46
<PAGE>
and $200 for each Committee meeting attended. However, no Director may receive
fees for more than two Board and Committee meetings held in any one day.
DIRECTOR DEFERRED COMPENSATION PLAN. Effective April 1, 1995, the Board approved
and established a Director Deferred Compensation Plan (the "Deferred
Compensation Plan"). This plan provides that any non-employee director of
Bankshares or TFB may elect to defer receipt of all or any portion of his or her
compensation as a director. A participating Director may elect to have amounts
deferred under the Deferred Compensation Plan held in a deferred cash account
which is credited on a quarterly basis with interest equal to the highest rate
offered by TFB at the end of the preceding quarter. Alternatively, a participant
may elect to have a deferred stock account in which deferred amounts are treated
as if invested in Bankshares common stock at the fair market value on the date
of deferral. The value of a stock account will increase and decrease based upon
the fair market value of an equivalent number of shares of common stock. In
addition, the deferred amounts deemed invested in common stock will be credited
with dividends on an equivalent number of shares. Amounts considered invested in
Bankshares common stock are paid, at the election of the director, either in
cash or in whole shares of the common stock and cash in lieu of fractional
shares. Directors may elect to receive amounts contributed to their respective
accounts in one or up to five installments. Bankshares may establish a trust to
hold amounts deferred and which accumulate under the plan. The purpose of the
Deferred Compensation Plan is to give the non-employee directors the option of
deferring current taxation on directors' fee income.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. In addition, the Board approved and
established effective April 1, 1995, a Non-Employee Director Stock Option Plan
(the "Option Plan"). Under this plan each Director who is not an employee of
Bankshares or its subsidiary will receive an option grant covering 1,120 shares
of Bankshares common stock on April 1 of each year during the five year term of
the Option Plan. The first grant under the Option Plan was made on May 1, 1995.
The exercise price of awards is fixed at the fair market value of the shares on
the date the option is granted. During the term of the Option Plan, a total of
61,600 shares of common stock may be granted. The options granted under the
Option Plan are not exercisable for six months from the date of grant except in
the case of death or disability. Options that are not exercisable at the time a
director's services on the Board terminates for reasons other than death,
disability or retirement in accordance with Bankshares' policy will be
forfeited. The purpose of the Option Plan is to promote a greater identity of
interest between non-employee directors and Bankshares' shareholders by
increasing each participant's proprietary interest in Bankshares through the
award of options to purchase Bankshares common stock.
INDEPENDENT CONTRACTOR AGREEMENT. C. H. Lawrence, Jr., a non-employee director,
continues to provide business development and customer relations services to TFB
under an Independent Contractor Agreement dated February 23, 1998, which
contract is renewable annually. Because of his successful performance under the
contract, Mr. Lawrence's compensation was increased from $50,000.00 to
$77,400.00 per annum, effective September 1, 1998.
EXECUTIVE COMPENSATION
OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN. In 1998, Bankshares
adopted an Omnibus Stock Ownership and Long-Term Incentive Plan for certain key
employee of The
47
<PAGE>
Fauquier Bank. Two hundred thousand (200,000) shares of common stock were
reserved and available for issuance under the Plan. On August 20, 1998, the
Board of Directors granted incentive stock options, which options, if exercised,
would equal 17,977 shares of common stock. The options have an exercise price of
$21.00 per share. Generally, the shares are not exercisable until three years
from the date of issuance and generally require continuous employment during the
period prior to exercise. The options will expire in no more than ten years
after the date of grant. The Plan is designed to encourage and motivate
employees to contribute to the successful performance of Bankshares. The Board
of Directors believes that stock ownership by employees promotes a unity of
purpose between employees and shareholders. The Plan supports the achievement of
Bankshares' primary long term performance objectives and helps to retain
employees.
OPTIONS/SAR GRANTS IN 1998
Individual Grants
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Number of Percent of
securities total options/
underlying SARs granted
options/SARS to employees Exercise or Expiration
Name granted (#) in fiscal year base price ($/Sh) date
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
C. Hunton Tiffany 6,422 35.7% $21.00 Oct. 20, 2008
Randy K. Ferrell 2,557 14.2% $21.00 Oct. 20, 2008
Gary R. Shook 2,493 13.9% $21.00 Oct. 20, 2008
David G. Koehler 2,463 13.7% $21.00 Oct. 20, 2008
Diane B. Coppage 2,016 11.2% $21.00 Oct. 20, 2008
H. Frances Stringfellow 2,026 11.3% $21.00 Oct. 20, 2008
Total 17,977 100% $21.00 Oct. 20, 2008
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
PENSION PLANS. TFB has a non-contributory benefit plan which covers
substantially all employees of TFB who are 21 years of age or older, who have at
least one year of service, and work a minimum of 1,000 hours per year.
The Plan's Normal Retirement Benefit formula is as follows:
(a) 1.35% of the Participant's final 5-year average compensation
per year of service up to 35 years plus
(b) 0.60% of the Participant's final 5-year average compensation,
in excess of his/her Covered Compensation Level, * per year of
service up to 35 years.
* Covered Compensation Level = The average of the last 35 years of the social
security wage base at normal retirement.
TFB's pension plan expense for calendar year 1998 was $92,609.
Cash benefits under the Plan generally commence on retirement, death or other
termination of employment and are payable in various forms, generally at the
Participant's election.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
5 Year YEARS OF SERVICE
Average 10 15 20 25 30 35
Salary
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
50,000 7,878 11,817 15,756 19,695 23,634 27,573
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
65,000 10,803 16,205 21,606 27,008 32,409 37,811
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
80,000 13,728 20,592 27,456 34,320 41,184 48,048
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
100,000 17,628 26,442 35,256 44,070 52,884 61,698
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
125,000 22,503 33,755 45,006 56,258 67,509 78,761
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
150,000 27,378 41,067 54,756 68,445 82,134 95,823
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
160,000 29,328 43,992 58,656 73,320 87,984 102,648
and above
- ----------------- -------------- --------------- -------------- --------------- -------------- --------------
</TABLE>
Based on a straight life annuity assuming full benefit at age 65, no offsets,
and covered compensation of $31,200 for a person age 65 in 1998. Compensation is
currently limited to $160,000 by IRC Regulation and includes all regular pay,
overtime and regular bonuses.
49
<PAGE>
The approximate years of service as of January 1, 1999 for the named executive
officers are as follows:
Service
<TABLE>
<CAPTION>
-------
Name Years Months
---- ----- ------
<S> <C> <C> <C>
C. Hunton Tiffany 34 (1/18/65)
Randy K. Ferrell 4 3 (9/19/94)
Gary R. Shook 4 (1/17/95)
</TABLE>
RETIREMENT PLAN. TFB has a defined contribution retirement plan under Code
Section 401(k) of the Internal Revenue Service covering employees who have
completed six months of service and who are at least 21 years of age. Under the
plan a participant may contribute an amount up to 15% of their covered
compensation for the year, subject to certain limitations. TFB may also make,
but is not required to make, a discretionary matching contribution. The amount
of this matching contribution, if any, is determined on an annual basis by the
Board of Directors. TFB made a contribution to the plan for the year ended
December 31, 1998 of $61,566.
INCENTIVE PLANS. No officer or director received remuneration other than as
stated above, in the form of bonus, profit-sharing, pension, retirement, options
or warrants to purchase stock or any other remuneration plan, for the year ended
December 31, 1998. An incentive compensation plan for 1998 was approved by the
Board of Directors to be shared by all employees of TFB. An incentive pool of
$297,031 for 1998 was divided among all employees of TFB in January 1999. There
are no commission agreements between Bankshares or TFB and their respective
directors or officers. A Change of Control Agreement was approved by the Board
of Directors of TFB in November 1994 and executed between TFB and six members of
Senior Management.
SPLIT DOLLAR LIFE INSURANCE AGREEMENT. On January 1, 1996, TFB entered into a
Split Dollar Life Insurance Agreement with Mr. Ferrell pursuant to which TFB
purchased two existing policies of insurance on Mr. Ferrell's life. Pursuant to
the agreement, TFB pays a portion of the annual premium on the insurance
policies. The policies provide for a combined death benefit of $440,000 to be
paid to the beneficiaries named thereon, and TFB is entitled to the total policy
proceeds in excess of the death benefits. TFB paid $5,711 of premiums in 1998 in
connection with this agreement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TFB, as Bankshares subsidiary, has had, and expects to have in the future,
banking transactions in the ordinary course of business with its directors,
executive officers, their immediate families and affiliated companies in which
they are principal stockholders. Such loans were made on substantially the same
terms, including interest rate, collateral, and repayment terms on loans, as
those prevailing at the same time for comparable transactions with similar risk.
The extensions of credit by TFB to these persons have not and do not currently
involve more than the normal risk of collectibility or present other unfavorable
features. At December 31, 1998, these loans (excluding loans that total less
than $60,000) totaled $4,396,078. During 1998, total principal additions were
$1,592,296 and total principal payments were $1,135,540.
50
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
There is no pending or threatened litigation that, in the opinion of management,
may materially impact the financial condition of Bankshares or TFB.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON BANKSHARES' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of March 11, 1999, there were 1,823,129 outstanding shares of common stock,
which is the only class of Bankshares stock. There is no organized trading
market for Bankshares' stock. Accordingly, there is no comprehensive record of
trades or the prices of any such trades. As a result, the prices reported for
Bankshares common stock may not be reliable indicators of market value. The
following table reflects stock prices for Bankshares' Shares, to the extent such
information is available. The following sets forth the high and low closing
prices for trades for Bankshares common stock that occurred in transactions know
to Bankshares management from January 1, 1997 and during the respective periods
indicated.
<TABLE>
<CAPTION>
1997 1998
------------------------------------------------ ------------------------------------------------
Q* HIGH LOW SHARES HIGH LOW SHARES
<S> <C> <C> <C> <C> <C> <C>
1st $12.33 $12.00 N/A $21.25 $18.75 N/A
2nd $13.25 $12.25 N/A $21.50 $21.00 N/A
3rd $14.00 $13.00 N/A $22.00 $19.00 N/A
4th $18.75 $14.00 N/A $20.00 $18.50 N/A
</TABLE>
* Quarter.
All prices are adjusted for the 2-for-1 stock split declared on March 19, 1998.
HOLDERS
As of March 11, 1999 there were 430 holders of record of Bankshares common
stock.
DIVIDENDS
On March 19, 1998, Bankshares declared a 2 for 1 stock split. Bankshares has
declared and paid the following cash dividends in the past two years:
51
<PAGE>
<TABLE>
<CAPTION>
($) ($)
Dividend Year Per Share * Total Annual
- ------------------ ------------ -----------------
<S> <C> <C>
1997 $0.35 $191,301
1998 $0.45 $238,910
</TABLE>
* The above figures are adjusted to reflect all stock splits and dividends.
Bankshares' future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
financial condition, cash requirements, and general business conditions.
Bankshares' ability to pay cash dividends will depend entirely upon TFB's
abilities to pay dividends to Bankshares.
Transfer of funds from TFB to Bankshares in the form of loans, advances and cash
dividends are restricted by federal and state regulatory authorities. As of
December 31, 1998, the aggregate amount of unrestricted funds that could be
transferred from TFB to Bankshares without prior regulatory approval totaled
$3,136,385.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Bankshares has sold no securities within the past three years.
ITEM 11. DESCRIPTION OF BANKSHARES' SECURITIES TO BE REGISTERED
SHARES OF COMMON STOCK
Bankshares has 8,000,000 shares of $3.13 par value common stock. As of March 11,
1999, Bankshares had 430 shareholders and 1,823,129 shares were issued and
outstanding. The outstanding shares are fully paid and non-assessable. In the
event of voluntary or involuntary liquidation, dissolution or winding up of the
affairs of Bankshares, Bankshares' assets shall be distributed pro rata to the
holders of the shares.
RIGHTS OF SHAREHOLDERS
The holders of Bankshares common stock are entitled to one vote per share on all
matters voted on by shareholders, including elections of directors, and possess
exclusively all voting power except as otherwise required by law. The Articles
do not provide for cumulative voting for the election of directors. The holders
of Bankshares common stock are entitled to such dividends as may be declared
from time to time by Bankshares' Board of Directors from funds available
therefore, and upon liquidation will be entitled to receive pro rata all assets
of Bankshares available for distribution to such holders. The holders of
Bankshares common stock have no
52
<PAGE>
preemptive or other subscription rights, and there are no conversion rights or
redemption or sinking fund provisions with respect to the common stock.
CERTAIN PROVISIONS OF BANKSHARES' ARTICLES OF INCORPORATION AND BYLAWS
The Articles and Bylaws contain provisions that may delay or prevent a change in
control of Bankshares. The Articles and Bylaws provide that: (i) the number of
directors shall be stated in TFB's Bylaws but the number of directors set forth
in the bylaws cannot be increased by more than two during any 12-month period
except by the affirmative vote of holders of 85% of all shares of voting stock
of TFB; (ii) that the Board of Directors shall be divided into three classes, as
nearly equal in number as possible and at each annual meeting of the
shareholders thereafter one class shall be elected each year to serve a
three-year term; (iii) subject to the rights of the holders of any series of
Preferred Stock then outstanding, any director may be removed, with out cause,
but only by the affirmative vote of the holders of at least 85% of the
outstanding shares of common stock; (iv) special meetings of the stockholders
may be called only by the Chairman of the Board, the President, a majority of
the Board of Directors, or by any three or more stockholders together holding at
least 25% of the number of shares of capital stock of TFB at the time
outstanding and entitled to vote with respect to the business to be transacted
at such meeting. At a special meeting no business may be transacted and no
corporate action may be taken other than that stated in the notice of the
meeting.
VIRGINIA STATE REGULATION OF CERTAIN TRANSACTIONS
AFFILIATED TRANSACTIONS. The Virginia Stock Corporation Act (the "Virginia Act")
contains provisions governing "Affiliated Transactions" designed to deter
certain coercive two-tier takeovers of Virginia corporations. Affiliated
Transactions include certain mergers and share exchanges, material dispositions
of corporate assets not in the ordinary course of business, any dissolution of
the corporation proposed by or on behalf of an "Interested Shareholder" (as
defined below), or reclassification, including reverse stock splits,
recapitalizations or mergers of the corporation with its subsidiaries which have
the effect of increasing the percentage of voting shares beneficially owned by
an Interested Shareholder by more than 5%. For purposes of the Virginia Act, an
"Interested Shareholder" is defined as any beneficial owner of more than 10% of
any class of the voting securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, a Virginia corporation
cannot engage in an Affiliated Transaction with such Interested Shareholder
unless approved by the affirmative vote of the holders of more than two-thirds
of the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the "Disinterested Directors." A "Disinterested Director"
means, with respect to a particular Interested Shareholder, a member of a
corporation's board of directors who (i) was a member before the later of
January 1, 1988 and the date on which an Interested Shareholder became an
Interested Shareholder and (ii) was recommended for election by, or was elected
to fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the corporation's board of directors. At the
expiration of the three-year period, these provisions
53
<PAGE>
require approval of Affiliated Transactions by the affirmative vote of the
holders of more than two-thirds of the outstanding shares of the corporation
entitled to vote, other than those beneficially owned by the Interested
Shareholder.
The principal exceptions to the special voting requirement apply to Affiliated
Transactions occurring after the three-year period has expired and require
either that the transaction be approved by a majority of the Disinterested
Directors or that the transaction satisfy certain fair price requirements of the
statute. In general, the fair price requirements provide that the shareholders
must receive the highest per share price for their shares as was paid by the
Interested Shareholder for his shares or the fair market value of their shares,
whichever is higher. The fair price requirements also require that, during the
three years preceding the announcement of the proposed Affiliated Transaction,
all required dividends have been paid and no special financial accommodations
have been accorded the Interested Shareholder, unless approved by a majority of
the Disinterested Directors.
None of the foregoing limitations and special voting requirements apply to an
Affiliated Transaction with an Interested Shareholder (i) who was an Interested
Shareholder on the date the corporation first became subject to the provisions
of the Virginia Act governing Affiliated Transactions by virtue of its having
300 shareholders of record or (ii) whose acquisition of shares making such a
person an Interested Shareholder was approved by a majority of the corporation's
Disinterested Directors.
The Affiliated Transactions provisions provide that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt, by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that Affiliated
Transaction provisions shall not apply to the corporation. Bankshares has not
adopted such an amendment.
CONTROL SHARE ACQUISITIONS. The Virginia Act contains provisions regulating
certain "control share acquisitions" which are transactions causing the voting
strength of any person acquiring beneficial ownership of shares of a public
corporation in Virginia to meet or exceed certain threshold percentages (20%,
33-1/3% or 50%) of the total votes entitled to be cast for the election of
directors. Shares acquired in a control share acquisition have no voting rights
unless granted by a majority vote of all outstanding shares other than those
held by the acquiring person or any officer or employee director of the
corporation. The acquiring person may require that a special meeting of the
shareholders be held to consider the grant of voting rights to the shares
acquired in the control share acquisition. If the acquiring person's shares are
not accorded voting rights (or if no request for a special meeting is made by an
acquirer), the corporation may, if authorized by its charter and bylaws prior to
control share acquisition, purchase the acquiring person's shares at their cost
to the acquiring person. If voting rights are approved and the acquiring person
controls 50% or more of the voting power, all shareholders other than the
acquiring person have dissenters' rights which enable them to receive the "fair
value" of their shares. "Fair value" is not less than the highest price paid in
the control share acquisition. The Virginia Act permits corporations to opt-out
of its provisions by adopting a bylaw or charter provision prior to a control
share acquisition stating that the control share provisions of the Virginia Act
shall not apply. Bankshares has not adopted such a provision.
54
<PAGE>
VOTING REQUIREMENTS FOR CERTAIN BUSINESS COMBINATIONS
Bankshares Articles of Incorporation establish voting requirements for certain
business combination in addition to any Virginia requirements. The affirmative
vote of the holders of 85% of all shares of Bankshares common stock entitled to
vote on any business combination (as hereinafter defined) shall be required for
the adoption or authorization of such business combination with any other entity
(as hereinafter defined) if such entity is the beneficial owner, directly or
indirectly, of more than 20% of Bankshares voting stock. This requirement is not
applicable if: (a) certain fair price considerations are met; (b) after such
other entity has acquired a 20% interest and prior to the consummation of the
business combination Bankshares' Board of Directors continues to be represented
by the same individuals who were directors prior to the time that such other
entity acquired in excess of 30% of Bankshares voting stock, and the other
entity has not acquired any more of Bankshares' voting stock beyond the
acquisitions that brought the entity above the 20% threshold; (c) such other
entity shall not have received the benefit, directly or indirectly (except
proportionately as a stockholder) of any loans, advances, guarantees, pledges or
other financial assistance provided by Bankshares, or made any major change in
Bankshares' business or capital structure with out the unanimous approval of the
directors, in either case prior to the consummation of such business
combination; and (d) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall be mailed to Bankshares' public
stockholders for the purpose of soliciting stockholder approval.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Bankshares' Articles of Incorporation state that each Director and Officer shall
be indemnified by the Corporation against liabilities, fines, penalties and
claims imposed upon or asserted against him (including amounts paid in
settlement) by reason of having been such a Director or Officer, whether or not
then continuing so to be, and against all expenses (including counsel fees)
reasonably incurred by him in connection therewith, except in relation to
matters as to which he shall have been finally adjudged to be liable by reason
of having been guilty of gross negligence or willful misconduct in the
performance of his duties as such Director or Officer. Further, in the event of
any other judgment against such Director or Officer or in the event of a
settlement, the indemnification shall be made only if the Corporation shall be
advised, in case none of the persons involved shall be or have been a Director
of the Corporation, by the Board of Directors, and otherwise by independent
counsel to be appointed by the Board of Directors, that in its or his opinion
such Director or Officer was not guilty of gross negligence or willful
misconduct in the performance of his duties, and, in the event of a settlement,
that such settlement was, or if still to be made is, in the best interests of
the Corporation. If this determination is to be made by the Board of Directors,
it may, as to all questions of law, rely on the advice of independent counsel.
Every reference therein to Director or Officer includes every Director or
Officer or former Director or Officer of the Corporation and every person who
may have served at its request as a director or officer of another corporation
in which the Corporation owned shares of stock or of which it is a creditor or,
in the case of a non-stock corporation, to which the Corporation contributes
and, in all of such cases, his executors and administrators. The right of
indemnification provided is not exclusive of any other rights to which any
Director or Officer may be entitled by Virginia law, or otherwise.
55
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors of
Fauquier Bankshares, Inc. and Subsidiaries
Warrenton, Virginia
We have audited the accompanying consolidated balance sheets of Fauquier
Bankshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fauquier
Bankshares, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 27, 1999
F-1
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 9 868 240 $ 10 715 490
Interest-bearing deposits in other banks 3 680 430 26 639
Federal funds sold 13 182 000 9 470 000
Securities (fair value: 1998, $22,865,960;
1997, $27,961,270) 22 790 801 27 945 650
Loans, net 162 272 291 128 153 154
Bank premises and equipment, net 5 879 737 6 155 862
Accrued interest receivable 1 084 500 915 724
Other real estate 56 944 199 085
Other assets 1 211 432 860 470
----------------- ----------------
Total assets $ 220 026 375 $ 184 442 074
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 34 438 128 $ 29 188 395
Savings and interest-bearing demand deposits 102 176 226 93 628 599
Time deposits 42 602 788 39 052 110
----------------- ---------------
Total deposits $ 179 217 142 $ 161 869 104
Federal Home Loan Bank advances 18 000 000 - -
Dividends payable 238 910 191 301
Other liabilities 1 393 487 1 403 771
Commitments and contingent liabilities - - - -
----------------- ---------------
Total liabilities $ 198 849 539 $ 163 464 176
================= ================
SHAREHOLDERS' EQUITY
Common stock, par value, 1998, $3.13; 1997, $6.25; authorized 1998, 8,000,000
shares; 1997, 4,000,000 shares; issued and
outstanding 1998, 1,837,770 shares; 1997, 956,504 shares $ 5 752 220 $ 5 978 150
Capital surplus - - 1 207 680
Retained earnings 15 432 062 13 887 212
Accumulated other comprehensive income (loss) (7 446) (95 144)
------------------ ----------------
Total shareholders' equity $ 21 176 836 $ 20 977 898
================= ================
Total liabilities and shareholders' equity $ 220 026 375 $ 184 442 074
================= ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
--------------- -------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 12 580 317 $ 11 152 802 $ 9 795 568
Interest on investment securities:
Taxable interest income 338 217 455 783 603 995
Interest income exempt from federal
income taxes 142 827 199 347 265 083
Interest and dividends on securities available
for sale:
Taxable interest income 1 037 353 1 362 679 1 663 606
Interest income exempt from federal
income taxes 70 493 49 774 16 542
Dividends 87 950 62 334 51 304
Interest on federal funds sold 492 677 155 531 150 769
Interest on deposits in other banks 88 862 9 960 - -
--------------- -------------- -------------
Total interest income $ 14 838 696 $ 13 448 210 $ 12 546 867
--------------- -------------- -------------
INTEREST EXPENSE
Interest on deposits $ 5 178 122 $ 4 495 621 $ 4 693 457
Interest on Federal Home Loan Bank advances 340 579 238 065 - -
Interest on federal funds purchased 160 17 474 5 285
--------------- -------------- -------------
Total interest expense $ 5 518 861 $ 4 751 160 $ 4 698 742
--------------- -------------- -------------
Net interest income $ 9 319 835 $ 8 697 050 $ 7 848 125
Provision for loan losses 534 675 465 000 578 000
--------------- -------------- -------------
Net interest income after
provision for loan losses $ 8 785 160 $ 8 232 050 $ 7 270 125
--------------- -------------- -------------
OTHER INCOME
Trust Department income $ 555 659 $ 522 190 $ 500 279
Service charges on deposit accounts 1 046 625 1 065 328 1 049 890
Other service charges, commissions
and fees 779 431 701 658 647 141
Gains on securities available for sale 16 673 10 142 78 036
Other operating income 5 829 54 361 9 540
--------------- -------------- -------------
Total other income $ 2 404 217 $ 2 353 679 $ 2 284 886
--------------- -------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
--------------- -------------- -------------
<S> <C> <C> <C>
OTHER EXPENSES
Salaries and employees' benefits $ 3 396 531 $ 3 274 362 $ 3 066 858
Net occupancy expense of premises 336 768 387 107 377 932
Furniture and equipment 792 402 883 089 823 610
Other operating expenses 3 183 078 2 809 098 2 696 659
--------------- -------------- -------------
Total other expenses $ 7 708 779 $ 7 353 656 $ 6 965 059
--------------- -------------- -------------
Income before income taxes $ 3 480 598 $ 3 232 073 $ 2 589 952
Income tax expense 1 039 053 981 510 748 387
--------------- -------------- -------------
Net income $ 2 441 545 $ 2 250 563 $ 1 841 565
=============== ============== =============
EARNINGS PER SHARE, basic $ 1.31 $ 1.18 $ 0.96
=============== ============== =============
EARNINGS PER SHARE, assuming dilution $ 1.30 $ 1.17 $ 0.96
=============== ============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
---------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2 441 545 $ 2 250 563 $ 1 841 565
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 773 863 824 725 762 744
Provision for loan losses 534 675 465 000 578 000
Provision for other real estate 30 000 40 000 25 000
Deferred tax (benefit) (40 964) (81 861) (114 660)
Net (gain) on sale of premises and equipment - - (2 861) (2 796)
Disposal of fixtures and equipment - - - - 27 994
(Gain) on securities available for sale (16 673) (10 142) (78 036)
(Gain) on other real estate (1 127) (11 954) (44 738)
(Gain) on sale of fixed assets (8 590) - - - -
Net premium amortization on investment
securities 29 272 62 537 44 388
Changes in assets and liabilities:
(Increase) decrease in other assets (537 700) (178 567) 204 110
Increase (decrease) in other liabilities (10 284) 339 447 144 421
---------------- -------------- -------------
Net cash provided by operating activities $ 3 194 017 $ 3 696 887 $ 3 387 992
---------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available
for sale $ 2 734 130 $ 9 918 783 $ 4 992 100
Proceeds from maturities, calls and principal
payments of investment securities 3 424 859 3 450 904 1 613 581
Proceeds from maturities, calls and principal
payments of securities available for sale 14 562 054 8 175 688 9 252 765
Purchase of investment securities (499 250) (25 000) - -
Purchase of securities available for sale (14 932 919) (7 623 455) (8 437 615)
Proceeds from sale of premises and equipment 8 590 2 861 6 199
Proceeds from sale of other real estate owned 121 368 249 991 620 345
Purchase of premises and equipment (497 738) (1 281 972) (354 948)
Capitalized improvements to other real estate - - - - (6 900)
Net (increase) in loans (34 661 912) (14 337 988) (15 838 095)
---------------- --------------- --------------
Net cash (used in) investing activities $ (29 740 818) $ (1 470 188) $ (8 152 568)
---------------- -------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
---------------- -------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts $ 13 797 360 $ 6 590 565 $ 4 828 215
Net increase (decrease) in certificates of deposit 3 550 678 2 340 206 (173 254)
Net increase in other borrowed funds 18 000 000 - - - -
Cash dividends paid (784 188) (620 539) (468 605)
Issuance of common stock - - - - 13 430
Acquisition of common stock (1 498 508) - - - -
---------------- -------------- -------------
Net cash provided by financing activities $ 33 065 342 $ 8 310 232 $ 4 199 786
---------------- -------------- -------------
Increase (decrease) in cash and cash equivalents $ 6 518 541 $ 10 536 931 $ (564 790)
CASH AND CASH EQUIVALENTS
Beginning 20 212 129 9 675 198 10 239 988
--------------- -------------- -------------
Ending $ 26 730 670 $ 20 212 129 $ 9 675 198
=============== ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest $ 5 432 911 $ 4 739 123 $ 4 718 362
=============== ============== =============
Income taxes $ 1 287 248 $ 1 021 000 $ 845 100
=============== ============== =============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES
Other real estate acquired in settlement
of loans $ 17 267 $ - - $ 292 579
=============== ============== =============
Unrealized gain (loss) on securities
available for sale, net $ 146 625 $ 190 270 $ (13 192)
=============== ============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS
------------- ------------ --------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 5 973 900 $ 1 198 500 $ 10 960 829
Comprehensive income:
Net income - - - - 1 841 565
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $22,047 - - - - - -
Less reclassification adjustment, net of income taxes
of $26,532 - - - - - -
Other comprehensive income (loss), net of tax - - - - - -
Total comprehensive income - - - - - -
Cash dividends ($0.26 per share) - - - - (497 382)
Issuance of 680 shares of common stock 4 250 9 180 - -
------------- ------------ --------------
BALANCE, DECEMBER 31, 1996 $ 5 978 150 $ 1 207 680 $ 12 305 012
Comprehensive income:
Net income - - - - 2 250 563
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $68,139 - - - - - -
Less reclassification adjustment, net of income taxes
of $3,448 - - - - - -
Other comprehensive income, net of tax - - - - - -
Total comprehensive income - - - - - -
Cash dividends ($0.35 per share) - - - - (668 363)
------------- ------------ ---------------
BALANCE, DECEMBER 31, 1997 $ 5 978 150 $ 1 207 680 $ 13 887 212
Comprehensive income:
Net income - - - - 2 441 545
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $50,847 - - - - - -
Less reclassification adjustment, net of income taxes
of $5,669 - - - - - -
Other comprehensive income, net of tax - - - - - -
Total comprehensive income - - - - - -
Cash dividends ($0.45 per share) - - - - (831 797)
Change in par value from $6.25 to $3.13 per share 9 264 (9 264) - -
Acquisition of 75,238 shares of common stock (235 194) (1 198 416) (64 898)
-------------- ------------- ---------------
BALANCE, DECEMBER 31, 1998 $ 5 752 220 $ - - $ 15 432 062
============= ============ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME TOTAL
------------- ------------- -----
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ (212 016) $ 17 921 213
Comprehensive income:
Net income - - $ 1 841 565 1 841 565
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $22,047 - - 42 797 - -
Less reclassification adjustment, net of income taxes
of $26,532 - - (51 504) - -
Other comprehensive income (loss), net of tax --------------
Total comprehensive income (8 707) $ (8 707) (8 707)
Cash dividends ($0.26 per share) --------------
Issuance of 680 shares of common stock - - $ 1 832 858 - -
=============
BALANCE, DECEMBER 31, 1996 - - (497 382)
Comprehensive income: - - 13 430
Net income --------------- ----------------
Other comprehensive income (loss) net of tax: $ (220 723) $ 19 270 119
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $68,139 - - $ 2 250 563 2 250 563
Less reclassification adjustment, net of income taxes
of $3,448
Other comprehensive income, net of tax - - 132 273 - -
Total comprehensive income
Cash dividends ($0.35 per share) - - (6 694) - -
--------------
BALANCE, DECEMBER 31, 1997 125 579 $ 125 579 125 579
Comprehensive income: -------------
Net income - - $ 2 376 142 - -
Other comprehensive income (loss) net of tax: =============
Unrealized holding gains on securities available - - (668 363)
for sale, net of deferred income taxes of $50,847 --------------- ----------------
Less reclassification adjustment, net of income taxes $ (95 144) $ 20 977 898
of $5,669
Other comprehensive income, net of tax - - $ 2 441 545 2 441 545
Total comprehensive income
Cash dividends ($0.45 per share)
Change in par value from $6.25 to $3.13 per share - - 98 702 - -
Acquisition of 75,238 shares of common stock
- - (11 004) - -
BALANCE, DECEMBER 31, 1998 --------------
87 698 $ 87 698 87 698
-------------
- - $ 2 529 243 - -
=============
- - (831 797)
- - - -
- - (1 498 508)
--------------- ----------------
$ (7 446) $ 21 176 836
================ ===============
</TABLE>
F-8
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Fauquier Bankshares, Inc. and Subsidiaries (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to
customers in Virginia. The loan portfolio is well diversified and
generally is collateralized by assets of the customers. The loans are
expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to the reporting
guidelines prescribed by regulatory authorities. The following is a
description of the more significant of those policies and practices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Fauquier Bankshares, Inc. and its wholly-owned subsidiaries, The
Fauquier Bank and Fauquier Bank Services, Inc. In consolidation,
significant intercompany accounts and transactions have been
eliminated.
SECURITIES
Securities are classified in three categories and accounted for
as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability
to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount,
computed by the interest method over their contractual
lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt
and equity securities that the Corporation intends to hold
for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors,
including significant movements in interest rates, changes
in the maturity mix of the Corporation's assets and
liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized
gains or losses are reported as a separate component of
other comprehensive income, net of the related deferred tax
effect. Realized gains or losses, determined on the basis of
the cost of specific securities sold, are included in
earnings.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c. Trading Securities
Trading securities, which are generally held for the short
term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading
account assets are included in interest income on trading
account securities. The Corporation had no trading
securities at December 31, 1998 and 1997.
LOANS
Loans are shown on the balance sheets net of unearned discounts
and the allowance for loan losses.
Interest is computed by methods which result in level rates of
return on principal. Loans are charged off when in the opinion of
management they are deemed to be uncollectible after taking into
consideration such factors as the current financial condition of
the customer and the underlying collateral and guarantees.
Impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided solely by
the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of
those loans is to be based on the fair value of the collateral.
The Corporation considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These loans
are not subject to the above impairment provisions. A loan is
considered impaired when it is probable that the Corporation will
be unable to collect all principal and interest amounts according
to the contractual terms of the loan agreement. Factors involved
in determining impairment include, but are not limited to,
expected future cash flows, financial condition of the borrower,
and the current economic conditions. A performing loan may be
considered impaired, if the factors above indicate a need for
impairment. A loan on nonaccrual status may not be impaired if in
the process of collection or there is an insignificant shortfall
in payment. An insignificant delay of less than 30 days or a
shortfall of less than 5% of the required principal and interest
payment generally does not indicate an impairment situation, if
in management's judgment the loan will be paid in full. Loans
that meet the regulatory definitions of doubtful or loss
generally qualify as an impaired loan. Charge-offs for impaired
loans occur when the loan or portion of the loan is determined to
be uncollectible, as is the case for all loans.
F-10
<PAGE>
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal
balance. Interest income on other nonaccrual loans is recognized
only to the extent of interest payments received.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows.
The allowance is increased by a provision for loan losses, which
is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowances relating to impaired loans
are charged or credited to the provision for loan losses. Because
of uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Premises and equipment are
depreciated over their estimated useful lives; leasehold
improvements are amortized over the lives of the respective
leases or the estimated useful life of the leasehold improvement,
whichever is less. Depreciation and amortization are recorded on
the accelerated and straight-line methods.
Costs of maintenance and repairs are charged to expense as
incurred. Costs of replacing structural parts of major units are
considered individually and are expensed or capitalized as the
facts dictate.
INCOME TAXES
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards and tax credit
carryforwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEFINED BENEFIT PLAN
In 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This pronouncement
does not change the measurement or recognition of amounts
recognized in the Corporation's financial statements applicable
to its defined benefit plan. Statement No. 132 revises the
existing disclosure requirements by standardizing the disclosure
requirements for pensions requiring certain additional
information on changes in the benefit obligations and fair values
of plan assets, and eliminating certain disclosures.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement 128 replaced
the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per
share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per
share.
NONREFUNDABLE LOAN FEES AND COSTS
Loan origination and commitment fees and certain direct loan
origination costs are being deferred and the net amount amortized
as an adjustment of the related loan's yield.
INVESTMENTS AND TRUST SERVICES
Securities and other property held by the Investments and Trust
Services Division in a fiduciary or agency capacity are not
assets of the Corporation and are not included in the
accompanying consolidated financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from
banks and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
OTHER REAL ESTATE
Real estate acquired by foreclosure is carried at the lower of
cost or fair market value less estimated costs of disposal.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING
The Corporation follows the policy of charging the costs of
advertising to expense as incurred. Advertising expense of
$169,475, $104,125 and $187,878 were incurred in 1998, 1997 and
1996, respectively.
COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the
Corporation's net income or shareholders' equity. Statement No.
130 requires other comprehensive income to include unrealized
gains and losses on investments in securities classified as
available for sale in accordance with Statement No. 115, which
prior to adoption were reported separately in shareholders'
equity. The December 31, 1997 and December 31, 1996 financial
statements have been reclassified to conform to the requirements
of Statement No. 130.
NOTE 2. SECURITIES
Amortized costs and fair values of securities being held to
maturity as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ----
1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 4 229 829 $ 25 582 $ (1 844) $ 4 253 567
Obligations of states and
political subdivisions 2 738 025 51 421 - - 2 789 446
----------------- ---------------- -------------- ----------------
$ 6 967 854 $ 77 003 $ (1 844) $ 7 043 013
================= ================ =============== ================
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ----
1997
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 6 665 399 $ 17 628 $ (20 088) $ 6 662 939
Obligations of states and
political subdivisions 3 240 764 19 472 (1 392) 3 258 844
----------------- ---------------- --------------- ----------------
$ 9 906 163 $ 37 100 $ (21 480) $ 9 921 783
================= ================ =============== ================
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1998, by contractual maturity, are
shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay
obligations without penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------------- ----------------
<S> <C> <C>
Due in one year or less $ 1 977 397 $ 1 976 667
Due after one year through five years 4 990 457 5 066 346
---------------- ----------------
$ 6 967 854 $ 7 043 013
================ ================
</TABLE>
Amortized costs and fair values of securities available for sale
as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ----
1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 12 621 891 $ 76 979 $ (16 387) $ 12 682 483
Obligations of states and
political subdivisions 684 580 3 832 - - 688 412
Mutual funds 937 809 - - (61 957) 875 852
Restricted investment -
Federal Home Loan
Bank stock 966 700 - - - - 966 700
Equity securities 609 500 - - - - 609 500
----------------- ---------------- -------------- ----------------
$ 15 820 480 $ 80 811 $ (78 344) $ 15 822 947
================= ================ =============== ================
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- ----
1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 14 764 914 $ 95 928 $ (138 087) $ 14 722 755
Obligations of states and
political subdivisions 685 582 3 464 - - 689 046
Mutual funds 1 144 449 - - (105 463) 1 038 986
Restricted investment -
Federal Home Loan
Bank stock 966 700 - - - - 966 700
Equity securities 622 000 - - - - 622 000
----------------- ---------------- -------------- ----------------
$ 18 183 645 $ 99 392 $ (243 550) $ 18 039 487
================= ================ =============== ================
</TABLE>
The amortized cost and fair value of securities available for
sale as of December 31, 1998, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations
without penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
---------------- ----------------
<S> <C> <C>
Due in one year or less $ 795 919 $ 803 417
Due after one year through five years 7 192 255 7 221 724
Due after five years through ten years 3 938 843 3 950 208
Due after ten years 1 379 454 1 395 546
Mutual funds 937 809 875 852
Equity securities 1 576 200 1 576 200
---------------- ----------------
$ 15 820 480 $ 15 822 947
================ ================
</TABLE>
There were no sales of securities being held to maturity during
1998, 1997 and 1996.
Proceeds from sales of securities available for sale during 1998,
1997 and 1996 were $2,734,130, $9,918,783 and $4,992,100. Gross
realized gains of $54,249, $46,967 and $80,183 and gross realized
losses of $37,576, $36,825 and $2,147 were recognized on those
sales.
The carrying value of securities pledged to secure deposits and
for other purposes amounted to $4,312,134 and $5,649,941 at
December 31, 1998 and 1997, respectively.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
---------------- ----------------
(Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 8 297 $ 6 998
Secured by farmland 1 163 1 449
Secured by 1-4 family residential 53 430 42 120
Other real estate loans 49 814 34 513
Commercial and industrial loans (except
those secured by real estate) 16 933 15 844
Loans to individuals for personal expenditures 30 284 24 417
All other loans 4 620 5 176
---------------- ----------------
Total loans $ 164 541 $ 130 517
Less: Unearned income 416 709
Allowance for loan losses 1 853 1 655
---------------- ----------------
Net loans $ 162 272 $ 128 153
================ ================
</TABLE>
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Balance at beginning of year $ 1 654 917 $ 1 465 390 $ 1 181 494
Provision charged to operating expense 534 675 465 000 578 000
Recoveries added to the allowance 35 032 87 501 99 462
Loan losses charged to the allowance (371 474) (362 974) (393 566)
-------------- ------------- --------------
Balance at end of year $ 1 853 150 $ 1 654 917 $ 1 465 390
============= ============ =============
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about impaired loans as of and for the years ended
December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
Impaired loans for which an allowance
has been provided $ 539 752 $ 550 820 $ 731 310
Impaired loans for which no allowance
has been provided - - - - - -
--------------- -------------- ---------------
Total impaired loans $ 539 752 $ 550 820 $ 731 310
=============== ============== ===============
Allowance provided for impaired loans,
included in the allowance for loan losses $ 100 000 $ 100 000 $ 245 000
=============== ============== ===============
Average balance in impaired loans $ 545 286 $ 644 283 $ 217 765
=============== ============== ===============
Interest income recognized $ 15 853 $ 46 497 $ 35 238
=============== ============== ===============
</TABLE>
There were no nonaccrual loans excluded from impaired loan disclosure
under FASB 114 at December 31, 1997. Nonaccrual loans excluded from
impaired loan disclosure under FASB 114 amounted to $126,704 and
$1,943 at December 31, 1998 and 1996, respectively. If interest on
these loans had been accrued, such income would have approximated
$6,064 and $40 for 1998 and 1996, respectively.
NOTE 5. RELATED PARTY TRANSACTIONS
The Corporation has had, and may be expected to have in the future,
banking transactions in the ordinary course of business with executive
officers, directors, their immediate families and affiliated companies
in which they are principal stockholders. Such loans were made on
substantially the same terms as those prevailing for comparable
transactions with similar risk. At December 31, 1998 and 1997, these
loans (excluding loans which total less than $60,000) totaled
$4,396,078 and $3,939,322, respectively. During 1998, total principal
additions were $1,592,296 and total principal payments were
$1,135,540.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. BANK PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Land $ 864 667 $ 864 667
Buildings and improvements 5 737 359 5 558 993
Furniture and equipment 5 343 567 5 024 195
---------------- ----------------
$ 11 945 593 $ 11 447 855
Less accumulated depreciation and amortization 6 065 856 5 291 993
---------------- ----------------
$ 5 879 737 $ 6 155 862
================ ================
</TABLE>
Depreciation and amortization of bank premises and equipment included
in operating expenses for the years ended December 31, 1998, 1997 and
1996, was $773,863, $824,725 and $762,744, respectively.
NOTE 7. DEPOSITS
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000 was approximately $10,756,134 and $7,638,671
in 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $ 30 293 263
2000 10 162 160
2001 2 033 347
2002 114 018
--------------
$ 42 602 788
==============
NOTE 8. EMPLOYEE BENEFIT PLANS
The Corporation has a pension plan for its employees. Benefits are
generally based upon years of service and the employees' compensation.
The Corporation funds pension costs in accordance with the funding
provisions of the Employee Retirement Income Security Act. Information
about the plan follows.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a reconciliation of the changes in the
plan's benefit obligations and fair value of assets over the two-year
period ending December 31, 1998 and 1997, computed as of October 1,
1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning $ 2 768 023 $ 2 193 845
Service cost 191 082 140 968
Interest cost 205 697 162 425
Actuarial (gain) loss (26 214) 335 902
Benefits paid (52 292) (65 117)
------------- -------------
Benefit obligation, ending $ 3 086 296 $ 2 768 023
============ ============
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning $ 3 111 184 $ 2 523 098
Actual return on plan assets (65 365) 653 203
Employer contributions 161 099 - -
Benefits paid (52 292) (65 117)
------------- -------------
Fair value of plan assets, ending $ 3 154 626 $ 3 111 184
============ ============
Funded status $ 68 330 $ 343 161
Unrecognized net actuarial gain (298 972) (631 080)
Unrecognized net obligation at transition (246 719) (265 698)
Unrecognized prior service cost 100 967 108 733
------------ ------------
Accrued benefit cost included in other liabilities $ (376 394) $ (444 884)
============= =============
</TABLE>
The following table provides the components of net periodic benefit
cost for the plan for the years ended December 31, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 191 082 $ 140 968 $ 142 239
Interest cost 205 697 162 425 163 511
Expected return on plan assets (277 721) (224 543) (225 402)
Amortization of prior service cost 7 766 7 766 7 766
Amortization of net obligation
at transition (18 979) (18 979) (18 979)
Recognized net actuarial gain (15 236) (14 301) (10 704)
------------- ------------- -------------
Net periodic benefit cost $ 92 609 $ 53 336 $ 58 431
============ ============ ============
</TABLE>
The assumptions used in the measurement of the Corporation's benefit
obligation are shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 5.0% 5.0% 6.0%
</TABLE>
The Corporation has a defined contribution retirement plan under Code
Section 401(k) of the
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Internal Revenue Service covering employees who have completed 6
months of service and who are at least 21 years of age. Under the plan
a participant may contribute an amount up to 15% of their covered
compensation for the year, subject to certain limitations. The
Corporation may also make, but is not required to make, a
discretionary matching contribution. The amount of this matching
contribution, if any, is determined on an annual basis by the Board of
Directors. The Corporation made contributions to the plan for the
years ended December 31, 1998, 1997 and 1996 of $61,566, $62,868 and
$43,468, respectively.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
As members of the Federal Reserve System, the Corporation's subsidiary
bank is required to maintain certain average reserve balances. For the
final weekly reporting period in the years ended December 31, 1998 and
1997, the aggregate amounts of daily average required balances were
approximately $1,573,000 and $2,132,000, respectively.
The Corporation has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the Year
2000 Issue, and has developed remediation plans to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Corporation is heavily dependent
on computer processing in the conduct of its business activities.
Failure of these systems could have a significant impact on the
Corporation's operations.
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as guarantees,
commitments to extend credit, etc., which are not reflected in the
accompanying financial statements. The Corporation does not anticipate
losses as a result of these transactions.
See Note 16 with respect to financial instruments with
off-balance-sheet risk.
F-20
<PAGE>
NOTE 10. INCOME TAXES
Net deferred tax assets consist of the following components as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 454 105 $ 368 107
Unearned fee income - - 28 653
Accrued pension obligation 127 480 151 315
Interest on nonaccrual loans 10 130 1 610
Allowance on other real estate owned 29 667 16 350
Securities available for sale 3 836 49 014
Other - - 21 851
--------------- ---------------
$ 625 218 $ 636 900
--------------- ---------------
Deferred tax liabilities:
Accumulated discount accretion $ 1 125 $ 1 568
Accumulated depreciation 276 584 283 609
--------------- ---------------
$ 277 709 $ 285 177
--------------- ---------------
$ 347 509 $ 351 723
=============== ===============
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- ---------------
<S> <C> <C> <C>
Current tax expense $ 1 080 017 $ 1 063 371 $ 863 047
Deferred tax (benefit) (40 964) (81 861) (114 660)
------------- -------------- --------------
$ 1 039 053 $ 981 510 $ 748 387
============ ============= =============
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1998, 1997 and 1996 due to the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1 183 403 $ 1 098 905 $ 880 584
Increase (decrease) in income taxes
resulting from:
Tax exempt interest income (109 185) (134 591) (107 488)
Other (35 165) 17 196 (24 709)
------------- ------------- --------------
$ 1 039 053 $ 981 510 $ 748 387
============ ============= =============
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. 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 years reported have been restated giving
effect to stock splits. Earnings per share amounts for prior periods
have been restated to give effect to the application of Statement 128
which was adopted by the Corporation in 1997.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share 1 857 282 $ 1.31 1 913 008 $ 1.18 1 912 328 $ 0.96
============ ============ ============
Effect of dilutive securities,
stock options 18 359 8 065 4 185
------------ ------------ ------------
Diluted earnings per share 1 875 641 $ 1.30 1 921 073 $ 1.17 1 916 513 $ 0.96
============ ============ ============ ============ ============ ============
</TABLE>
NOTE 12. STOCK-BASED COMPENSATION PLAN
In 1998, the Corporation adopted an incentive stock option plan under
which options may be granted to certain key employees for purchase of
the Corporation's stock. The effective date of the plan was April 21,
1998 with a ten-year term. The plan reserves for issuance 200,000
shares of the Corporation's common stock. The stock option plan
requires that options be granted at an exercise price equal to at
least 100% of the fair market value of the common stock on the date of
the grant; however, for those individuals who own more than 10% of the
stock of the Corporation, the option price must be at least 110% of
the fair market value on the date of grant. Such options are generally
not exercisable until three years from the date of issuance and
generally require continuous employment during the period prior to
exercise. The options will expire in no more than ten years after the
date of grant.
Grants under the above plan are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the plan. Had compensation cost
for the stock-based compensation plan been determined based on the
grant date fair value of awards (the method described in FASB No.
123), reported net income would have been reduced to the pro forma
amounts shown below; however, there would have been no change in basic
and diluted earnings per share:
1998
----
Net income:
As reported $ 2 441 545
Pro forma $ 2 433 767
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1998: price volatility of 15.65%, risk-free
interest rate of 4.5%, dividend rate of .58% and expected life of 7
years.
The status of the option plan during 1998 is as follows:
1998
---------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------------- --------------
Outstanding at January 1 - - $ - -
Granted 17 977 21.00
--------------- --------------
Outstanding at December 31 17 977 $ 21.00
=============== ==============
Exercisable at end of year - -
Weighted-average fair value
per option of options granted
during the year $ 5.90
NOTE 13. DIRECTOR COMPENSATION PLANS
The Corporation maintains a Nonemployee Director Stock Option Plan.
Under this plan each director who is not an employee of the
Corporation or its subsidiary will receive an option grant covering
1,120 shares of Corporation common stock on April 1 of each year
during the five-year term of the plan. The first grant under the plan
was made on May 1, 1995. The exercise price of awards are fixed at the
fair market value of the shares on the date the option is granted.
During the term of the plan, a total of 61,600 shares of common stock
may be granted. The options granted under the Plan are not exercisable
for six months from the date of grant except in the case of death or
disability. Options that are not exercisable at the time a director's
services on the Board terminates for reason other than death,
disability or retirement in accordance with the Corporation's policy
will be forfeited.
The status of the Option Plan during 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1 38 080 $ 10.57 24 640 $ 9.52 11 200 $ 8.75
Granted 11 200 20.00 13 440 12.50 13 440 10.13
---------- ---------- -----------
Outstanding at
December 31 49 280 $ 12.71 38 080 $ 10.57 24 640 $ 9.52
========== ========== ===========
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of the options outstanding as of December 31, 1998 is as
follows:
WEIGHTED
AVERAGE REMAINING
EXERCISE CONTRACTUAL
PRICE NUMBER LIFE
-------- ------ -----------
$ 8.75 11 200 6.33 years
10.13 13 440 7.25 years
12.50 13 440 8.25 years
20.00 11 200 9.25 years
-------
$ 14.92 49 280
All options have been restated giving retroactive effect to the stock
split in 1998.
The Corporation also maintains a Director Deferred Compensation Plan
(the "Deferred Compensation Plan"). This plan provides that any
non-employee director of the Corporation or the Bank may elect to
defer receipt of all or any portion of his or her compensation as a
director. A participating director may elect to have amounts deferred
under the Deferred Compensation Plan held in a deferred cash account
which is credited on a quarterly basis with interest equal to the
highest rate offered by the Bank at the end of the preceding quarter.
Alternatively, a participant may elect to have a deferred stock
account in which deferred amounts are treated as if invested in the
Corporation's common stock at the fair market value on the date of
deferral. The value of a stock account will increase and decrease
based upon the fair market value of an equivalent number of shares of
common stock. In addition, the deferred amounts deemed invested in
common stock will be credited with dividends on an equivalent number
of shares. Amounts considered invested in the Corporation's common
stock are paid, at the election of the director, either in cash or in
whole shares of the common stock and cash in lieu of fractional
shares. Directors may elect to receive amounts contributed to their
respective accounts in one or up to five installments.
NOTE 14. FEDERAL HOME LOAN BANK ADVANCES
The Corporation has obtained a $31,000,000 line of credit from Federal
Home Loan Bank of Atlanta (FHLB). The interest rate and term of each
advance from the line is dependent upon the type of advance and
commitment. Advances on the line are secured by all of the
Corporation's first lien loans on one-to-four unit single family
dwellings. As of December 31, 1998, the book value of these loans
totalled approximately $50,535,000. The amount of the available credit
is limited to seventy-five percent of qualifying collateral. Any
borrowings in excess of the qualifying collateral requires pledging of
additional assets. As of December 31, 1998, the Corporation had the
following advances outstanding which have stated maturities in 2008:
INTEREST OUTSTANDING
ADVANCE DATE RATE TERM PRINCIPAL
------------ -------- ---- ---------
June 19, 1998 4.97% 10 years $ 5 000 000
June 23, 1998 5.51% 10 years 3 000 000
September 16, 1998 5.51% 10 years 5 000 000
October 1, 1998 4.89% 10 years 5 000 000
----------------
$ 18 000 000
================
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The advance dated June 19, 1998 has an imbedded call option that gives
the FHLB the option to call after 1 year and quarterly thereafter. The
remaining three advances also have imbedded call options that give the
FHLB the option to call only on the five-year anniversary date.
NOTE 15. DIVIDEND LIMITATIONS ON AFFILIATE BANK
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of December
31, 1998, the aggregate amount of unrestricted funds which could be
transferred from the banking subsidiary to the parent corporation,
without prior regulatory approval, totalled $3,136,385.
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes of
financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of December 31, 1998 and 1997,
is as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $ 29 747 714 $ 19 528 640
Standby letters of credit $ 4 568 044 $ 3 186 013
</TABLE>
F-25
<PAGE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds
marketable securities, land and bank deposits as collateral supporting
those commitments for which collateral is deemed necessary.
NOTE 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market
prices or dealer quotes. For other securities held as
investments, fair value equals quoted market price, if available.
If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other
consumer loans, fair value is estimated using the quoted market
prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other
types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
F-26
<PAGE>
DEPOSIT LIABILITIES AND BORROWINGS
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. For all other deposits and borrowings, the fair
value is determined using the discounted cash flow method. The
discount rate is equal to the rate currently offered on similar
products.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter similar agreements, taking
into account the remaining terms of the agreements and the
present credit worthiness of the counterparties. For fixed-rate
loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At December 31, 1998 and 1997, the difference between the
carrying amounts and fair values of loan commitments and stand-by
letters of credit were immaterial.
The estimated fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ---- -------- ----
(Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-
term investments $ 13 549 $ 13 549 $ 10 742 $ 10 742
Federal funds sold 13 182 13 182 9 470 9 470
Securities 22 791 22 866 27 946 27 961
Loans 162 272 162 487 128 153 128 218
--------------- -------------- --------------- ---------------
Total financial
assets $ 211 794 $ 212 084 $ 176 311 $ 176 391
=============== ============== =============== ===============
Financial liabilities:
Deposits $ 179 217 $ 171 157 $ 161 869 $ 154 870
FHLB advances 18 000 18 309 - - - -
--------------- -------------- --------------- ---------------
Total financial
liabilities $ 197 217 $ 189 466 $ 161 869 $ 154 870
=============== ============== =============== ===============
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. OTHER OPERATING EXPENSES
The principal components of "Other operating expenses" in the
Consolidated Statements of Income are:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Advertising $ 169 475 $ 104 125 $ 187 878
Bank card 312 622 304 118 312 550
Consulting 197 200 221 460 213 791
Data processing 489 814 396 783 212 359
Postage 139 972 168 451 164 634
Supplies 109 760 88 462 122 535
Taxes, other than income 233 740 189 150 162 802
Telephone 176 292 161 429 148 545
Other 1 354 203 1 175 120 1 171 565
-------------- --------------- ---------------
$ 3 183 078 $ 2 809 098 $ 2 696 659
============== =============== ===============
</TABLE>
NOTE 19. CONCENTRATION RISK
The Corporation maintains its cash accounts in several correspondent
banks. The total amount by which cash on deposit in those banks
exceeds the federally insured limits is approximately $7,181,726 at
December 31, 1998.
NOTE 20. SHAREHOLDERS' EQUITY
On March 19, 1998, the Corporation adopted a resolution to effect a
2-for-1 stock split reducing the par value of its common stock from
$6.25 per share to $3.13 per share and increased the number of
authorized shares of common stock from 4,000,000 to 8,000,000. The per
share computations for the years ended December 31, 1997 and 1996 have
been retroactively adjusted for this split as if it occurred on
January 1, 1996.
NOTE 21. CAPITAL REQUIREMENTS
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors.
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets.
Management believes, as of December 31, 1998, that the Corporation
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Corporation must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 22 975 14.3% $ 12 884 8.0% N/A
The Fauquier Bank $ 23 058 14.3% $ 12 884 8.0% $ 16 106 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 21 122 13.1% $ 6 442 4.0% N/A
The Fauquier Bank $ 21 205 13.2% $ 6 442 4.0% $ 9 663 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 21 122 9.7% $ 8 676 4.0% N/A
The Fauquier Bank $ 21 205 9.8% $ 8 676 4.0% $ 10 845 5.0%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 22 604 17.7% $ 10 251 8.0% N/A
The Fauquier Bank $ 22 617 17.7% $ 10 251 8.0% $ 12 814 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 21 003 16.4% $ 5 126 4.0% N/A
The Fauquier Bank $ 21 015 16.4% $ 5 126 4.0% $ 7 688 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 21 003 11.9% $ 7 065 4.0% N/A
The Fauquier Bank $ 21 015 11.9% $ 7 065 4.0% $ 8 831 5.0%
</TABLE>
F-30
<PAGE>
NOTE 22. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after
June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Corporation
has not determined whether to adopt the new statement early. The
Statement will require the Corporation to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must
be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value
of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in
earnings.
Because the Corporation does not use derivatives, management does not
anticipate that the adoption of the new Statement will have a
significant effect on the Bank's earnings or financial position.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB Statement No. 65." FASB No. 65, as amended, requires
that, after securitization of a mortgage loan held for sale, an entity
engaged in mortgage banking activities classify the resulting
mortgage-backed security as a trading security. This Statement further
amends Statement No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold
those investments. This Statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for
securities retained after the securitization of other types of assets
by a non-mortgage banking enterprise. This Statement is effective
beginning in 1999.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. PARENT CORPORATION ONLY FINANCIAL STATEMENTS
FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
ASSETS 1998 1997
--------------- --------------
<S> <C> <C>
Cash on deposit with subsidiary bank $ 29 555 $ 60 099
Investment in subsidiary; at cost,
plus equity in undistributed net income 21 259 492 20 990 180
Dividend receivable 238 910 191 301
Other assets 23 957 14 605
--------------- --------------
Total assets $ 21 551 914 $ 21 256 185
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividend payable $ 238 910 $ 191 301
Other liabilities 136 168 86 986
--------------- --------------
$ 375 078 $ 278 287
--------------- --------------
SHAREHOLDERS' EQUITY
Common stock $ 5 752 220 $ 5 978 150
Capital surplus - - 1 207 680
Retained earnings, which are substantially
undistributed earnings of subsidiary 15 432 062 13 887 212
Accumulated other comprehensive income (loss) (7 446) (95 144)
---------------- ---------------
$ 21 176 836 $ 20 977 898
--------------- --------------
Total liabilities and shareholders' equity $ 21 551 914 $ 21 256 185
=============== ==============
</TABLE>
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
---------------- --------------- -------------
<S> <C> <C> <C>
REVENUE, dividends from subsidiary $ 2 306 438 $ 668 365 $ 497 382
---------------- --------------- -------------
EXPENSES
Legal $ 51 104 $ - - $ 637
Directors' fees 4 047 12 872 18 004
Miscellaneous 15 313 4 644 6 839
---------------- --------------- -------------
Total expenses $ 70 464 $ 17 516 $ 25 480
---------------- --------------- -------------
Income before income taxes and equity
in undistributed net income of
subsidiary $ 2 235 974 $ 650 849 $ 471 902
Income tax (benefit) (23 958) (5 955) (8 650)
----------------- ---------------- --------------
Income before equity in undistributed
net income of subsidiary $ 2 259 932 $ 656 804 $ 480 552
Equity in undistributed net income of
subsidiary 181 613 1 593 759 1 361 013
---------------- --------------- -------------
Net income $ 2 441 545 $ 2 250 563 $ 1 841 565
================ =============== =============
</TABLE>
F-33
<PAGE>
FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1998
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
---------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2 441 545 $ 2 250 563 $ 1 841 565
Adjustments to reconcile net income
to net cash provided by operating
activities:
Undistributed earnings of subsidiary (181 613) (1 593 759) (1 361 013)
Increase in undistributed dividends
receivable from subsidiary (47 609) (47 825) (28 777)
(Increase) in other assets (9 353) (5 955) (4 449)
Increase in other liabilities 49 182 39 860 44 726
Net cash provided by
operating activities $ 2 252 152 $ 642 884 $ 492 052
---------------- --------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid $ (784 188) $ (620 539) $ (468 605)
Issuance of common stock - - - - 13 430
Acquisition of common stock (1 498 508) - - - -
----------------- --------------- -------------
Net cash (used in)
financing activities $ (2 282 696) $ (620 539) $ (455 175)
----------------- ---------------- --------------
Increase (decrease) in cash
and cash equivalents $ (30 544) $ 22 345 $ 36 877
CASH AND CASH EQUIVALENTS
Beginning 60 099 37 754 877
---------------- --------------- -------------
Ending $ 29 555 $ 60 099 $ 37 754
================ =============== =============
</TABLE>
F-34
<PAGE>
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
56
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
C O N T E N T S
PAGE
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of income F-3 and F-4
Consolidated statements of cash flows F-5 and F-6
Consolidated statements of changes
in shareholders' equity F-7 and F-8
Notes to consolidated financial statements F-9 - F-34
DESCRIPTION OF EXHIBITS
Exhibit Number Description
- -------------- -----------
(3)(i) Articles of Incorporation of Fauquier Bankshares, Inc.
(including amendments)
(3)(ii) Bylaws of Fauquier Bankshares, Inc.
(10) Fauquier Bankshares, Inc.
Non-Employee Director Stock Option Plan
Fauquier Bankshares, Inc.
Director Deferred Compensation Plan
Fauquier Bankshares, Inc.
Omnibus Stock Ownership and Long Term Incentive Plan
Agreement with C. Hunton Tiffany
(11) Not applicable
(21) Subsidiaries of the Registrant
Financial Data Schedule
57
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized.
FAUQUIER BANKSHARES, INC
Date: April 16, 1999
-------------------------------
By: /s/ C. Hunton Tiffany
---------------------------------
C. Hunton Tiffany
President and Chief Executive
Officer
58
<PAGE>
INDEX TO EXHIBITS
(3) (i) Articles of Incorporation
(ii) Bylaws
(10) Material contracts
(11) Statement re: computation of per share earnings
(21) Subsidiaries of the registrant
Financial Data Schedule
59
EXHIBIT 3(i)
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
MARCH 19, 1998
The State Corporation Commission has found the accompanying articles submitted
on behalf of
FAUQUIER BANKSHARES, INC.
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective March 19, 1998 at 11:59 PM.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison, Jr.
Commissioner
<PAGE>
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF
FAUQUIER BANKSHARES, INC.
ONE
The name of the Corporation is Fauquier Bankshares, Inc.
TWO
Article 3 of the Articles of Incorporation of the Corporation is amended
(the "Amendment") so that after amendment it reads in its entirety as follows:
"3. Authorized Stock. The Corporation shall have authority to issue
8,000,000 shares of Common Stock, par value $3.13 per share."
THREE
On the effective date of the Amendment each outstanding share of the
Corporation's Common Stock, par value $6.25 per share, shall be converted into
two shares of the Corporation's Common Stock, par value $3.13 per share.
FOUR
The foregoing Amendment was adopted on February 19, 1998.
FIVE
The Amendment was adopted by the Board of Directors of the Corporation
without shareholder action. Shareholder action was not required for the adoption
of Amendment pursuant to the provisions of Section 13.1-706 of the Code of
Virginia.
SIX
The Certificate of Amendment shall become effective at 11:59 o'clock p.m.
on March 19, 1998, payable April 30, 1998.
The undersigned President declares that the facts stated herein are true as
of February 27, 1998.
FAUQUIER BANKSHARES, INC.
By: /s/ C. Hunton Tiffany
C. Hunton Tiffany
President
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
APRIL 8, 1996
The State Corporation Commission has found the accompanying articles submitted
on behalf of
FAUQUIER BANKSHARES, INC.
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective April 8, 1996.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison, Jr.
Commissioner
<PAGE>
ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF
FAUQUIER BANKSHARES, INC.
ONE
The name of the Corporation is Fauquier Bankshares, Inc.
TWO
Article 3 of the Articles of Incorporation of the Corporation is amended
(the "Amendment") so that after amendment it reads in its entirety as follows:
"3. Authorized Stock. The Corporation shall have authority to issue
4,000,000 shares of Common Stock, par value $6.25 per share."
THREE
On the effective date of the Amendment each outstanding share of the
Corporation's Common Stock, par value $25.00 per share, shall be converted into
four shares of the Corporation's Common Stock, par value $6.25 per share.
FOUR
The foregoing Amendment was adopted on February 15, 1996.
FIVE
The Amendment was adopted by the Board of Directors of the Corporation
without shareholder action. Shareholder action was not required for the adoption
of Amendment pursuant to the provisions of Section 13.1-706 of the Code of
Virginia.
SIX
The undersigned President declares that the facts stated herein are true as
of February 16, 1996.
FAUQUIER BANKSHARES, INC.
By: /s/ C. Hunton Tiffany
C. Hunton Tiffany
President
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
MAY 24, 1994
The State Corporation Commission has found the accompanying articles submitted
on behalf of
FAUQUIER BANKSHARES, INC.
(FORMERLY FAUQUIER NATIONAL BANKSHARES INC.)
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective May 24, 1994 at 10:07 AM.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison, Jr.
Commissioner
<PAGE>
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
FAUQUIER NATIONAL BANKSHARES INC.
ONE
The name of the Corporation is FAUQUIER BANKSHARES, INC
TWO
Article 1 of the Corporation Articles of Incorporation is hereby amended to
read as follows:
1. Name. The name of the Corporation is FAUQUIER BANKSHARES, INC.
THREE
The foregoing amendment was adopted on May 19, 1994.
FOUR
The Amendment was adopted by unanimous consent of the directors of the
Corporation pursuant to Section 13.1-706.5 of the Code of Virginia, as amended.
The undersigned president of the Corporation declares that the facts herein
stated are true as of May 19, 1994.
FAUQUIER NATIONAL BANKSHARES, INC.
By: /s/ C. Hutton Tiffany
C. Hunton Tiffany
President
<PAGE>
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
May 2, 1994
The State Corporation Commission has found the accompanying articles submitted
on behalf of
FAUQUIER NATIONAL BANKSHARES INC.
to comply with the requirements of law, and confirms payment of all related
fees.
Therefore, it is ORDERED that this
CERTIFICATE OF AMENDMENT
be issued and admitted to record with the articles of amendment in the Office of
the Clerk of the Commission, effective May 2, 1994 at 09:22 AM.
The corporation is granted the authority conferred on it by law in accordance
with the articles, subject to the conditions and restrictions imposed by law.
STATE CORPORATION COMMISSION
By /s/ T.V. Morrison, Jr.
Commissioner
<PAGE>
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
FAUQUIER NATIONAL BANKSHARES INC.
ONE
The name of the corporation is
FAUQUIER NATIONAL BANKSHARES INC.
TWO
Article 3 of the Corporation's Articles of Incorporation is
hereby amended to read as follows:
3. Authorized Stock. The Corporation shall have authority to issue 1,000,000
shares of Common Stock, par value $25.00 per share.
The holders of Common Stock shall have one vote for each share of Common
Stock held by them. The holders of shares of Common Stock shall be entitled
to receive dividends if, when and as declared by the Board of Directors out
of funds legally available therefor and to the net assets remaining after
payment of all liabilities upon any voluntary or involuntary liquidation of
the Corporation.
THREE
The foregoing amendment was adopted
on March 3, 1994.
FOUR
The amendment was adopted by unanimous written consent of the directors of
the corporation pursuant to Section 13.1-706.4 of the Code of Virginia, as
amended.
The undersigned president of the Corporation declares that the facts herein
stated as true as of April 26, 1994.
FAUQUIER NATIONAL BANKSHARES INC.
By: /s/ C. Hunton Tiffany
C. Hunton Tiffany
President
<PAGE>
ARTICLES OF INCORPORATION
OF
FAUQUIER NATIONAL BANKSHARES INC.
1. Name. The name of the Corporation is
FAUQUIER NATIONAL BANKSHARES INC.
2. Purpose. The purpose of the Corporation is to transact any or all
lawful business not required to be specifically stated in these Articles of
Incorporation for which corporations may be incorporated under the Virginia
Stock Corporation Act.
3. Authorized Stock. The Corporation shall have authority to issue
1,000,000 shares of Common Stock, par value $1.25 per share.
4. Preemptive Rights. Stockholders shall not have the preemptive right
to acquire unissued shares of Common Stock.
5. Cumulative Voting. Stockholders of the Corporation shall not have
cumulative voting rights.
6. Indemnification of Directors and officers. Each Director and
Officer shall be indemnified by the Corporation against liabilities, fines
penalties and claims imposed upon or asserted against him (including amounts
paid in settlement) by reason of having been such a Director or Officer, whether
or not then continuing so to be, and against all expenses (including counsel
fees) reasonably incurred by him in connection therewith, except in relation to
matters as to which he shall have been finally adjudged to be liable by reason
of having been guilty of gross negligence or willful misconduct in the
performance of his duties as such Director or Officer. In the event of any other
judgement against such Director or Officer or in the event of a settlement, the
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indemnification shall be made only if the Corporation shall be advised, in case
none of the persons involved shall be or have been a Director of the
Corporation, by the Board of Directors, and otherwise by independent counsel to
be appointed by the Board of Directors, that in its or his opinion such Director
or Officer was not guilty of gross negligence or willful misconduct in the
performance of his duties, and, in the event of a settlement, that such
settlement was, or if still to be made is, in the best interests of the
Corporation. If the determination is to be made by the Board of Directors, it
may, as to all questions of law, rely on the advice of independent counsel.
Every reference herein to Director or Officer shall include every Director or
Officer or former Director or Officer of the Corporation and every person who
may have served at its request as a director or officer of another corporation
in which the Corporation owned shares of stock or of which it is a creditor or,
in the case of a nonstock corporation, to which the Corporation contributes and,
in all of such cases, his executors and administrators. The right of
indemnification hereby provided shall not be exclusive of any other rights to
which any Director or Officer may be entitled by Virginia law or otherwise.
7. Registered Office. The Corporation's initial registered office shall
be located in the County of Fauquier at 10 Court House Square, Warrenton,
Virginia 22186. The Corporation's initial registered agent shall be William T.
Miller, whose address is the same as the Corporation's registered office and who
is a resident of Virginia and a director of the Corporation.
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8. Directors. The Number of Directors shall be as stated in the
Corporation's bylaws but the number of directors set forth in the bylaws cannot
be increased by more than two during any 12-month period except by the
affirmative vote of holders of 85% of all shares of voting stock of the
Corporation. In the absence of a bylaw, the number of Directors shall be three.
The Corporation's initial Board of Directors shall consist of three individuals
whose names and addresses are as follows:
Name Address
---- -------
D. Harcourt Lees, Jr. 3 Hotel Street
Warrenton, Virginia 22186
William T. Miller 10 Court House Square
Warrenton, Virginia 22186
C. Hunton Tiffany 10 Court House Square
Warrenton, Virginia 22186
Commencing with the 1984 Annual Meeting of Stockholders, the Board of Directors
shall be divided into three classes -- Class I, Class II and Class III -- as
nearly equal in number as possible. At the 1984 Annual Meeting of Stockholders,
directors of the first class (Class I) shall be elected to hold office for a
term expiring at the 1985 Annual Meeting of Stockholders; directors of the
second class (Class II) shall be elected to hold office for a term expiring at
the 1986 Annual Meeting of Stockholders; and directors of the third class (Class
III) shall be elected to hold office for a term expiring at the 1987 Annual
Meeting of Stockholders. At each annual meeting of stockholders after 1984, the
successors to the class of directors whose term shall then expire shall be
identified as being of the same class as the directors they succeed
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and elected to hold office for a term expiring at the third succeeding annual
meeting of stockholders. When the number of directors is changed, any newly
created directorships or any decrease in directorships shall be so apportioned
among the classes as to make all classes as nearly equal in number as possible.
Any vacancy occurring in the Board of Directors, including a vacancy
resulting in an increase by not more than two in the number of directors, may be
filled by the affirmative vote of a majority of the remaining directors though
less than a quorum of the Board of Directors, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of the class to which they have been elected expires. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any director may be removed, with out cause, but only by the
affirmative vote of the holders of at least 85% of the outstanding shares of
Common Stock.
9. Voting Requirements for Certain Business Combinations. (1) The
affirmative vote of the holders of 85% of all shares of stock of the Corporation
entitled to vote on any business combination (as hereinafter defined) considered
for the purposes of this Article 9 as one class (herein called "voting stock"),
shall be required for the adoption or authorization of such business combination
with any other entity (as hereinafter defined) if, as of the record date for the
determination of stockholders entitled
4
<PAGE>
to notice thereof and to vote thereon, such other entity is the beneficial
owner, directly or indirectly, of more than 20% of the voting stock OF THE
CORPORATION; PROVIDED THAT SUCH 85% VOTING REQUIREMENT shall NOT BE APPLICABLE
if:
(a) The cash, or fair market value of the property, securities or
other consideration to be received per share by common stockholders of the
Corporation in such business combination:
(i) is not less than the highest per share price (including
brokerage commissions and/or soliciting dealers' fees) paid by such other entity
in acquiring any of its holdings of the Corporation's Common Stock;
(ii) bears the same or a greater percentage relationship to
the market price of the Corporation's Common Stock immediately prior to the
public announcement of such business combination as the highest per share price
(including brokerage commissions and/or soliciting dealers' fees) that such
other entity has theretofore paid for any of the shares of the Corporation's
Common Stock already owned by it bears to the market price of the Common Stock
of the Corporation immediately prior to the public announcement or commencement
of the tender offer or market acquisition of the Corporation's Common Stock by
such other entity; and
(iii) if the public announcement of such business
combination occurs more than one year after the transaction which resulted in
such other entity having a 20% interest, is not less
5
<PAGE>
than the earnings per share of Common Stock of the Corporation for the four full
consecutive fiscal quarters immediately preceding the record date for
solicitation of votes on such business combination, multiplied by the
price-earnings multiple represented by the price referred to in paragraph (i) in
relation to the earnings per share of Common Stock of the Corporation for the
four full consecutive fiscal quarters immediately preceding the transaction
which resulted in such other entity having a 20% interest;
(b) After such other entity has acquired a 20% interest and prior
to the consummation of such business combination:
(i) the Corporation's Board of Directors shall have included
at all times representation by continuing director(s) (as hereinafter defined)
proportionate to the voting stock of the Corporation not held by such other
entity (with a continuing director to occupy any resulting fractional board
position);
(ii) such other entity shall not have acquired any newly
issued or treasury shares of stock, directly or indirectly, from the Corporation
(except upon conversion of convertible securities acquired by it prior to
obtaining a 20% interest or as a result of a pro rata stock dividend or stock
split); and
(iii) such other entity shall not have acquired any
additional shares of the Corporation's outstanding Common Stock except as a part
of the transaction which results in such other entity having a 20% interest;
(c) Such other entity shall not have:
(i) received the benefit, directly or indirectly (except
6
<PAGE>
proportionately as a stockholder) of any loans, advances, guarantees, pledges or
other financial assistance provided by the Corporation, or
(ii) made any major change in the Corporation's business or
capital structure without the unanimous approval of the directors, in either
case prior to the consummation of such business combination; and
(d) A proxy statement responsive to the requirements of the
Securities Exchange Act of 1934 shall be mailed to public stockholders of the
Corporation for the purpose of soliciting stockholder approval of such business
combination and shall contain at the front thereof, in a prominent place, any
recommendations as to the availability (or inadvisability) of the business
combination which the continuing directors, an opinion of a reputable investment
banking firm as to the fairness (or not) of the terms of such business
combination, from the point of view of the remaining public stockholders of the
Corporation (such investment banking firm to be selected by a majority of the
continuing directors and to be paid a reasonable fee for its services by the
Corporation upon receipt of such opinion).
The provisions of this Article 9 shall also apply to a business
combination with any other entity which at any time has been the beneficial
owner, directly or indirectly, of more than 20% of the outstanding shares of
voting stock of the Corporation, notwithstanding the fact that such other entity
has reduced its shareholdings below 20% if, as the record date for the
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<PAGE>
determination of stockholders entitled to notice of and to vote on the business
combination, such other entity is an "affiliate" of the Corporation (as
hereinafter defined).
(2) For the purposes of this Article 9,
(a) the term "other entity" shall include any corporation, person
or other entity and other entity with which it or its "affiliate" or "associate"
(as defined below) has any agreement, arrangement or understanding, directly or
indirectly, for the purpose of acquiring, holding, voting or disposing of stock
of the Corporation, or which is its "affiliate" or "associate" as those terms
are defined in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934 as in effect on January 1, 1984, together with
the successors and assigns of such persons in any transaction or series of
transactions not involving a public offering of the Corporation's stock within
the meaning of the Securities Act of 1933;
(b) another entity shall be deemed to be the beneficial owner of
any shares of stock of the Corporation which the other entity (as defined above)
has the right to acquire pursuant to any agreement, or upon exercise of
conversion rights, warrants or options, or otherwise;
(c) the outstanding shares of any class of stock of the
Corporation shall be deemed to include shares deemed owned through application
of clause (b) above but shall not include any other shares which may be issuable
pursuant to any agreement, or upon exercise of conversion rights, warrants or
options or otherwise;
8
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(d) the term "business combination" shall include (i) any merger
or consolidation of the Corporation or any Subsidiary with or into any other
entity; (ii) any statutory stock exchange for cash, property, securities or
obligations of any other entity; (iii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of ALL OR SUBSTANTIALLY ALL of the
property and assets of the Corporation or any Subsidiary to any other entity;
(iv) the issuance or transfer by the Corporation or any Subsidiary of any
securities having an aggregate fair market value greater than $1,000,000; (v)
the adoption of any plan or proposal for the liquidation or dissolution of the
Corporation; or (vi) any reclassification of securities (including any reverse
stock split) or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries, or any other
transaction which has the effect, directly or indirectly, of increasing the
proportion of any class of securities of the Corporation or any Subsidiary
directly or indirectly owned by any other entity who, prior to such transaction,
owned 20% of the voting stock of the Corporation.
(e) the term "continuing director" shall mean a person who was a
member of the Board of Directors of the Corporation prior to the time that such
other entity acquired in excess of 20% of the voting stock of the Corporation,
or a person designated (whether before or after election as a director) to be a
continuing director by a majority of continuing directors;
(f) the "fair market value" of property, securities or
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other consideration shall be as determined in good faith by the Board of
Directors of the Corporation and concurred in by a majority of continuing
directors;
(g) in the event of a business combination in which the
Corporation is the surviving corporation, the term "other consideration to be
received" as used in paragraph 9(a) shall mean Common Stock of the Corporation
retained by its existing public stockholders;
(h) a "Subsidiary" is any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation.
(3) A majority of the continuing directors shall have the power and
duty to determine for the purposes of this Article 9, on the basis of
information known to them, whether (a) such other entity beneficially owns more
than 20% of the outstanding shares of voting stock of the Corporation, (b)
another entity is an "affiliate" or "associate" of another, (c) another entity
has an agreement, arrangement or understanding with another, or (d) the assets
being acquired by the Corporation, or any subsidiary thereof, have an aggregate
fair market value of less than $1,000.000.
(4) Nothing contained in this Article 9 shall be construed to relieve
any other entity from any fiduciary obligation imposed by law. The voting
requirements of this Article 9, shall be in addition to the voting requirements
imposed by law or other provisions of these Articles of Incorporation in favor
of certain
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classes of stock.
10. Voting Requirements for Certain Amendments. No amendment to the
Articles of Incorporation of the Corporation shall change, repeal or make
inoperative any of the provisions of Article 5, Article 8 or Article 9, unless
such amendment receives the affirmative vote of the holders of 85% of all shares
of voting stock of the Corporation, provided that this Article 10 shall not
apply to, and such 85% vote shall not be required for, any such amendment
unanimously recommended to the stockholders by the Board of Directors of the
Corporation (a) at a time when no other entity beneficially owns or to the
knowledge of any director proposes to acquire 20% or more of the Corporation's
voting stock, or (b) if all such directors are "continuing directors" within the
meaning of paragraph (2) of Article 9.
January 9, 1984 /s/ Lathan M. Ewers, Jr.
-----------------------
Lathan M. Ewers, Jr.
11
EXHIBIT 3(ii)
BY-LAWS
OF
FAUQUIER BANKSHARES, INC. (AMENDED 5/19/94)
ARTICLE I.
Meeting of Stockholders.
1.1 Places of Meetings. All meetings of the stockholders shall be held
at such place, either within or without the State of Virginia, as from time to
time may be fixed by the Board of Directors.
1.2 Annual Meeting. The annual meeting of the stockholders, for the
election of Directors and transaction of such other business as may come before
the meeting, shall be held in each year, beginning in 1985, on the first Tuesday
in April, or on such other date as the Board of Directors may by resolution
designate, at an hour designated by the Board. (Amended 02-21-85)
1.3 Special Meetings. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the Chairman of the Board, or
the President, by a majority of the Board of Directors, or by any three or more
stockholders together holding at least 25% of the number of shares of capital
stock of the Corporation at the time outstanding and entitled to vote with
respect to the business to be transacted at such meetings. At a special meeting
no business shall be transacted and no corporate action shall be taken other
than that stated in the notice of the
1
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meeting.
1.4 Notice of Meetings. Written or printed notice stating the place,
day and hour of every meeting of the stockholders and, in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
mailed not less than ten nor more than fifty days before the date of the meeting
to each stockholder of record entitled to vote at such meeting, at his address
which appears in the stock transfer books of the Corporation. Such further
notice shall be given as may be required by law, but meetings may be held
without notice if all the stockholders entitled to vote at the meeting are
present in person or by proxy or if notice is waived in writing by those not
present, either before or after the meeting.
1.5 Quorum. Any number of stockholders together holding at least a
majority of the outstanding shares of capital stock entitled to vote with
respect to the business to be transacted, who shall be present in person or
represented by proxy at any meeting duly called, shall constitute a quorum for
the transaction of business. If less than a quorum shall be in attendance at the
time for which a meeting shall have been called, the meeting may be adjourned
from time to time by a majority of the stockholders present or represented by
proxy without notice other than by announcement at the meeting until a quorum
shall attend.
1.6 Voting. At any meeting of the stockholders each stockholder of a
class entitled to vote on any matter coming before
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the meeting shall, as to such matter, have one VOTE, IN PERSON OR by proxy, for
each share of capital stock of such class standing in his or her name on the
books of the Corporation on the date, not more than fifty days prior to such
meeting, fixed by the Board of DIRECTORS, FOR the purpose of determining
stockholders entitled to vote, as the date on WHICH THE STOCK TRANSFER BOOKS OF
THE Corporation are to be closed or as the record date. Every proxy shall be in
writing, dated and signed by the stockholder entitled to vote or his duly
authorized attorney in fact.
1.7 Inspectors. An appropriate number of inspectors for any meeting of
stockholders may be appointed by the Chairman of such meeting. Inspectors so
appointed will open and close the polls, will receive and take charge of proxies
and ballots, and will decide all questions as to the qualifications of voters,
validity of proxies and ballots, and the number of votes properly cast.
ARTICLE II.
Directors.
2.1 General Powers. The property, affairs and business of the
Corporation shall be managed by the Board of Directors, and, except as otherwise
expressly provided by law, the Articles of Incorporation or these By-laws, all
of the powers of the Corporation shall be vested in such Board.
[2.2 Number of Directors. The number of Directors constituting the
Board of Directors shall be thirteen (13). The number of Directors may be
increased by no more than two by the Board of Directors from time to time during
the periods between the
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annual meetings of stockholders. (Amended 11-01-90)
2.3 Election and Removal of Directors; Quorum.
(a) Directors shall be elected at each annual meeting of
stockholders to succeed those Directors whose terms have expired and to fill any
vacancies then existing, as PROVIDED IN THE ARTICLES OF INCORPORATION.
(b) Directors shall hold their offices for terms of three
years as provided in the Articles of Incorporation and until their successors
are elected. Any Director may be removed from office at a meeting called
expressly for that purpose by the vote of stockholders holding 85% of the shares
entitled to vote at an election of Directors.
(c) Any vacancy occurring in the Board of Directors may be
filled by the affirmative vote of the majority of the remaining Directors though
less than a quorum of the board, and the term of office of any Director so
elected shall expire on the date fixed for the expiration of the term of office
of the Director to which such Director was so elected.
(d) A majority of the number of Directors elected and serving
at the time of any meeting shall constitute a quorum for the transaction of
business. The act of a majority of Directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. Less than a quorum
may adjourn any meeting.
2.4 Meetings of Directors. An annual meeting of the Board of Directors
shall be held as soon as practicable after the
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adjournment of the annual meeting of stockholders at such place as the Board may
designate. Other meetings, including regular monthly meetings, of the Board of
Directors shall be held at places within or without the State of Virginia and at
times fixed by resolution of the Board, or upon call of the Chairman of the
Board, the President or a majority of the Directors. The Secretary or officer
performing the Secretary's duties shall give not less than twenty-four hours'
notice by letter, telegraph or telephone (or in person) of all meetings of the
Board of Directors, provided that notice need not be given of the annual meeting
or of regular meetings held at times and places fixed by resolution of the
Board. Meetings may be held at any time without notice if all of the Directors
are present, or if those not present waive notice in writing either before or
after the meeting. The notice of meetings of the Board need not state the
purpose of the meeting.
2.5 Compensation. By resolution of the Board, Directors may be allowed
a fee and expenses for attendance at all meetings, but nothing herein shall
preclude Directors from serving the Corporation in other capacities and
receiving compensation for such other services.
2.6 Eligibility for Service as a Director. No person who shall have
attained the age of 75 years at the time the election is held shall be eligible
for election as a Director of the Corporation; PROVIDED, HOWEVER, THAT THIS
PROHIBITION shall not bar the election or re-election to the Board of Directors
at any time hereafter of any person who on February 19, 1971 was a Director Of
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The Fauquier National Bank of Warrenton.
Any person elected a Director prior to age 75 shall be entitled to
SERVE out his term regardless of age. ANY PERSON WHO AT ANY TIME has served as a
Director, but whose term of office as director has EXPIRED, MAY be elected by
the Board of Directors as a Director-Emeritus for as many three-year terms as
the Board of Directors may determine. A Director-Emeritus may attend meetings of
the Board of Directors and participate in its discussions and shall be paid the
regular fees paid to Directors, but shall not be entitled to vote and shall not
be counted for the PURPOSE of a quorum. (Amended 03-06-86)
ARTICLE III.
Committees.
3.1 Executive Committee. The Board of Directors, by resolution adopted
by a majority of the number of Directors fixed by these By-laws, may elect an
Executive Committee which shall consist of the President and eight Directors.
When the Board of Directors is not in session, the Executive Committee shall
have all power vested in the Board of Directors by law, by the Articles of
Incorporation, or by these By-laws, provided that the Executive Committee shall
not have power to declare dividends, to approve an amendment to the Articles of
Incorporation or a plan of merger or consolidation, or to take any action
prohibited by express resolution of the Board of Directors. The Executive
Committee shall report in writing at the next regular or special meeting of the
Board of Directors all action which the Executive Committee may
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have taken on behalf of the Board since the last regular or special meeting of
the Board of Directors.
3.2 Other Committees. The Board of Directors, by resolution duly
adopted, may establish such other standing or special committees of the Board as
it may deem advisable; and the members, terms and authority of such committees
shall be as set forth in the resolutions establishing the same.
3.3 Meetings. Regular and special meetings of any Committee
established pursuant to this Article may be called and held subject to the same
requirements with respect to time, place and notice as are specified in these
By-laws for regular and special meetings of the Board of Directors.
3.4 Quorum and Manner of Acting. A majority of the members of any
Committee serving at the time of any meeting thereof shall constitute a quorum
for the transaction of business at such meeting, except that 50% of the
membership of the Executive Committee shall constitute a quorum for the
transaction of business by such Committee. The action of a majority of those
members present at a Committee meeting at which a quorum is present shall
constitute the act of the Committee.
3.5 Term of Office. Members of any Committee shall be elected as above
provided and shall hold office until their successors are elected by the Board
of Directors or until such Committee is dissolved by the Board of Directors.
3.6 Resignation and Removal. Any member of a Committee may resign at
any time by giving written notice of his intention to do
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so to the Chairman of the Board of the Corporation, or may be removed, with or
without cause, at any time by such vote of the Board of Directors as would
suffice for his election.
3.7 Vacancies. Any vacancy occurring in a Committee resulting from any
cause whatever may be filled by the Board of Directors.
ARTICLE IV.
Officers and Employees.
4.1 Election of Officers; Terms. The officers of the Corporation shall
consist of a Chairman of the Board, a President, one or more Vice Presidents
(whose seniority and titles, including Executive Vice Presidents and Senior Vice
Presidents, may be specified by the Board of Directors), a Secretary, a
Treasurer, one or more Assistant Treasurers and such other assistant and
subordinate officers as may from time to time be elected by the Board of
Directors. All officers shall hold office until the next annual meeting of the
Board of Directors and until their successors are elected. The Chairman of the
Board and the President shall be chosen from among the Directors. Any two
officers may be combined in the same person as the Board of Directors may
determine, except that the President and Secretary may not be the same person.
4.2 Removal of Officers; Vacancies. Any officer of the Corporation may
be removed summarily without or without cause, at any time, by the Board of
Directors. Vacancies may be filled by the Board of Directors.
4.3 Duties. The officers of the Corporation shall have such
8
<PAGE>
duties as generally pertain to their offices, respectively, as well as such
powers and duties as are prescribed by law or are hereinafter provided or as
from time to time shall be conferred by the Board of Directors. The Board of
Directors may require any officer to give such bond for the faithful performance
of his duties as the board may see fit.
4.4 Duties of the Chairman of the Board. The Chairman of the Board
shall preside at all corporate meetings and shall be exofficio a member of all
Committees of the Board. He also shall serve the Corporation in an advisory
capacity and perform all duties incident to the office of Chairman of the Board
and such other duties as from time to time may be assigned to him by the Board
of Directors.
4.5 Duties of the President. The President shall be the chief
executive officer of the Corporation and shall be primarily responsible for the
implementation of the policies of the Board of Directors. Except as otherwise
provided in these By-laws or in the resolutions establishing such committees, he
shall be exofficio a member of all Committees of the Board. In the absence of
the Chairman of the Board the President shall preside at all corporate meetings.
He may sign and execute in the name of the Corporation stock certificates,
deeds, mortgages, bonds, contracts or other instruments except in cases where
the signing and the execution thereof shall be expressly delegated by the Board
of Directors or by these By-laws to some other officer or agent of the
Corporation or shall be required by law otherwise to be signed or executed. In
9
<PAGE>
addition, he shall perform all duties incident to the office of the President
and such other duties as from time to time may be assigned to him by the Board
of Directors or the Chairman of the Board.
4.6 Duties of the Vice Presidents. Each Vice President shall have such
powers and duties as may from time to time be assigned to him by the Board of
Directors. Any Vice President may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts or other instruments authorized
by the Board of Directors, except where the signing and execution of such
documents shall be expressly delegated by the Board of Directors, the Chairman
of the Board or the President to some other officer or agent of the Corporation
or shall be required by law or otherwise to be signed or executed. One of the
Vice Presidents, who shall be a member of the Board of Directors, shall perform
the duties of the President in his absence or his inability to act.
4.7 Duties of the Treasurer. The Treasurer shall have charge of and be
responsible for maintaining adequate financial accounts and records in
accordance with generally accepted principles and for the performance of all
duties incident to the office of Treasurer and such other duties as from time to
time may be assigned to him by the Board of Directors or the Chairman of the
Board.
4.8 Duties of the Secretary. The Secretary shall act as secretary of
all meetings of the Board of Directors and stockholders of the Corporation. When
requested, he shall also act
10
<PAGE>
as secretary of the meetings of the Committees of the Board. He shall keep and
preserve the minutes of all such meetings in permanent books. He shall see that
all notices required to be given by the Corporation are duly given and served;
shall have custody of the seal of the Corporation and shall affix the seal or
cause it to be affixed to all stock certificates of the Corporation and to all
documents the execution of which on behalf of the Corporation under its
corporate seal is duly authorized in accordance with law or the provisions of
these By-laws; shall have custody of all deeds, leases, contracts and other
important corporate documents; shall have charge of the books, records and
papers of the Corporation relating to its organization and management as a
Corporation; shall see that all reports, statements and other documents required
by law are properly filed; and shall in general perform all the duties incident
to the office of Secretary and such other duties as from time to time may be
assigned to him by the Board of Directors, the Chairman of the Board or the
President.
4.9 Compensation. The Board of Directors shall have authority to fix
the compensation of all officers and employees of the Corporation.
4.10 Retirement. Unless otherwise expressly authorized by resolution
of the Board, no officer or employee shall be employed beyond December 31 of the
year in which such officer or employee attains the age of 65 years.
11
<PAGE>
ARTICLE V.
Capital Stock.
5.1 Certificates. The shares of capital stock of the Corporation shall
be evidenced by certificates in forms prescribed by the Board of Directors and
executed in any manner permitted by law and stating thereon the information
required by law. Transfer agents and/or registrars for one or more classes of
the stock of the Corporation may be appointed by the Board of Directors and may
be required to countersign certificates representing stock of such class or
classes. If any officer whose signature or facsimile thereof shall have been
used on a stock certificate shall for any reason cease to be an officer of the
Corporation and such certificate shall not then have been delivered by the
Corporation, the Board of Directors may nevertheless adopt such certificate and
it may then be issued and delivered as though such person had not ceased to be
an officer of the Corporation.
5.2 Lost, Destroyed and Mutilated Certificates. Holders of the stock
of the Corporation shall immediately notify the Corporation of any loss,
destruction or mutilation of the certificate therefor, and the Board of
Directors may in its discretion cause one or more new certificates for the same
number of shares in the aggregate to be issued to such stockholder upon the
surrender of the mutilated certificate or upon satisfactory proof of such loss
or destruction, and the deposit of a bond in such form and amount and with such
surety as the Board of Directors may require.
5.3 Transfer of Stock. The stock of the Corporation shall be
12
<PAGE>
transferable or assignable only on the books of the Corporation by the holders
in person or by attorney on surrender of the certificate for such shares duly
endorsed and, if sought to be transferred by attorney, accompanied by a written
power of attorney to have the same transferred on the books of the Corporation.
The Corporation will recognize, however, the exclusive right of the person
registered on its books as the owner of shares to receive dividends and to vote
as such owner.
5.4 Closing of Transfer Books and Fixing Record Date. For the purpose
of determining stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may provide that the stock transfer books
shall be closed for a stated period but not to exceed, in any case, fifty days.
In lieu of closing the stock transfer books, the Board of Directors may fix in
advance a date as the record date for any such determination of stockholders,
such date in any case to be taken. If the stock transfer books are not closed
and no record date is fixed for the determination of stockholders entitled to
notice of or to vote at a meeting of stockholders, or stockholders entitled to
receive payment of a dividend, the date on which notices of the meeting are
mailed or the date on which the resolution of the Board of Directors declaring
such dividend is adopted, as the case may be, shall be the record date for such
determination of stockholders. When a determination of stockholders entitled to
13
<PAGE>
vote at any meeting of stockholders has been made as provided in this section,
such determination shall apply to any adjournment hereof.
ARTICLE VI.
Miscellaneous Provisions.
6.1 Seal. The seal of the Corporation shall consist of a flat-faced
circular die, of which there may be any number of counterparts, on which there
shall be engraved the word "Seal" and the name of the Corporation.
6.2 Fiscal Year and Accounting. The fiscal year of the Corporation
shall be the calendar year ending December 31. The Board of Directors shall on
at least one occasion each fiscal year cause an examination to be made of the
accounts of the monies of the Corporation and a settlement to be made of the
accounts by the Treasurer, a statement of which examination shall be recorded
with the minutes of meetings of the Board.
6.3 Checks, Notes and Drafts. Checks, notes, drafts and other orders
for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize. When the Board of Directors so
authorizes, however, the signature of any such person may be a facsimile.
6.4 Amendment of By-laws. Unless proscribed by the articles of
incorporation, these by-laws may be amended or altered at any meeting of the
board of directors by affirmative vote of a majority of the number of Directors
fixed by these By-laws. The
14
<PAGE>
stockholders entitled to vote in respect of the election of Directors, however,
shall have the power to rescind, amend, alter or repeal any By-laws and to enact
By-laws which, if expressly so provided, may not be amended, altered or repealed
by the Board of Directors.
6.5 Voting of Stock Held. Unless otherwise provided by resolution of
the Board of Directors or of the Executive Committee, if any, the Chairman of
the Board may from time to time appoint an attorney or attorneys or agent or
agents of this Corporation, in the name and on behalf of this Corporation, to
cast the vote which this Corporation may be entitled to cast as a stockholder or
otherwise in any other corporation, any of whose stock or securities may be held
by this Corporation, at meetings of the holders of the stock or other securities
of such other corporation, or to consent in writing to any action by any such
other corporation; and the Chairman of the Board shall instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent and may execute or cause to be executed on behalf of this Corporation,
and under its corporate seal or otherwise, such written proxies, consents,
waivers or other instruments as may be necessary or proper in the premises. In
lieu of such appointment the Chairman of the Board may himself attend any
meetings of the holders of stock or other securities of any such other
corporation and there vote or exercise any or all power of this Corporation as
the holder of such stock or other securities of such other corporation.
15
<PAGE>
ARTICLE VII.
Emergency By-laws.
The Emergency By-laws provided in this Article VII shall be operative
during any emergency declared by the President of the United States or any
person performing his functions, resulting from an attack on the United States
or any nuclear or atomic disaster, notwithstanding any different provision in
the preceding Articles of these By-laws or in the Articles of Incorporation of
the Corporation or in the Virginia Stock Corporation Act (other than those
provisions relating to emergency by-laws). To the extent not inconsistent with
these Emergency By-laws, the By-laws provided in the preceding articles shall
remain in effect during such emergency and upon the termination of such
emergency the Emergency By-laws shall cease to be operative unless and until
another such emergency shall occur.
During any such emergency:
(a) Any meeting of the Board of Directors may be called by any officer
of the Corporation or by any Director. The notice thereof shall specify the time
and place of the meeting. To the extent feasible, notice shall be given in
accord with Section 2.4 above, but notice may be given only to such of the
Directors as it may be feasible to reach at the time, by such means as may be
feasible at the time, including publication or radio, and at a time less than
twenty-four hours before the meeting if deemed necessary by the person giving
notice. Notice shall be similarly given, to the extent feasible, to the other
persons referred to in (b) below.
16
<PAGE>
(b) At any meeting of the Board of Directors, a quorum shall consist
of a majority of the number of Directors fixed by Article II of the By-laws. If
it is impossible to assemble a quorum of the Board of Directors or a quorum of
the Executive Committee, then such members of the Board of Directors as shall be
available shall constitute an emergency executive committee, which Emergency
Executive Committee shall possess and exercise all of the powers and authority
of the Board of Directors (except the power and authority to approve an
amendment of the Articles of Incorporation or a plan of merger or consolidation)
for the purpose of continuing the banking operation at its usual or other
available quarters.
The Chairman of the Emergency Executive Committee shall be the
President if available, or if not available the Vice Presidents, in the order of
their seniority. If neither the President nor any Vice President is available,
then a President and Vice President shall be elected by the Emergency Executive
Committee. The Emergency Executive Committee shall, subject to law then
applicable to such conditions, be empowered to employ such persons or firms as
it deems necessary to carry out the functions of banking and tomake such other
adjustments as in its judgment are necessary for the proper operation of the
Association under the existing conditions, which power shall include, without
limitation, the power to change the Corporation's principal office or designate
several alternative offices, or authorize the officers so to do.
No officer, Director or employee acting in accordance with these
Emergency By-laws shall be liable except for willful
17
<PAGE>
misconduct.
These Emergency By-laws shall be subject to repeal or change by
further action of the Board of Directors or by action of the stockholders,
except that no such repeal or change shall modify the provisions of the next
preceding paragraph with regard to action or inaction prior to the time of such
repeal or change. Any such amendment of these Emergency Bylaws may make any
further or different provision that may be practical and necessary for the
circumstances of the emergency.
18
FAUQUIER BANKSHARES, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
<PAGE>
FAUQUIER BANKSHARES, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
1.01 Agreement means a written agreement (including any amendment or supplement
thereto) between the Company and a Participant specifying the terms and
conditions of an Award granted to such Participant.
1.02. Award means an award of Options as provided for hereunder.
1.03. Bank means The Fauquier Bank, or its successors.
1.04. Board means the Board of Directors of the Company.
1.05. Code -means the Internal Revenue Code of 1986, as amended.
1.06. Common Stock means the common stock of the Company.
1.07. Company means Fauquier Bankshares, Inc. and its subsidiaries, or such
successors thereto.
1.08, Date of Grant means each April 1st during the term of the Plan.
1.09 Fair Market Value means the average of the five -most recent trades of the
Common Stock on the over-the-counter market during the period, not to exceed 30
calendar days, immediately preceding an Option's Date of Grant, or if there are
insufficient trades, then the Fair Market Value shall be determined as of the
Date of Grant in good faith by the Board of Directors.
1.10. Option means a stock option granted pursuant to Article IV, and that
entitles the holder to purchase from the Company stated number of shares of
Common Stock at the shares' Fair Market Value.
1.11. Participant means a member of the Board who is not an, employee of the
Company or the Bank on the applicable Date of Grant.
1.12. Plan means the Fauquier Bankshares, Inc. Non-Employee. Director Stock
option Plan.
ARTICLE II
PURPOSE
The Plan is intended to promote a greater identity of interest between
Participants and the Company's shareholders by
<PAGE>
increasing the Participants' proprietary interest in the Company through the
receipt of Awards in the form of options.
ARTICLE III
ADMINISTRATION
The Plan shall be administered by the one or more persons who are employees of
the Company and directors of the Board (the "Employee Directors"), and such
additional employees as the Employee Directors shall appropriately designate,
who shall have complete authority to interpret all provisions of this Plan; to
prescribe the form of Agreements; to adopt, amend, and rescind rules and
regulations pertaining to the administration of the Plan; and to make all other
determinations necessary or advisable for the administration of this Plan. Any
decision made, or action taken, by the Employee Directors in connection with the
administration of this Plan shall be final and conclusive. All expenses of
administering this Plan shall be borne by the Company.
ARTICLE IV
GRANT OF OPTIONS
On each Date of Grant during the term of the Plan, each Participant
automatically will receive an Option for shares of Common Stock determined in
accordance with the following schedule:
Number of Shares
Date of Grant Subject to Option
------------- -----------------
April 1, 1995 140
April 1, 1996 140
April 1, 1997 140
April 1, 1998 140
April 1, 1999 140
All Options shall be evidenced by Agreements which shall be subject to the
applicable provisions of the Plan and to such other provisions as the Employee
Directors may adopt.
ARTICLE V
STOCK SUBJECT TO OPTIONS
Upon the exercise of any Option, the Company may deliver to the Participant (or
the Participant's broker if the Participant so directs) authorized but unissued
Common Stock. The maximum aggregate number of shares of Common Stock that may be
issued pursuant to the exercise of Options under this Plan is 7,700, subject to
adjustment as provided in Article IX. If an Option is terminated, in whole or in
part, for any reason other than its
2
<PAGE>
exercise, the number of shares of Common Stock allocated to the option or
portion thereof may be reallocated to other options to be granted under this
Plan.
ARTICLE VI
OPTION PRICE
The price per share for Common Stock purchased on the exercise of an Option
shall be the share's Fair Market Value.
ARTICLE VII
EXERCISE OF OPTIONS
7.01. Maximum Option Period. No Option shall be exercisable after the expiration
of ten years from its Date of Grant.
7.02. Nontransferability. Options granted under this Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom the Option is granted, the Option
may be exercised only by the Participant. No right or interest of a Participant
in any Option shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
ARTICLE VIII
METHOD OF EXERCISE OF OPTIONS
8.01. Exercisability of Options. Subject to the provisions of Articles VII and
X, an Option becomes exercisable six months after its Date of Grant. However, an
Option granted to a Participant shall be immediately exercisable if the
Participant's membership on the Board terminates as a result of the
Participant's retirement in accordance with Company policy, death or permanent
and total disability (as such term is defined in Section 22(e)(3) of the Code).
An Option shall be forfeited if, as of thetermination of the Participants
membership on the Board, the Option is not then exercisable and such termination
occurs for any reason other than the Participant's retirement in accordance with
Company policy, death or disability (as defined above). Options that are
exercisable or that become exercisable upon the Participant's termination of
membership on the Board will remain exercisable until the tenth anniversary of
the Option's Date of Grant. An Option may be exercised with respect to any
number of whole shares less than the full number for which the Option could be
exercised. A partial exercise of an Option shall not affect the right to
exercise the Option from time to time in accordance with this Plan and the
applicable Agreement with respect to the shares remaining subject to the Option.
3
<PAGE>
8.02. Payment. Unless otherwise provided by the Agreement, payment of the Option
price shall be made in cash or a cash equivalent acceptable to the Board. In
addition, all or part of the Option price may be paid by surrendering shares of
Common Stock to the Company. If Common Stock is used to pay all or part of the
Option price, the shares surrendered must have a fair market value (determined
as of the day before the date of exercise and based on the average of the five
most recent trades of the Common Stock on the over-the-counter market during the
period, not to exceed 30 calendar days, preceding such date) that is not less
than such price or part thereof.
8.03. Shareholder Rights. No Participant shall have any rights as a stockholder
with respect to shares subject to his Option until the date of exercise Of such
Option.
ARTICLE IX
ADJUSTMENT UPON CHANGE IN COMMON STOCK
The maximum number of shares to which Awards may be granted under this Plan
shall be proportionately adjusted, and the terms of outstanding Awards shall be
adjusted, as the Employee Directors shall determine to be equitably required in
the event that the Company (a) effects one or more stock dividends, stock
split-ups, subdivisions or consolidations of shares or (b) engages in a
transaction to which Section 424 of the Code applies. Any determination made
under this Article IX by the Board shall be final and conclusive.
The issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares of obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, outstanding
Awards.
ARTICLE X
COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES
No Option shall be exercisable, no Common Stock shall be issued, no certificates
for shares of common Stock shall be delivered, and no payment shall be made
under this Plan except in compliance with all applicable federal and state laws
and regulations (including, without limitation, withholding tax requirements),
and applicable requirements of any exchange or other market having authority
over the trading of the Company's shares.
4
<PAGE>
ARTICLE XI
GENERAL PROVISIONS
12.01. Effect on Service. Neither the adOption of this Plan, its operation,
documents describing or referring to this Plan (or any part thereof) shall
confer on any Participant any right to continue service as a member of the
Board.
12.02. Unfunded Plan. Th Plan, insofar as it provides for grants, shall be
unfunded and the Company shall not be required to segregate any assets that may
be represented at any time by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon any contractual obligations that are created pursuant to this Plan.
No such obligation of the Company shall be deemed to be secured by any pledge
of, or other encumbrance on, any property of the Company.
12.03. Rules of Construction. Headings are given to the articles and sections of
the Plan solely as a convenience to facilitate reference. The reference to any
statute, regulation, or provision of law shall be construed to refer to any
amendment to or successor of such provision of law.
ARTICLE XII
AMENDMENT
The Board may amend this Plan from time to time; provided that, if the Board
determines that shareholder approval is required and the Plan is submitted for
such approval and adopted, then no subsequent amendment may become effective
until shareholder approval is obtained if the amendment (i) materially increases
the aggregate number of shares of Common Stock that may be issued under the
Plan, except in accordance with the provisions of Article IX, (ii) materially
changes the class of individuals eligible to become Participants or (iii)
materially increases the benefits that may accrue to Participants under the
Plan, and provided further that the Board may not amend the Plan more than once
in any six month period unless such amendment is required to comply with the
Code. No amendment shall, without a Participant's consent, adversely affect any
rights of such Participant under any Option outstanding at the time such
amendment is made.
ARTICLE XIII
TERMINATION
The Board may terminate this Plan at any time. This Plan will
5
<PAGE>
terminate automatically, without any action of the Board, if, on any Date of
Grant, there are insufficient shares available for the grant of Awards in
accordance with the terms of the Plan. The termination of this Plan shall not
affect any rights of a Participant under any Option outstanding at the time of
such termination.
ARTICLE XIV
DURATION OF PLAN
No Award may be granted under this Plan after ten years from the date of the
first grant of an Option tinder the Plan. Options granted on or before such date
shall remain valid in accordance with their terms.
ARTICLE XV
EFFECTIVE DATE OF PLAN
This Plan was approved by the Board of Directors of the Company on February 16,
1995. The Effective Date of the Plan shall be April 1, 1995 and no Awards may be
granted prior to the Effective Date.
6
<PAGE>
FAUQUIER BANKSHARES, INC.
DIRECTOR DEFERRED COMPENSATION PLAN
(As Adopted Effective May 1, 1995)
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
Definition of Terms
1.1 Administrator .......................................................1
1.2 Affiliate ...........................................................1
1.3 Beneficiary .........................................................1
1.4 Benefits Committee ..................................................1
1.5 Board................................................................1
1-6 Code ................................................................1
1.7 Compensation ........................................................1
1.8 Corporation .........................................................2
1.9 Deferral Account ....................................................2
1.10 Deferral Contributions ..............................................2
1.11 Effective Date ......................................................2
1.14 Eligible Director ...................................................2
1.13 Participant .........................................................2
1.14 Plan ................................................................2
1.15 Plan Sponsor ........................................................2
1.16 Plan Year ...........................................................2
1.17 Rate of Return ......................................................2
1.18 Stock ...............................................................2
1 19 Valuation Date ......................................................3
1.20 Value ...............................................................3
ARTICLE II
Eligibility and Participation
2.1 Eligibility and Notice .............................................3
2.2 Election Required for Commencement of Active Participation..........3
2.3 Deferred Compensation Election .....................................4
2.4 Termination of Active Participation ................................5
2.5 Length of Participation ............................................5
ARTICLE, III
DETERMINATION of Deferral Accounts
3.1 Deferral Account and Subaccounts ...................................5
3.2 Crediting of Deferral Contributions to Deferral Account ............6
3.3 Subtractions from Deferral Account .................................6
3.4 Crediting of Deemed Earnings to Deferral Account ...................6
3.5 Equitable Adjustment in Case or Error or Omission ..................6
3.6 Statement of Benefits ..............................................6
-i-
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Page
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ARTICLE IV
Vesting
4.1 Vesting ............................................................6
ARTICLE V
Death Benefits
5.1 Death after Benefit Commencement ...................................7
5.2 Death before Benefit Commencement ..................................7
5.3 Beneficiary Designation.............................................7
ARTICLE VI
Payment of Benefits
6.1 Time and Form of Payment to a Participant ..........................7
6.2 Time and Form of Payment to a Beneficiary ..........................8
6.3 Lump Sum Payments and Periodic Installments ........................8
6.4 Benefit Determination and Payment Procedure........... .............9
6.5 Payments to Minors and Incompetents ................................9
6.6 Distribution of Benefit When Distributee Cannot be Located .........9
ARTICLE VII
Withdrawals
7.1 No Withdrawals Permitted ...........................................9
ARTICLE VIII
Funding
8.1 Funding ............................................................9
8.2 Use of Trust ......................................................10
ARTICLE IX
Plan Administrator
9.1 Plan Administrator ................................................10
9.2 Duties and Responsibilities of Plan Administrator .................10
9.3 Power and Authority ...............................................11
9.4 Availability of Records ...........................................11
ARTICLE X
AMENDMENT OR TERMINATION OF PLAN
10.1 Amendment or Termination of the Plan ..............................11
10.2 Effect of Corporate Merger, Consolidation or Liquidation ..........11
- ii -
<PAGE>
Page
----
ARTICLE XI
Miscellaneous
11.1 Non-assignability .................................................12
11.2 Right to Require Information and Reliance Thereon .................12
11.3 Notices and Elections .............................................12
11.4 Delegation of Authority ...........................................12
11.5 Service of Process ................................................12
11.6 Governing Law .....................................................12
11.7 Binding Effect ....................................................12
11.8 Severability ......................................................12
11.9 No Effect on Agreement ............................................12
11.10 Gender and Number .................................................12
11.11 Titles and Captions ...............................................12
ARTICLE XII
Adoption by Additional Corporations
12.1 Adoption by Additional Corporations ................................13
12.2 Termination Events with Respect to Corporations Other Than
the Plan Sponsor ................................................13
iii
<PAGE>
Pursuant to action taken by the Board of Directors of Fauquier
Bankshares, Inc., a Virginia corporation, and The Fauquier Bank, a Virginia
corporation, (hereinafter collectively or individually called the
"Corporation"), the Fauquier Bankshares, Inc. Director Deferred Compensation
Plan (hereinafter referred to as the "Plan") is hereby adopted as follows;
WITNESSETH:
WHEREAS, the Corporations desire to adopt a plan for deferral of
directors compensation as hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and of the covenants
herein contained, this Plan is adopted to provide benefits, as herein set forth:
ARTICLE I
DEFINITION OF TERMS
The following words and terms as used in this Plan shall have the
meaning set forth below, unless a different meaning is clearly required by the
context:
1.1 "ADMINISTRATOR": The Plan Administrator provided for in ARTICLE IX
hereof.
1.2 "AFFILIATE": Any subsidiary, parent, affiliate, or other related
business entity to the Plan Sponsor, as determined by the Administrator.
1.3 "BENEFICIARY": The person or persons designated by a Participant or
otherwise entitled pursuant to paragraph 5.3 to receive benefits under the Plan
attributable to such Participant after the death of such Participant.
1.4 "BENEFITS COMMITTEE": The standing committee of the Board of
Directors of the Plan Sponsor having responsibility over the Plan; or if' no
such committee is so serving at any time, the Board of the Plan Sponsor.
1.5 "BOARD": The present and any succeeding Board of Directors of the
Plan Sponsor, unless such term is used with respect to a particular Corporation
and its Board of Directors, in which event it shall mean the present and any
succeeding Board of Directors of that Corporation.
1.6 "CODE": The Internal Revenue Code of 1986, as the same may be
amended from time to time, or the corresponding section of any subsequent
Internal Revenue Code, and, to the extent not inconsistent therewith,
regulations issued thereunder,
1.7 "COMPENSATION": A Participant's (i) retainers (referred to as
"Retainers") for Board or committee service and (ii) fees for Board or committee
meetings (referred to as "Meeting Fees") paid by the Corporation to an Eligible
Director, but excluding any such compensation deferred from a prior period, any
such compensation attributable to a period during which a Deferred Compensation
Election with respect thereto is not in effect, any expense reimbursement or
allowance, any such compensation not normally paid in cash to the Participant,
and any such compensation attributable to service on the board of directors of
any Affiliate which is not a participating Corporation.
<PAGE>
1.8 "CORPORATION ":
1.8(a) Fauquier Bankshares, Inc., a Virginia corporation, The Fauquier
Bank, a Virginia corporation, and any other Affiliate which adopts the Plan as a
participating Corporation, including any successor to any such Corporation. A
register of all such Corporations which have adopted the Plan and who are at any
time participating in the Plan shall be maintained by the Administrator.
1.8(b) Employment as a common law employee with an Affiliate shall be
considered employment as a common law employee with the Corporation for all
purposes of the Plan.
1.8(c) Service as a director of an Affiliate shall not be considered
service as a director of the Corporation unless the Affiliate is a participating
Corporation.
1.9 "DEFERRAL ACCOUNT": An unfunded, bookkeeping account maintained on
the books of the Corporation for a Participant which reflects his interest in
amounts attributable to his Deferral Contributions under the Plan,
(i) Separate subdivisions of the Deferral Account shall be
maintained to reflect Deferral Contributions made pursuant to separate
Deferred Compensation Elections.
(ii) Separate subaccounts of each Deferral Account shall be
maintained to reflect a Participant's interest in the Cash Account and
in the Share Account.
1.10 "DEFERRAL CONTRIBUTIONS": That portion of a Participant's
Compensation which is deferred under the Plan.
1.11 "EFFECTIVE DATE". The Effective Date of the Plan is May 1, 1995.
1.12 "ELIGIBLE DIRECTOR": An individual who is a member of the Board of
Directors of the Corporation but who is not a common law employee of the
Corporation.
1.13 "Participant": An Eligible Director who elects to participate in
the Plan for so long as he is considered a Participant as provided in ARTICLE II
hereof, and further differentiated as follows:
(i) "Active Participant"; A Participant who has an election
to make Deferral Contributions to the Plan in effect at the time in
question.
(ii) "Inactive Participant"; A Participant who does not have
an election to make Deferral Contributions to the Plan in effect at
the time in question.
1.14 "PLAN"; This document, as contained herein or duly amended, which
shall be known as the "Fauquier Bankshares, Inc. Director Deferred Compensation
Plan".
1.15 "PLAN SPONSOR": Fauquier Bankshares, Inc., a Virginia corporation,
or any successor thereto.
1.16 "PLAN YEAR": The calendar year.
1.17 "RATE OF RETURN": The annual rate equivalent to the highest
interest rate offered by The Fauquier Bank (or its successor) on any of its
deposits, determined at the end of each calendar quarter for the next calendar
quarter.
1.18 "STOCK": The common stock of Fauquier Bankshares, Inc., a Virginia
corporation, or any successor thereto.
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1.19 "VALUATION DATE": The last day of each Plan Year and such other
dates, if any, as the Administrator may designate. In the event of a
Participant's death where all or one or more subdivisions of his Deferral
Account is to be paid pursuant to paragraph 5.2, the last day of the calendar
month in the Participant dies shall also be a Valuation Date for such benefit to
be paid pursuant to paragraph 5.2.
1.20 "VALUE":
1.20(a) In the event there is a generally recognized market for Stock,
either (i) the average of the closing trading prices of Stock reported on a
national securities exchange which is registered under Section 6 of the
Securities Exchange Act of 1934 for the five (5) most recent days on which Stock
was traded during the last thirty (30) days ending on the determination date or
(ii) if Stock is not traded on a national securities exchange, the average of
the trading prices for the five (5) most recent trades in the over-the-counter
market during the last thirty (30) days ending on the determination date.
1.20(b) In the event there is no generally recognized market for Stock
or trades are insufficient to establish the Value, the fair market value of
Stock as determined in good faith by the Board or Benefits Committee.
ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.1 ELIGIBILITY AND NOTICE.
2.1(a) Each Eligible Director shall be eligible to participate in the
Plan by becoming an Active Participant as provided in paragraph 2.2.
2.1(b) The Administrator shall give notice of eligibility to each
Eligible Director who is anticipated to be eligible to make Deferral
Contributions within a reasonable period of time prior to the Effective Date of
the Plan and thereafter prior to the beginning of each Plan Year or any
subsequent commencement of status as an Eligible Director.
2.2 ELECTION REQUIRED FOR COMMENCEMENT OF ACTIVE PARTICIPATION.
2.2(a) An Eligible Director may elect to become an Active Participant
by executing a Deferred Compensation Election (as provided in paragraph 2.3) and
timely filing it with the Administrator at such time as the Administrator may
require prior to the first day of the Plan Year for which it is to become
effective or, in the case of an Eligible Director's commencement of eligibility
to participate as provided in clause (ii) of subparagraph 2.2(b), within thirty
(30) days after he is first eligible to become an Active Participant.
2.2(b) An Eligible Director shall become an Active Participant for a
Plan Year as of the beginning of a calendar month at any of the following times
for which he timely files a Deferred Compensation Election (as provided in
paragraph 2.3):
(i) On the first day or the Plan Year if he timely files his
election therefor, or
(ii) In the case of his first becoming eligible for the Plan
Year, on the first day of the calendar month after he timely files his
election therefor.
If a Corporation institutes payment of a particular type of Compensation during
a Plan Year, the Administrator may permit elections to be made solely with
respect to such newly instituted type of Compensation as though the period for
which such type of Compensation is first offered is the date an Eligible
director is first eligible.
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2.3 DEFERRED COMPENSATION ELECTION.
2.3(a) Subject to the restrictions and conditions hereinafter provided,
an Eligible Director shall be entitled to elect to defer, as a Deferral
Contribution with respect to a Plan Year or other period of active
participation, an amount or percentage of his Compensation which is specified by
and in accordance with his direction in his Deferred Compensation Election for
such Plan Year or period. Any such election must be filed with the Administrator
at the time required under paragraph 2.2.
2.3(b) Deferred Compensation Elections shall be subject to the
following rules:
(i) Active participation in the Plan is available on either
an annual basis, which requires an annual election for active
participation for each Plan Year, or a continuing basis, which permits
an election for continuing active participation from year to year.
(ii) Where a Participant has made a Deferred Compensation
Election for active participation on a continuing basis, the Participant
may modify such election on a prospective basis as of the beginning of
any Plan Year as though a new election were being made. Such
modification may include, but is not limited to, a change in the dollar
amount or percentage of his Compensation to be contributed as Deferral
Contributions, a change in the payment time or form, and a change in the
participation basis from participation on a continuing basis to
participation on annual basis.
(iii) Each Deferred Compensation Election (whether made on an
annual or continuing basis) must specify the following:
(A) The dollar amount or percentage of his Compensation
to be contributed as Deferral Contributions for the
applicable period;
(B) The Compensation from which the Deferral
Contribution shall be withheld;
(C) The Eligible Director's benefit commencement date
which date (I) shall be determined pursuant to subparagraph
6.1(b), (II) except where permitted by the Administrator,
shall be the same for the subdivision of his Deferral Account
attributable to the same Deferred Compensation Election, and
(III) shall be irrevocable;
(D) The form of payment of the Deferral Account to the
Participant which form (I) shall be determined pursuant to
subparagraph 6.1(b), (II) shall be the same for the
subdivision of his Deferral Account attributable to the same
Deferred Compensation Election, and (111) shall be
irrevocable-,
(E) The Plan Year or period to which it relates,
(F) The subaccount (that is, the Cash deferral Account
and/or the Share Account) in which the Deferral Contribution
will be considered invested; and
(G) Such other information as the Administrator may
require.
2.3(c) Each Deferral Contribution is intended to be an elective
compensation reduction amount which shall be deducted from a Participant's
Compensation otherwise payable to him for a Plan Year by way of Retainers or
Meeting Fees. Unless otherwise approved by the Administrator:
(i) Deferral Contributions of Retainers shall be withheld on
a pro rata basis if a percentage deferral is elected or on a first
dollar basis from the Retainers before any part of the designated
Retainers is paid to the Participant if a dollar amount deferral is
elected; and
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(ii) Deferral Contributions of Meeting Fees shall be withheld
on a pro rata basis.
2.4 TERMINATION OF ACTIVE PARTICIPATION. A Participant who is an Active
Participant for a Plan Year shall cease to be an Active Participant for the Plan
Year if and when he ceases to be an Eligible Director during the Plan Year or if
and when he files an election to cease being an Active Participant for the Plan
Year. If an Active Participant files an election to cease being an Active
Participant for a Plan Year, the election must be filed with the Administrator
prior to the first day of the calendar month it will become effective, and he
may not again become an Active Participant until a subsequent Plan Year.
2.5 LENGTH OF PARTICIPATION. AN Eligible Director who becomes a
Participant shall be or remain a Participant for so long as he is entitled to
future benefits under the terms of the Plan.
ARTICLE III
DETERMINATION OF DEFERRAL ACCOUNTS
3.1 DEFERRAL ACCOUNT AND SUBACCOUNTS.
3.1(a) The Corporation shall establish and maintain on its books a
Deferral Account (and appropriate subdivisions thereof to reflect the amount
attributable to each Deferred Compensation Election) for each Participant to
reflect the Participant's benefits under the Plan.
3.1(b) The balance in the Deferral Account of a Participant shall
consist of his Deferral Contributions made to the Plan pursuant to paragraph 2.3
and credited pursuant to paragraph 3.2, subtractions pursuant to paragraph 3.3,
and deemed earnings thereon determined pursuant to paragraph 3.4.
3.1(c) Each Deferral Account shall be subdivided into a Cash Account and
a Share Account based oil the Participant's Deferred Compensation Election.
(i) The Cash Account shall be considered invested in deposit
instrument offered by The Fauquier Bank, which shall be maintained on a
cash basis.
(ii) The Share Account shall be considered invested in Stock
and which shall be maintained on a share basis. Under the share basis of
accounting:
(A) Contributions and other amounts (including but not
limited to deemed dividends) credited to the subaccount shall
be converted to whole and fractional shares of Stock based on
the Value of a share of Stock on the day credited,
Notwithstanding the foregoing, if the Plan Sponsor maintains a
dividend reinvestment plan at any time, deemed dividends
credited to the subaccount shall be considered invested in
shares of Stock pursuant to the purchase price determination
under such plan.
(B) The value of the subaccount at any time is the
number of shares considered held in the account multiplied by
the Value of a share of Stock for the day in question.
(C) Fractional shares (calculated to the second, third
or fourth decimal place, as determined by the Administrator)
shall be maintained on such basis as the Administrator
determines from time to time.
(D) In the event of a Stock dividend or Stock split or a
change in the number of shares of Stock held by the Plan as a
result of a reorganization or other recapitalization of the
issuer of Stock, there shall be credited to each such
subaccount a proportionate number of full and fractional
shares of Stock which would have been received by the Plan if
the Stock considered held by the Plan were outstanding as a
result of such dividend, split or change based on the number
of
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shares and fractions thereof in such account as of the
Valuation Date. (or such other date as the Administrator may
direct) coinciding with or next following the ex-dividend or
record date as applicable.
3.1(d) As of any Valuation Date, a Participant (or if deceased, his
Beneficiary) may elect that all or any designated portion of the balance in his
Share Account be transferred to his Cash Account. Any such election shall be
made in writing and filed with the Administrator at least fifteen (15) days (or
shorter period as the Administrator may accept) prior to the Valuation Date as
of which the election is made.
3.2 CREDITING OF DEFERRAL CONTRIBUTIONS TO DEFERRAL ACCOUNT Deferral
Contributions made by a Participant shall be credited to his Deferral Account
and the applicable subaccount and subdivision thereof as of the date the
Compensation from which such contributions are deducted would otherwise have
been paid to him.
3.3 SUBTRACTIONS FROM DEFERRAL ACCOUNT. All distributions shall be
subtracted from a Participant's Deferral Account and the applicable subaccount
and subdivision thereof when made.
3.4 CREDITING OR DEEMED EARNINGS TO DEFERRAL ACCOUNT.
3.4(a) As of each Valuation Date, there shall be credited to each
Participant's Deferral Account and the applicable subaccount and subdivision
thereof an amount representing deemed earnings on the balance of such account or
subdivision since the last Valuation Date.
3.4(b) Such earnings shall be determined as follows:
(i) Such earnings for the Cash Account, shall be based on the
applicable Rate of Return for the period since the last Valuation Date
applied to the average daily balance in the subaccount and applicable
subdivision thereof for the valuation period or portion thereof ending
on the Valuation Date.
(ii) Such earnings for the Share Account shall consist of
dividends which would have been paid on the number of shares credited to
such subaccount on the applicable record date and changes in Value of
the shares of Stock considered held in the subaccount since the last
Valuation Date.
3.4(c) Normally, deemed earnings shall not be credited to benefit
payments made since the last Valuation Date. Notwithstanding the foregoing, in
the event that any payment of benefits under the Plan is made more than one
month after the most recent Valuation Date for which such benefits are adjusted
for deemed earnings, such payment shall be increased by additional deemed
earnings for each complete calendar month that has elapsed between such
Valuation Date and the date as of which the payment is made. Such additional
deemed earnings shall be determined and credited on the basis of the Rate of
Return as of such Valuation Date and as of any intervening Valuation Dates.
3.5 EQUITABLE ADJUSTMENT IN CASE OF ERROR OR OMISSION. Where an error or
omission is discovered in the Deferral Account of a Participant, the
Administrator shall be authorized to make such equitable adjustment as the
Administrator deems appropriate.
3.6 STATEMENT OF BENEFITS. Within a reasonable time after the end of
each Plan Year and at the date a Participant's Deferral Account (or a
subdivision thereof) becomes payable under the Plan, the Administrator shall
provide to each Participant (or, if deceased, to his Beneficiary) a statement of
the Participant's Deferral Account balance (or applicable subaccount and
subdivision thereof) under the Plan
ARTICLE IV
VESTING
4.1 VESTING. A Participant's Deferral Account shall be fully vested and
non-forfeitable at all times.
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ARTICLE V
DEATH BENEFITS
5.1 DEATH AFTER BENEFIT COMMENCEMENT. If a Participant dies after a
separately maintained subdivision of his Deferral Account has begun to be paid
to him, the benefits payable under the Plan after his death with respect to such
subdivision shall be the remainder of such subdivision, if any, payable as
provided under the form of payment being made to him at his death. Such benefits
shall be paid to his Beneficiary at the time and in the manner described in
ARTICLE VI.
5.2 DEATH BEFORE BENEFIT COMMENCEMENT. If a Participant dies before a
separately maintained subdivision of his Deferral Account has begun to be paid
to him, the benefits payable under the Plan after his death with respect to such
subdivision shall be paid to his Beneficiary at the time and in the manner
described in ARTICLE VI.
5.3 BENEFICIARY DESIGNATION
5.3(a) Each Participant shall have the right to notify the Administrator
in writing of any designation of a Beneficiary to receive, if alive, benefits
under the Plan in the event of his death. Such designation may be changed from
time to time by notice in writing to the Administrator.
5.3(b) If a Participant dies without having designated a Beneficiary, or
if the Beneficiary so designated has predeceased the Participant or, except when
his Beneficiary is his spouse, cannot be located by the Administrator within one
year after the date when the Administrator commenced making a reasonable effort
to locate such Beneficiary, then his surviving spouse, or if none, then the
executor or the administrator of his estate shall be deemed to be his
Beneficiary.
5.3(c) Any Beneficiary designation may include multiple, contingent or
successive Beneficiaries and may specify the proportionate distribution to each
Beneficiary. If a Beneficiary shall survive the Participant, but shall die
before the entire benefit payable to such Beneficiary has been distributed, then
absent any other provision by the Participant, the unpaid amount of such benefit
shall be distributed to the estate of the deceased Beneficiary. If multiple
Beneficiaries are designated, absent provisions by the Participant, those named
or the survivors of them shall share equally any benefits payable under the
Plan. Any Beneficiary, including the Participant's spouse, shall be entitled to
disclaim any benefit otherwise payable to him under the Plan.
ARTICLE VI
PAYMENT OF BENEFITS
6.1 TIME AND FORM OF PAYMENT TO A PARTICIPANT.
6.1 (a) Except as provided in subparagraph 6.1(c), the subdivision of a
Participant's Deferral Account attributable to his Deferral Contributions made
with respect to a Deferred Compensation Election shall be payable in cash to the
Participant, if then alive, at the time and in the form elected by the
Participant in his Deferred Compensation Election.
6.1 (b) The Participant shall have the following election choices for
the time, form and manner of payment for his Deferral Account. The choices apply
separately to each subdivision of his Deferral Account attributable to his
Deferral Contributions made with respect to a Deferred Compensation Election
(i) Time of Payment -
(A) At the January 15th of the calendar year following the
calendar year in which the Participant ceases to be a member of the
Board.
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(B) At the January 15th of a calendar year specified by the
Participant,
(C) At the later of (A) or (B).
(D) At the earlier of (A) or (B).
(ii) Form of Payment -
(A) In a lump sum payment as provided in paragraph 6.3.
(B) In periodic installments as provided in paragraph 6.3.
(iii) Manner of Payment -
(A) Payments from the Cash Account shall be made in cash.
(B) Payments from the Share Account shall be made in whole
and fractional shares of Stock or, if fractional shares are not
permitted to be issued, in whole shares of Stock and cash in lieu of
fractional shares. Notwithstanding the foregoing, a participant (or if
deceased, his Beneficiary), may elect that all or any portion of a
payment from Share Account shall be made in cash at its Value on the
day before the date of payment. Any such election shall be made in
writing and filed with the Administrator at least Fifteen (15) days (or
shorter period as the Administrator may accept) prior to the date of
payment.
6.1(c) Notwithstanding the foregoing, payment of the Deferral Account or
a subdivision thereof may be delayed for a reasonable period in the event the
Participant cannot be located or is not competent to receive the benefit
payment, there is a dispute as to the proper recipient of such benefit payment,
additional time is needed to complete the Plan allocations, or additional time
is needed for other administrative reasons.
6.2 TIME OF AND FORM PAYMENT TO A BENEFICIARY.
6.2(a) Except as provided in subparagraph 6.2(c), each subdivision of
the Deferral Account with respect to a deceased Participant payable pursuant to
paragraph 5.1 shall continue to be paid in accordance with the form of payment
in effect at the Participant's death.
6.2(b) Except as provided in subparagraph 6.2(c), each subdivision of
the Deferral Account with respect to a deceased Participant payable pursuant to
paragraph 5.2 shall become payable in cash to his Beneficiary in the form of a
lump sum payment as soon as possible after the calendar month in which the
Participant dies.
6.2(c) Notwithstanding the foregoing, payment of the Deferral Account or
a subdivision thereof may be delayed for a reasonable period in the event the
recipient cannot be located or is not competent to receive the benefit payment,
there is a dispute as to the proper recipient of such benefit payment,
additional time is needed to complete the Plan allocations, or additional time
is needed for other administrative reasons.
6.3 LUMP SUM PAYMENTS AND PERIODIC INSTALLMENTS.
6.3(a) The term "lump sum payment" generally means a single payment of
the Deferral Account or applicable subaccount and subdivision thereof. The
amount of a lump sum payment shall be the balance in the Deferral Account or
applicable subaccount and subdivision thereof determined at the last Valuation
Date immediately preceding payment. In the event a Deferral Account or
subdivision thereof is to be paid in a lump sum payment and the amount thereof
has not been determined, the Administrator is authorized to make one or more
interim payments prior to the time the amount of such lump sum payment is
finally determined.
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6.3(b) Periodic installments shall be paid in 2, 3, 4 or 5 annual
periodic installments. Under this form of payment, the Deferral Account or
applicable subaccount and subdivision thereof will be paid in annual
installments over the selected number of years, subject to the following rules:
(i) The amount of' each installment shall equal the balance
in the Deferral Account or applicable subaccount and subdivision thereof
determined at the last Valuation Date immediately preceding each
installment payment divided by the remaining number of payments to be
made therefrom.
(ii) Until paid out, each subdivision of the Participant's
Deferral Account remaining in the Plan shall continue to be adjusted for
deemed earnings thereon determined pursuant to paragraph 3.4.
(iii) If payment commences to the Participant, the balance of
any periodic installments remaining at the Participant's death shall
continue to his Beneficiary.
6.4 BENEFIT FIT DETERMINATION AND PAYMENT PROCEDURE. The Administrator
shall make all determinations concerning eligibility for benefits under the
Plan, the time or terms of payment, and the form or manner of payment to the
Participant or, in the. event of' the death of the Participant, the
Participant's Beneficiary. The Administrator shall promptly notify the
Corporation of' each such determination that benefit payments are due and
provide to the Corporation all other information necessary to allow the
Corporation to carry out said determination, whereupon the Corporation shall pay
such benefits in accordance with the Administrator's determination.
6.5 PAYMENTS TO MINORS AND INCOMPETENTS. If a Participant or
Beneficiary entitled to receive any benefits hereunder is a minor or is adjudged
to be legally incapable of giving valid receipt and discharge for such benefits,
or is deemed so by the Administrator, benefits will be paid to such person as
the Administrator may designate for the benefit of such Participant or
Beneficiary. Such payments shall he considered a payment to such Participant or
Beneficiary and shall, to the extent made, be deemed a complete discharge of any
liability for such payments under the Plan,
6.6 DISTRIBUTION OF BENEFIT WHEN DISTRIBUTEE CANNOT BE LOCATED. The
Administrator shall make all reasonable attemps to determine the identity and/or
whereabouts of a Participant or a Participant's Beneficiary entitled to
benefits, under the Plan, including the mailing by certified mail of a notice to
the last known address shown on the Corporation's or the Administrator's
records. If the Administrator is unable to locate such a person entitled to
benefits hereunder, or if there has been no claim made for such benefits, the
Corporation shall continue to hold the benefit due such person, subject to any
applicable statute of escheats.
ARTICLE VII
WITHDRAWALS
7.1 NO WITHDRAWALS PERMITTED. No withdrawals or other distributions
shall be permitted from a Participant's Deferral Account except as provided in
ARTICLE VI.
ARTICLE VII
FUNDING
8.1 FUNDING.
8.1(a) The undertaking to pay benefits hereunder shall be an unfunded
obligation payable. solely from the general assets of the Corporation and
subject to the claims of the Corporation's creditors. The Deferral Account shall
be maintained as a book reserve account solely for accounting purposes,
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8.1(b) Nothing contained in the Plan and no action taken pursuant to the
provisions of the Plan (including establishing a trust pursuant. to paragraph
8.2) shall create or be construed to give any Participant or Beneficiary any
right, title or interest in any specific asset or assets of the Corporations or
the assets of any trust established pursuant to paragraph 8.2 at any time or any
priority of payment. To the extent that any person acquires a right to receive
payments from the Corporation under the Plan, such rights shall be no greater
than the. right of any unsecured general creditor of the Corporation.
8.1(c) Where more than one Corporation participates in the Plan, the
funding and payment provisions hereof shall apply separately to each such
Corporation, except that the Plan Sponsor shall guarantee payment, of all
benefits due under the Plan.
8.1(d) The Plan Sponsor may in its discretion make the payment of any
or all benefits under the Plan in lieu of payment by one or more Corporations,
Where the Plan Sponsor makes payments on behalf of other Corporations the Plan
Sponsor may require contributions by participating Corporations to the Plan
Sponsor at such times (whether before, at or after the time of payment), in such
amounts and or such basis as it may from time to time determine in order to
defray the cost of benefits and administration of the Plan
8.2 USE OF TRUST
8.2(a) Notwithstanding any provision herein to the contrary, the Plan
Sponsor may in its sole discretion establish and cause certain of assets to be
held pursuant to a trust agreement for the, purpose of providing benefits under
the Plan.
8.2(b) The Corporations shall pay over Deferral Contributions to the
trustee of any such trust agreement as and when directed by the Plan Sponsor
8.2(c) The Corporations acknowledge that. any such trust agreement may
be established by the Plan Sponsor for the benefit of one or more of the
participating Corporations, that execution of the Plan or an adoption agreement
relating to the Plan by a participating Corporation automatically makes the
Corporation a participating Corporation for purposes of any such trust agreement
(if and to the extent so provided in the trust agreement), and that any such
trust agreement may be amended by appropriate action of the Plan Sponsor or the,
Benefits Committee (without any action required by the other participating
Corporations).
8.2(d) The trustee of any such trust shall promptly follow the
direction of the Administrator regarding any PAYMENTS which are to be made from
the trust.
ARTICLE IX
Plan Administrator
9.1 PLAN ADMINSTRATOR. The person serving as Treasurer of the Plan
Sponsor from time to time shall serve as the Plan Administrator (the
"Administrator") for the purpose of carrying out the duties specifically imposed
on the Administrator by the Plan and the Code.
9.2 DUTIES AND RESPONSIBILITIES OF PLAN ADMINISTRATOR. The
Administrator shall have the following duties and responsibilities under the
Plan:
9.2(a) The Administrator shall be responsible for the fulfillment of all
relevant reporting and disclosure requirements set forth in the Plan and the
Code, the distribution thereof to Participants and their Beneficiaries, and the
filing thereof with the appropriate governmental officials and agencies.
9.2(b) The Administrator shall maintain and retain necessary records
regarding its administration of the Plan and matters upon which disclosure is
required under the Plan and the Code.
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9.2(c) The Administrator shall make any elections for the Plan required
to be made by it under the Plan and the Code.
9.2(d) The Administrator is empowered to settle claims against the Plan
and to make such equitable adjustments in a Participant's or Beneficiary's
rights or entitlements under the Plan as it deems appropriate in the event an
error or omission is discovered or claimed in the operation or administration of
the Plan.
9.2(e) The Administrator may construe the Plan, correct defects, supply
omissions or reconcile inconsistencies to the extent necessary to effectuate the
Plan, and such action shall be conclusive.
9.3 POWER AND AUTHORITY. The Administrator is hereby vested with all
the power and authority necessary in order to carry out its duties and
responsibilities imposed hereunder in connection with the administration of the
Plan. For such purpose, the Administrator shall have the power to adopt rules
and regulations consistent with the terms of the Plan.
9.4 AVAILABILITY OF RECORDS. The Corporation shall, at the, request of
the. Administrator, make available necessary records or other information which
they possess which may be required by the Administrator in order to carry out
its duties hereunder.
ARTICLE X
AMENDMENT OR TERMINATION OF PLAN
10.1 AMENDMENT OR TERMINATION OF THE PLAN.
10.1(a) The Plan may be amended in whole. or in part from time to time
by the Board of the Plan Sponsor effective as of any date specified. Any such
amendment to the Plan shall be in writing. The Plan may be terminated at any
time by the Board of the Plan Sponsor. No amendment or termination shall operate
to decrease a Participant's Deferral Account balance determined as of the
earlier of the date on which the amendment or termination is approved by the
Board of the Plan Sponsor or the date on which an instrument of amendment or
termination is signed on behalf of the Board of the. Plan Sponsor. Any such
action to amend of, terminate the Plan shall be adopted pursuant to action by
the Board of the Plan Sponsor (including pursuant to any standing authorization
for any officer, director or committee to adopt amendments) taken in accordance
with its applicable procedures, including where applicable by majority vote or
consent in writing.
10.1(b) In addition, and as an alternative, to amendment of the Plan by
action of the Board of the Plan Sponsor, but subject to tile limitations on
amendment contained in subparagraph 10.1(a), the Board hereby delegates to tile
Benefits Committee the right to amend the Plan in whole or in part to make any
technical modification, alteration or amendment which in the opinion of counsel
for the Plan Sponsor is required by law and is deemed advisable by the Benefits
Committee, and to make any other modification, alteration or amendment which
does not, in the Benefits Committee's view, materially increase costs or the
Plan to the Corporation.
10.1 (c) Termination of the Plan shall mean termination of active
participation by Participants, but shall not mean immediate payment of all
Deferral Accounts unless the Board of the Plan Sponsor or the Benefits Committee
so directs.
10.2 EFFECT OF CORPORATE MERGER. CONSOLIDATION OR LIQUIDATION.
Notwithstanding any other provision of the Plan, the merger or liquidation of
any Corporation into any other Corporation or Affiliate or the consolidation of
two (2) or more of the Corporations and/or Affiliate shall not cause the Plan to
terminate with respect to the merging, liquidating or consolidating
Corporation(s), provided that the Plan has been adopted or is continued by and
has not terminated with respect to the surviving or continuing corporation.
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ARTICLE XI
MISCELLANEOUS
11.1 NON-ASSIGNABILITY. The of each Participant under the Plan are not
subject to claims of the Participant's creditors; and neither the Participant,
nor his Beneficiary, shall have any right to sell, assign, transfer or otherwise
convey the right to receive any payments hereunder or any interest under the
Plan, which payments and interest are expressly declared to be non-assignable
and non-transferable.
11.2 RIGHT TO REQUIRE INFORMATION AND RELIANCE THEREON. The Corporation
and the Administrator shall have the right to require any Participant,
Beneficiary or other person receiving benefit payments to provide it with such
information, in writing, and in such form as it may deem necessary to the
administration of the Plan. The Administrator may rely on such information in
carrying out its duties hereunder. Any payment to or on behalf of a Participant
or Beneficiary in accordance with the provisions of the Plan in good faith
reliance upon any such written information provided by a Participant or any
other person to whom such payment is made shall be in full satisfaction of all
claims by such Participant and his Beneficiary; and any payment to or on behalf
of a Beneficiary in accordance with a provision of the Plan in good faith
reliance upon any such written information provided by such Beneficiary or any
other person to whom such payment is made shall be in full satisfaction of all
claims by such Beneficiary.
11.3 NOTICES AND ELECTIONS. All notices required to be given in writing
and all elections required to be made in writing under any provision of the Plan
shall be invalid unless made on such forms as may be provided or approved by the
Administrator and, in the case of a notice or election by a Participant or
Beneficiary, unless executed by the Participant or Beneficiary giving such
notice or making such election.
11.4 DELEGATION OF AUTHORITY. Whenever the Corporation is permitted or-
required to perform any act, such act may be performed by its President or Chief
Executive Officer or other person duly authorized by its President or Chief
Executive Officer, its Board or the Benefits Committee.
11.5 SERVICE OF PROCESS. The Administrator shall be the agent for
service of process on the Plan
11.6 GOVERNING LAW. The Plan shall be construed, enforced and
administered in accordance with the laws of the State of Virginia.
11.7 BINDING EFFECT. The Plan shall be binding upon and inure to the
benefit of the Corporation, its successors and assigns, and each Participant and
his heirs, executors, administrators and legal representatives.
11.8 SEVERABILITY. If any provision of the. Plan should for any reason
be declared invalid or unenforceable by a court of competent jurisdiction, the
remaining provisions shall nevertheless remain in full force and effect.
11.9 NO EFFECT ON AGREEMENT. The Plan shall not be considered or
construed to modify, amend or supersede any agreement between the Corporation
and the Participant relating to the Participant's services as a member of the
Board heretofore or hereafter entered into unless so specifically provided.
11.10 GENDER AND NUMBER. In the construction of the Plan, the masculine
shall include the feminine or neuter and the singular shall include the plural
and vice-versa in all cases where such meanings would be appropriate.
11.11 TITLES AND CAPTIONS. Titles and captions and headings herein have
been inserted for convenience of reference only and are to be ignored in any
construction of the provisions hereof.
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ARTICLE XII
PARTICIPATION BY ADDITIONAL CORPORATIONS
12.1 ADOPTION BY ADDITIONAL CORPORATION .
12.1(a) Any Affiliate may adopt the Plan with the consent of the Board
of the Plan Sponsor and its Board.
12.1(b) In addition, and as alternative to the consent, authorization
and approval by the Board required under subparagraph 12. 1(a) with respect to
the adoption of the Plan by an Affiliate, the Board of the Plan Sponsor hereby
delegates to the Benefits Committee the authority to consent to, authorize and
approve any such adoption of the Plan.S
12.2 TERMINATION EVENTS WITH RESPECT TO CORPORATIONS OTHER THAN THE PLAN
SPONSOR. The Plan shall terminate with respect to any Corporation other than the
Plan Sponsor, and such Corporation shall automatically cease to be a
participating Corporation in the Plan, upon the happening of any of the
following events:
(i) Action by the Corporation's Board terminating its
participation in the Plan and specifying the date of such termination.
Notice of such termination shall be delivered to the Administrator and
the, Plan Sponsor
(ii) The Corporation's ceasing to be an Affiliate.
(iii) Action by the Board of the Plan Sponsor or the Benefits
Committee terminating the, Corporation's participation in the Plan and
specifying the date of such termination. Notice or such termination
shall be delivered to the Administrator and the former participating
Corporation.
Termination of the Plan with respect to any Corporation shall mean termination
of active participation of the Participants employed by such Corporation, but
shall not mean immediate payment of Deferral Account balances with respect to
the Participant, of such Corporation unless the Board of the Plan Sponsor or the
Benefits Committee so directs.
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IN WITNESS WHEREOF, each Corporation has caused the Plan to be signed on
its behalf by its duly authorized officer on the 27th of April, 1995.
FAUQUIER BANKSHARES, INC.
By:
-----------------------------
Its
-----------------------------
Attest:
- -----------------------------
Its
--------------------------
THE FAUQUIER BANK
By:
-----------------------------
Its
-----------------------------
Attest:
- -----------------------------
Its
--------------------------
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FAUQUIER BANKSHARES, INC.
OMNIBUS STOCK OWNERSHIP AND
LONG TERM INCENTIVE PLAN
THIS IS THE OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN ("Plan")
of FAUQUIER BANKSHARES, INC. (the "Corporation" or "Company"), a Virginia
corporation with its principal office in Warrenton, Virginia, under which
Incentive Stock Options and Non-Qualified Options to acquire shares of the
Stock, Restricted Stock, Stock Appreciation Rights, and/or Units may be granted
from time to time to Eligible Employees of the Corporation and of any of its
Subsidiaries (the "Subsidiaries"), subject to the following provisions:
ARTICLE I
DEFINITIONS
The following terms shall have the meanings set forth below. Additional
terms defined in this Plan shall have the meanings ascribed to them when first
used herein.
1.1 BOARD. The Board of Directors of FAUQUIER BANKSHARES, INC.
1.2 CHANGE IN CONTROL TRANSACTION.
(a) Any person, including a "group" as defined in Section 13(d)(3) of the
1934 Act becomes the owner or beneficial owner of securities of the Company or
of the Fauquier Bank (the "Bank") having 20% or more of the combined voting
power of the then outstanding Bank of Company securities that may be cast for
the election of the Bank or Company directors other than a result of an issuance
of securities initiated by the Bank or Company, as long as the majority of the
Board of Directors approving the purchases is a majority at the time the
purchases are made; or
(b) as the direct or indirect result of, or in connection with, a tender or
exchange offer, a merger or other business combination, a sale of assets,
contested election, or any combination of these events, the persons who were
directors of the Bank or Company before such events cease to constitute a
majority of the Bank's or Company's Board, or any successor's board, within two
years of the last of such transactions.
For purposes of this Agreement, the date of the Change in Control
Transaction is the date on which an event described in (a) or (b) occurs. If a
Change in Control Transaction occurs on
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account of a series of transactions, the date of the Change in Control
Transaction is the date of the last of such transactions.
1.3 CODE. The Internal Revenue Code of 1986, as amended.
1.4 COMMITTEE. The Compensation Committee of the Board.
1.5 COMMON STOCK. The common stock, $3.13 par value per share, of the
Corporation.
1.6 DEATH. The date of death as established by the relevant death
certificate.
1.7 DISABILITY. For purposes of Incentive Stock Options, the date on which
an Eligible Employee becomes permanently and totally disabled within the meaning
of Section 22 (e) (3) of the Code, which shall be determined by the Committee on
the basis of such medical or other evidence as it may reasonably require or deem
appropriate. For purposes of other Rights, the date on which an Eligible
Employee becomes disabled as determined by the Committee in its sole discretion
on the basis of such medical or other evidence as it may reasonably require or
deem appropriate
1.8 EFFECTIVE DATE. The date on which this Plan is adopted by the Board.
1.9 ELIGIBLE EMPLOYEES. Those individuals who meet the following
eligibility requirements:
(i) Such individual must be a full time employee of the Corporation or
a Subsidiary. For this purpose, an individual shall be considered to be an
"employee" only if there exists between the Corporation or a Subsidiary and
the individual the legal and bona fide relationship of employer and
employee. In determining whether such relationship exists, the regulations
of the United States Treasury Department relating to the determination of
such relationship for the purpose of collection of income tax at the source
on wages shall be applied.
(ii) Such individual falls within the job grade classifications set
forth in Schedule 1. Such job grade classification may be amended,
expanded, restricted or otherwise modified by the Committee, subject to
ratification of such action by the Board.
(iii) Such individual, being otherwise an Eligible Employee under the
foregoing items, shall have been selected by the Committee as a person to
whom a Right or Rights shall be granted under the Plan.
1.10 FAIR MARKET VALUE. With respect to the Corporation's Common Stock, the
market price per share of such Common Stock determined by the Committee,
consistent with the requirements of Section 422 of the Code and to the extent
consistent therewith, as follows, as of the date specified in the context within
which such term is used:
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(i) if the Common Stock was traded on a stock exchange on the date in
question, then the Fair Market Value will be equal to the closing price
reported by the applicable composite-transactions report on the last
trading day prior to such date;
(ii) if the Common Stock was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair
Market Value will be equal to the last transaction price quoted by the
Nasdaq National Market System ("NMS") on the last trading day prior to such
date;
(iii) if the Common Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair
Market Value will be equal to the average of the last reported
representative bid and asked prices quoted by Nasdaq on the last trading
day prior to such date; and
(iv) if none of the foregoing provisions is applicable, then the Fair
Market Value will be determined by the Committee in good faith on such
basis as it deems appropriate. In such case, the Committee shall maintain a
written record of its method of determining Fair Market Value.
1.11 ISO. An "incentive stock option" as defined in Section 422 of the
Code.
1.12 JUST CAUSE TERMINATION. A termination by the Corporation or a
Subsidiary of an Eligible Employee's employment by the Corporation or the
Subsidiary in connection with the good faith determination of the Board or the
Board of Directors of the Subsidiary, as applicable, that the Eligible Employee
is incompetent or otherwise has engaged in any acts involving dishonesty or
moral turpitude or in any acts that materially and adversely affect the
business, affairs or reputation of the Corporation or the Subsidiary.
1.13 NON-QUALIFIED OPTION. Any Option granted under III whether designated
by the Committee as a Non-Qualified Option or otherwise, other than an Option
designated by the Committee as an ISO, or any Option so designated but which,
for any reason, fails to qualify as an ISO pursuant to Section 422 of the Code
and the rules and regulations thereunder.
1.14 OPTION AGREEMENT. The agreement between the Corporation and an
Optionee with respect to Options granted to such Optionee, including such terms
and provisions as are necessary or appropriate under III.
1.15 OPTIONS. ISOs and Non-Qualified Options are collectively referred to
herein as "Options;" provided, however, whenever reference is specifically made
only to ISOs or Non-Qualified Options, such reference shall be deemed to be made
to the exclusion of the other.
1.16 PLAN POOL. A total of two hundred thousand (200,000) shares of
authorized, but unissued, Common Stock, as adjusted pursuant to Section 2.3(b),
which shall be available as Stock under this Plan.
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1.17 REGISTRATION. The registration by the Corporation under the 1933 Act
and applicable state "Blue Sky" and securities laws of this Plan, the offering
of Rights under this Plan, the offering of Stock under this Plan, and/or the
Stock acquirable under this Plan.
1.18 RESTRICTED STOCK. The Stock which a Holder shall be awarded with
restrictions when, as, in the amounts and with the restrictions described in IV.
1.19 RESTRICTED STOCK GRANT AGREEMENT. The agreement between the
Corporation and a Holder with respect to Rights to Restricted Stock, including
such terms and provisions as are necessary or appropriate under IV.
1.20 RETIREMENT. "Retirement" shall mean
(i) the termination of an Eligible Employee's employment under
conditions which would constitute "normal retirement" or "early retirement"
under any tax qualified retirement plan maintained by the Corporation or a
Subsidiary, or
(ii) termination of employment after attaining age 65 (except in the
case of a Just Cause Termination).
1.21 RIGHTS. The rights to exercise or receive the Options, Restricted
Stock, Units and SARs described herein.
1.22 RIGHTS AGREEMENT. An Option Agreement, a Restricted Stock Grant
Agreement, a Unit Agreement or an SAR Agreement.
1.23 SAR. The Right of an SAR Recipient to receive cash when, as and in the
amounts described in VI.
1.24 SAR AGREEMENT. The agreement between the Corporation and an SAR
Recipient with respect to the SAR awarded to the SAR Recipient, including such
terms and conditions as are necessary or appropriate under VI.
1.25 SEC. The Securities and Exchange Commission.
1.26 STOCK. The shares of Common Stock in the Plan Pool available for
issuance pursuant to the valid exercise of a Right.
1.27 TAX WITHHOLDING LIABILITY. All federal and state income taxes, social
security tax, and any other taxes applicable to the compensation income arising
from the transaction required by applicable law to be withheld by the
Corporation.
1.28 TRANSFER. The sale, assignment, transfer, conveyance, pledge,
hypothecation, encumbrance, loan, gift, attachment, levy upon, assignment for
the benefit of creditors, by operation of law (by will or descent and
distribution), transfer by a qualified domestic relations order, a property
settlement or maintenance agreement, transfer by result of the bankruptcy laws
or otherwise of a share of Stock or of a Right.
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1.29 UNITS. The Right of a Unit Recipient to receive a combination of cash
and Stock when, as and in the amounts described in V.
1.30 UNIT AGREEMENT. The agreement between the Corporation and Unit
Recipient with respect to the award of Units to the Unit Recipient, including
such terms and conditions as are necessary or appropriate under V.
1.31 1933 ACT. The Securities Act of 1933, as amended.
1.32 1934 ACT. The Securities Exchange Act of 1934, as amended.
ARTICLE II
GENERAL
2.1 PURPOSE. The purposes of this Plan are to encourage and motivate
employees within specified job grade classifications to contribute to the
successful performance of the Corporation and its Subsidiaries and the growth of
the market value of the Corporation's Common Stock; to achieve a unity of
purpose between such employees and shareholders by providing ownership
opportunities, and, when viewed in conjunction with potential benefit plans for
members of the Board and the Boards of Directors of some or all of the
Subsidiaries, to achieve a unity of purpose between such employees and directors
in the achievement of the Corporation's primary long term performance
objectives; and to retain such employees by rewarding them with potentially
tax-advantageous future compensation. These objectives will be promoted through
the granting of Rights to designated Eligible Employees pursuant to the terms of
this Plan.
2.2 ADMINISTRATION.
(a) The Plan shall be administered by the Committee which shall consist of
two or more Non-Employee Directors as defined in Rule 16b-3(b)(3)(i) promulgated
by the SEC under the 1934 Act. The Committee may designate any officers or
employees of the Corporation or any Subsidiary to assist in the administration
of the Plan, to execute documents on behalf of the Committee and to perform such
other ministerial duties as may be delegated to them by the Committee.
(b) Subject to the provisions of the Plan, the determinations and the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion:
(i) to construe and interpret the Plan and all Rights granted
hereunder and to determine the terms and provisions (and amendments
thereof) of the Rights granted under the Plan (which need not be
identical);
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(ii) to define the terms used in the Plan and in the Rights granted
hereunder;
(iii) to prescribe, amend and rescind the rules and regulations
relating to the Plan;
(iv) to determine the Eligible Employees to whom and the time or times
at which such Rights shall be granted, the number of shares of Stock, as
and when applicable, to be subject to each Right, the exercise price or,
other relevant purchase price or value pertaining to a Right, and the
determination of leaves of absence which may be granted to Eligible
Employees without constituting a termination of their employment for the
purposes of the Plan; and
(v) to make all other determinations and interpretations necessary or
advisable for the administration of the Plan.
(c) It shall be in the discretion of the Committee to grant Options to
purchase shares of Stock which qualify as ISOs under the Code or which will be
given tax treatment as Non-Qualified Options. Any Options granted which fail to
satisfy the requirements for ISOs shall become Non-Qualified Options.
(d) In determining the Eligible Employees to whom Rights may be granted and
the number of shares of Stock to be covered by each Right, the Committee shall
take into account such factors as the Committee shall deem relevant. An Eligible
Employee who has been granted a Right under this Plan may be granted an
additional Right or Rights under this Plan if the Committee shall so determine.
If, pursuant to the terms of this Plan, or otherwise in connection with this
Plan, it is necessary that the percentage of stock ownership of an Eligible
Employee be determined, the ownership attribution provisions set forth in
Section 424(d) of the Code shall be controlling.
(e) The granting of Rights pursuant to this Plan is in the exclusive
discretion of the Committee, and until the Committee acts, no individual shall
have any rights under this Plan. The terms of this Plan shall be interpreted in
accordance with this intent. The grant of Rights shall not obligate the Company
to pay an Eligible Employee any particular amount of remuneration, to continue
the employment of the Eligible Employee after the grant or to make further
grants to the Eligible Employee at any time thereafter.
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2.3 STOCK AVAILABLE FOR RIGHTS.
(a) Shares of the Stock shall be subject to, or underlying, grants of
Options, Restricted Stock and Units under this Plan. The total number of shares
of Stock for which, or with respect to which, Rights may be granted (including
the number of shares of Stock in respect of which Units may be granted) under
this Plan shall be those designated in the Plan Pool. In the event that a Right
granted under this Plan to any Eligible Employee expires or is terminated
unexercised as to any shares of Stock covered thereby, such shares thereafter
shall be deemed available in the Plan Pool for the granting of Rights under this
Plan; provided, however, if the expiration or termination date of a Right is
beyond the term of existence of this Plan as described in Section 7.3, then any
shares of Stock covered by unexercised or terminated Rights shall not reactivate
the existence of this Plan and therefore shall not be available for additional
grants of Rights under this Plan.
(b) In the event the outstanding shares of Common Stock are increased,
decreased, changed into or exchanged for a different number or kind of
securities as a result of a stock split, reverse stock split, stock dividend,
recapitalization, merger, share exchange acquisition, combination or
reclassification appropriate proportionate adjustments will be made in: (i) the
aggregate number and/or kind of shares of Stock in the Plan Pool that may be
issued pursuant to the exercise of, or that are underlying, Rights granted
hereunder; (ii) the exercise or other purchase price or value pertaining to, and
the number and/or kind of shares of Stock called for with respect to, or
underlying, each outstanding Right granted hereunder; and (iii) other rights and
matters determined on a per share basis under this Plan or any Rights Agreement.
Any such adjustments will be made only by the Committee, subject to ratification
by the Board, and when so made will be effective, conclusive and binding for all
purposes with respect to this Plan and all Rights then outstanding. No such
adjustments will be required by reason of (i) the issuance or sale by the
Corporation for cash of additional shares of its Common Stock or securities
convertible into or exchangeable for shares of its Common Stock, or (ii) the
issuance of shares of Common Stock in exchange for shares of the capital stock
of any corporation, financial institution or other organization acquired by the
Corporation or any Subsidiary in connection therewith.
(c) The grant of a Right pursuant to this Plan shall not affect in any way
the right or power of the Corporation to make adjustments, reclassification,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
(d) No fractional shares of Stock shall be issued under this Plan for any
adjustment under Section 2.3(b).
2.4 SEVERABLE PROVISIONS. The Corporation intends that the provisions of
each of Articles III, IV, V and VI, in each case together with Articles I, II
and VII, shall each be deemed to be effective on an independent basis, and that
if one or more of such Articles, or the operative provisions thereof, shall be
deemed invalid, void or voidable, the remainder of such Articles shall continue
in full force and effect.
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ARTICLE III
OPTIONS
3.1 GRANT OF OPTIONS.
(a) Options may be granted to Eligible Employees as provided in this
Article III. Options will be deemed granted pursuant to this Article III only
upon (i) authorization by the Committee, and (ii) the execution and delivery of
an Option Agreement by the Eligible Employee optionee ("the "Optionee") and a
duly authorized officer of the Company. Options will not be deemed granted
hereunder merely upon authorization of such grant by the Committee. The
aggregate number of shares of Stock potentially acquirable under all Options
granted shall not exceed the total number of shares of Stock remaining in the
Plan Pool, less all shares of Stock potentially acquired under, or underlying,
all other Rights outstanding under this Plan.
(b) The Committee shall designate Options at the time a grant is authorized
as either ISOs or Non-Qualified Options. In accordance with Section 422 (d) of
the Code, the aggregate Fair Market Value (determined as of the date an ISO is
granted) of the shares of Stock as to which an ISO may first become exercisable
by an Optionee in a particular calendar year (pursuant to Article III and all
other plans of the Company and/or its Subsidiaries) may not exceed $100,000 (the
"$100,000 Limitation"). If an Optionee is granted Options in excess of the
$100,000 Limitation, or if such Options otherwise become exercisable with
respect to a number of shares of Stock which would exceed the $100,000
Limitation, such excess Options shall be Non-Qualified Options.
3.2 EXERCISE PRICE.
(a) The initial exercise price of each Option granted under this Plan (the
"Exercise Price")shall be determined by the Committee in its discretion;
provided, however, that the Exercise Price of an ISO shall not be less than (i)
the Fair Market Value of the Common Stock on the date of grant of the Option, in
the case of any Eligible Employee who does not own stock possessing more than
ten percent (10%) of the total combined voting power of all classes of the
capital stock of the Company (within the meaning of Section 422 (b) (6) of the
Code), or (ii) one hundred ten percent (110%) of such Fair Market Value in the
case of any Eligible Employee who owns stock in excess of such amount.
(b) In its discretion and subject to the provisions of Section 3.2(a) (as
to the establishment of the Exercise Price of an Option on the date of grant),
the Committee may establish that the Exercise Price of an Option shall be
adjusted based on subsequent events. The adjustments may include adjustments,
upward or downward, on a quarterly basis, based upon the market value
performance of the Common Stock in comparison with the aggregate market value
performance of one or more indices composed of publicly-traded financial
institutions and financial institution holding companies deemed by the Committee
to be similar (in terms of asset size, capitalization, trading volumes and other
factors deemed relevant by the Committee) to the Company (an "Index" and the
"Indices"). The Exercise Price of an ISO shall not be adjustable if, under the
Code, such adjustable Exercise Price would disqualify the ISO as an ISO. The
Committee may utilize Indices published by third parties and/or may construct
one or more Indices meeting the characteristics described above or other
characteristics.
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The Indices utilized may be recalculated quarterly, including in such
quarterly recalculation such adjustments for stock splits, reverse stock splits
and stock dividends of the companies in the indices and of the Company as are
appropriate. If more than one Index is utilized by the Committee, it may give
such weighting to each Index utilized as the Committee may determine in its sole
discretion, consistent with the provisions of this Article III.
3.3 TERMS AND CONDITIONS OF OPTIONS.
(a) All Options must be granted within ten (10) years of the Effective
Date.
(b) The Committee may grant ISOs and Non-Qualified Options, either
separately or jointly, to an Eligible Employee.
(c) Each grant of Options shall be evidenced by an Option Agreement in form
and substance satisfactory to the Committee in its discretion, consistent with
the provisions of this Article III.
(d) At the discretion of the Committee, an Optionee, as a condition to the
granting of an Option, may be required to execute and deliver to the Company a
confidential information agreement or other employment-related agreements
approved by the Committee.
(e) Except as otherwise provided herein, each Option Agreement may specify
the period or periods of time within which each Option or portion thereof will
first become exercisable (the "Vesting Period") with respect to the total number
of shares of Stock acquirable thereunder. Such Vesting Periods will be fixed by
the Committee in its discretion, and may be accelerated or shortened by the
Committee in its discretion.
(f) An Optionee shall have no rights as a shareholder of the Company with
respect to any shares of Stock covered by Options granted to the Optionee until
payment in full of the Exercise Price by such Optionee for the shares being
purchased. No adjustment shall be made for dividends (ordinary or extraordinary,
whether in cash, securities or other property) or distributions or other rights
for which the record date is prior to the date such Stock is fully paid for,
except as provided in Sections 2.3(b) and 3.2(b).
(g) To the extent provided in an Option Agreement, shares of Stock obtained
pursuant to an Option which qualifies as an ISO may be held in escrow for a
period which ends on the later of (i) two (2) years from the date of the
granting of the ISO or (ii) one (1) year after the issuance of such shares
pursuant to the exercise of the ISO. Such shares of Stock shall be held by the
Company or its designee. The Optionee who has exercised the ISO shall have all
rights of a shareholder, including, but not limited to, the rights to vote,
receive dividends and sell such shares. The sole purpose of the escrow is to
inform the Company of a disqualifying disposition of the shares of Stock
acquired within the meaning of Section 422 of the Code, and it shall be
administered solely for this purpose.
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3.4. EXERCISE OF OPTIONS.
(a) An Optionee must be an Eligible Employee at all times from the date of
grant until the exercise of the Options granted, except as provided in Section
3.5(b) or in the Option Agreement.
(b) An Option may be exercised to the extent exercisable (i) by giving
written notice of exercise to the Company, specifying the number of full shares
of Stock to be purchased and, if applicable, accompanied by full payment of the
Exercise Price thereof and the amount of the Tax Withholding Liability pursuant
to Section 3.4(c) below; and (ii) by giving assurances satisfactory to the
Company that the shares of Stock to be purchased upon such exercise are being
purchased for investment and not with a view to resale in connection with any
distribution of such shares in violation of the 1933 Act; provided, however,
that in the event the prior occurrence of the Registration or in the event
resale of such Stock without such Registration would otherwise be permissible,
this second condition will be inoperative if, in the opinion of counsel for the
Company, such condition is not required under the 1933 Act or any other
applicable law, regulation or rule of any governmental agency.
(c) As a condition to the issuance of the shares of Stock upon full or
partial exercise of a Non-Qualified Option, the Optionee will pay to the Company
in cash, or in such other form as the Committee may determine in its discretion
(including the withholding of shares of Stock as to which the Option is then
being exercised), the amount of the Company's Tax Withholding Liability required
in connection with such exercise.
(d) The Exercise Price of an Option shall be payable to the Company either
(i) in United States dollars, in cash or by check, Corporation draft or money
order payable to the order of the Company, or (ii) at the discretion of the
Committee, through the delivery of shares of the Stock owned by the Optionee
(including, if the Committee so permits, a portion of the shares of stock as to
which the Option is then being exercised) with a Fair Market Value as of the
date of delivery equal to the Exercise Price, or (iii) at the discretion of the
Committee by a combination of (i) and (ii) above. No shares of Stock shall be
delivered until full payment has been made.
3.5 TERM AND TERMINATION OF OPTION.
(a) The Committee shall determine, and each Option Agreement shall state,
the expiration date or dates of each Option, but such expiration date shall be
not later than ten (10) years after the date such Option was granted (the
"Option Period"). In the event an ISO is granted to a 10% Shareholder, the
expiration date or dates of each Option Period shall be not later than five (5)
years after the date such Option is granted. The Committee, in its discretion,
may extend the expiration date or dates of an Option Period of any Non-Qualified
Option after such date was originally set; provided, however such expiration
date may not exceed the maximum expiration date described in this Section
3.5(a).
(b) To the extent not previously exercised, each Option will terminate upon
the expiration of the Option Period specified in the Option Agreement; provided,
however, that, subject to the provisions of Section 3.5(a), each ISO will
terminate upon the earlier of: (i) ninety (90) days after the date that the
Optionee ceases to be an Eligible Employee for any reason, other than by reason
of Death, Disability, or a Just Cause Termination; (ii) twelve (12) months after
the date that the Optionee ceases to be an Eligible Employee by reason of
Disability. The Committee
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may, in its discretion, specify other events that will result in the termination
of an ISO (including, without limitation, termination of employment by reason of
Death, or a Just Cause Termination). In the case of Non-Qualified Options, the
Committee shall have full discretion to specify what, if any, events will
terminate the Option prior to the expiration of the Option Period.
3.6 CHANGE IN CONTROL TRANSACTION. At any time prior to the date of
consummation of a Change in Control Transaction, the Committee may, in its
absolute discretion, determine that all or any part of the Options theretofore
granted under this Article III shall become immediately exercisable in full and
may thereafter be exercised at any time before the date of consummation of the
Change in Control Transaction (except as otherwise provided in Article II
hereof. Any Option that has not been fully exercised before the date of
consummation of the Change in Control Transaction shall terminate on such date,
unless a provision has been made in writing in connection with such transaction
for the assumption of all Options theretofore granted, or the substitution for
such Options of options to acquire the voting stock of a successor employer
corporation, or a parent or a subsidiary thereof, with appropriate adjustments
as to the number and kind of shares and prices, in which event the Options
theretofore granted shall continue in the manner and under the terms so
provided.
3.7 RESTRICTIONS ON TRANSFER. An Incentive Stock Option may not be
Transferred except by will or the laws of descent and distribution and, during
the lifetime of the Optionee to whom it was granted, may be exercised only by
such Optionee. A Non-Qualified Stock Option may not be Transferred except by
will or the laws of descent and distribution, unless otherwise provided in the
Option Agreement.
3.8 STOCK CERTIFICATES. Certificates representing the Stock issued pursuant
to the exercise of Options will bear all legends required by law and necessary
to effectuate the provisions hereof. The Company may place a "stop transfer"
order against such shares of Stock until all restrictions and conditions set
forth in this Article III, the applicable Option Agreement, and in the legends
referred to in this Section 3.8 have been complied with.
3.9 AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue the provisions of this Article III at any time or from time to time;
provided that no action of the Board will cause ISOs granted under this Plan not
to comply with Section 422 of the Code unless the Board specifically declares
such action to be made for that purpose; and, provided, further, that no such
action may, without the approval of the shareholders of the Company, materially
increase (other than by reason of an adjustment pursuant to Section 2.3(b)
hereof) the maximum aggregate number of shares of Stock in the Plan Pool,
materially increase the benefits accruing to Eligible Employees or materially
modify eligibility requirements for participation under this Article III.
Moreover, no such action may alter or impair any Option previously granted under
this Article III without the consent of the applicable Optionee.
3.10 COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section
16 of the 1934 Act, transactions under this Article III are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the 1934
Act. To the extent any provision of this Article III or action by the Board or
the Committee fails so to comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee
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ARTICLE IV
RESTRICTED STOCK GRANTS
4.1 GRANTS OF RESTRICTED STOCK.
(a) Restricted Stock may be issued to Eligible Employees as provided in
this Article IV. Restricted Stock will be deemed issued only upon (i)
authorization by the Committee and (ii) the execution and delivery of a
Restricted Stock Grant Agreement by the Eligible Employee to whom such
Restricted Stock is to be issued (the "Holder") and a duly authorized officer of
the Company. Restricted Stock will not be deemed to have been issued merely upon
authorization by the Committee.
(b) Each issuance of Restricted Stock pursuant to this Article IV will be
evidenced by a Restricted Stock Grant Agreement between the Company and the
Holder in form and substance satisfactory to the Committee in its sole
discretion, consistent with this Article IV. Each Restricted Stock Grant
Agreement will specify the purchase price per share, if any, paid by the Holder
for the Restricted Stock, such amount to be fixed by the Committee in its
discretion.
(c) Without limiting the foregoing, each Restricted Stock Grant Agreement
shall set forth the terms and conditions of any forfeiture provisions regarding
the Restricted Stock, (including any provisions for accelerated vesting in the
event of a change in Control Transaction) as determined by the Committee in its
discretion.
(d) At the discretion of the Committee, the Holder, as a condition to the
issuance of shares, may be required (i) to execute and deliver to the Company a
confidential information agreement approved by the Committee, and/or (ii) to
agree to pay to the Corporation in cash, or in such other form as the Committee
may determine in its discretion (including the withholding of shares of Stock as
to which the Option is then being exercised), the amount of the Corporation's
Tax Withholding Liability required in connection with lapse of restrictions on
such Restricted Stock.
4.2 RESTRICTIONS ON TRANSFER OF RESTRICTED STOCK.
(a) Shares of Restricted Stock acquired by a Holder may be Transferred only
in accordance with the specific limitations on the Transfer of Restricted Stock
imposed by applicable state or federal securities laws or set forth below, and
subject to certain undertakings of the transferee set forth in Section 4.2(c).
All Transfers of Restricted Stock not meeting the conditions set forth in this
Section 4.2(a) are expressly prohibited.
(b) Any prohibited Transfer of Restricted Stock is void and of no effect.
Should such a Transfer purport to occur, the Company may refuse to carry out the
Transfer on its books, attempt to set aside the Transfer, enforce any
undertaking or right under this Section 4.2(b), and/or exercise any other legal
or equitable remedy.
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(c) Any Transfer of Restricted Stock that would otherwise be permitted
under the terms of this Plan is prohibited unless the transferee executes such
documents as the Company may reasonably require to ensure the Company's rights
under a Restricted Stock Grant Agreement and this Article IV are adequately
protected with respect to the Restricted Stock so Transferred. Such documents
may include, without limitation, an agreement by the transferee to be bound by
all of the terms of this Plan applicable to Restricted Stock and of the
applicable Restricted Stock Grant Agreement, as if the transferee were the
original Holder of such Restricted Stock.
(d) To facilitate the enforcement of the restrictions on Transfer set forth
in this Article IV, the Committee may, at its discretion, require the Holder of
shares of Restricted Stock to deliver the certificate(s) for such shares with a
stock power executed in blank by the Holder and the Holder's spouse, to the
Secretary of the Company or his or her designee, and the Company may hold said
certificate(s) and stock power(s) in escrow and take all such actions as are
necessary to insure that all Transfers and/or releases are made in accordance
with the terms of this Plan. The certificates may be held in escrow so long as
the shares of Restricted Stock whose ownership they evidence are subject to any
restriction on Transfer under this Article IV or under a Restricted Stock Grant
Agreement. Each Holder shall acknowledge that the Secretary of the Company (or
his or her designee) is so appointed as the escrow holder with the foregoing
authorities as a material inducement to the issuance of shares of Restricted
Stock under this Article IV, that the appointment is coupled with an interest,
and that it accordingly will be irrevocable. The escrow holder will not be
liable to any party to a Restricted Stock Grant Agreement (or to any other
party) for any actions or omissions unless the escrow holder is grossly
negligent relative thereto. The escrow holder may rely upon any letter, notice
or other document executed by any signature purported to be genuine.
4.3 COMPLIANCE WITH LAW. Notwithstanding any other provision of this
Article IV, Restricted Stock may be issued pursuant to this Article IV only
after there has been compliance with all applicable federal and state securities
laws, and such issuance will be subject to this overriding condition. The
Company may include shares of Restricted Stock in a Registration, but will not
be required to register or qualify Restricted Stock with the SEC or any state
agency.
4.4 STOCK CERTIFICATES. Certificates representing the Restricted Stock
issued pursuant to this Article IV will bear all legends required by law and
necessary to effectuate the provisions hereof. The Company may place a "stop
transfer" order against shares of Restricted Stock until all restrictions and
conditions set forth in this Article IV, the applicable Restricted Stock Grant
Agreement and the legends referred to in this Section 4.4 have been complied
with.
4.5 MARKET STANDOFF. To the extent requested by the Company and any
underwriter of securities of the Company in connection with a firm commitment
underwriting, no Holder of any shares of Restricted Stock will Transfer any such
shares not included in such underwriting, or not previously registered in a
Registration, during the one hundred twenty (120) day period following the
effective date of the registration statement filed with the SEC under the 1933
Act in connection with such offering.
4.6 AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue this Article IV at any time or from time to time; provided, that no
such action of the
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Board shall alter or impair any rights previously granted to Holders under this
Article IV without the consent of such affected Holders.
4.7 COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section
16 of the 1934 Act, transactions under this Article IV are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the 1934
Act. To the extent any provision of this Article IV or action by the Board or
the Committee fails so to comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.
ARTICLE V
LONG-TERM INCENTIVE COMPENSATION UNITS
5.1 AWARDS OF UNITS.
(a) Units may be granted to Eligible Employees as provided in this Article
V. Units will be deemed granted only upon (i) authorization by the Committee and
(ii) the execution and delivery of a Unit Agreement by the Eligible Employee to
whom Units are to be granted (a "Unit Recipient") and an authorized officer of
the Company. Units will not be deemed granted merely upon authorization by the
Committee. Units may be granted in each of the years 1997 through 2004 in such
amounts and to such Unit Recipients as the Committee may determine in its sole
discretion subject to the limitation in Section 5.2 below.
(b) Each grant of Units pursuant to this Article V will be evidenced by a
Unit Award Agreement between the Company and the Unit Recipient in form and
substance satisfactory to the Committee in its sole discretion, consistent with
this Article V.
(c) Except as otherwise provided herein, Units will be distributed only
after the end of a performance period of two or more years ("Performance
Period") beginning with the year in which such Units were awarded. The
Performance Period shall be set by the Committee for each award of Units.
(d) The percentage of the Units awarded under this Section 5.1 or credited
pursuant to Section 5.5 that will be distributed to Unit Recipients shall depend
on the levels performance objectives achieved during each year of the
Performance Period. The Committee may adopt one or more performance categories,
including financial performance. Financial performance shall be based on the
consolidated results of the Company and its Subsidiaries prepared on the same
basis as the financial statements published for financial reporting purposes and
determined in accordance with Section 5.1(e) below. Other performance categories
adopted by the Committee shall be based on such measurements of performance as
the Committee shall deem appropriate.
(e) Distributions of Units awarded will be based on the Company's
performance as compared to the performance objectives. The Committee may provide
for annual or longer performance measurement periods. The performance results
will be translated into percentage factors according to graduated criteria
established by the Committee for the entire Performance Period. The resulting
percentage factors shall determine the percentage of Units to be
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distributed. The Committee may provide that to distributions of Units, based on
financial performance and other performance, shall be made if a minimum average
percentage of the applicable measurement of performance, to be established by
the Committee, is not achieved for the Performance Period. The performance
levels achieved for each Performance Period and percentage of Units to be
distributed shall be conclusively determined by the Committee.
(f) The percentage of Units awarded which Unit Recipients become entitled
to receive based on the levels of performance (including those Units credited
under Section 5.5) will be determined as soon as practicable after each
Performance Period and are called "Retained Units."
(g) As soon as practical after determination of the number of Retained
Units, such Retained Units shall be distributed in the form of a combination of
shares and cash in the relative percentages as between the two as determined by
the Committee in its sole discretion. The Units awarded, but which Unit
Recipients do not become entitled to receive, shall be canceled.
(h) Notwithstanding any other provision in this Article V, the Committee,
if it determines in its sole discretion that it is necessary or advisable under
the circumstances, may adopt rules pursuant to which Eligible Employees by
virtue of hire, or promotion or upgrade to a higher job grade classification, or
special individual circumstances, may be granted the total award of Units or any
portion thereof, with respect to one or more Performance Periods that began in
prior years and that at the time of the awards have not yet been completed.
5.2 LIMITATIONS.
The aggregate number of shares of Stock potentially distributable under all
Units granted, including those Units credited pursuant to Section 5.5, shall not
exceed the total number of shares of Stock remaining in the Plan Pool, less all
shares of Stock potentially acquirable under, or underlying, all other Rights
outstanding under this Plan.
5.3 TERMS AND CONDITIONS.
(a) All awards of Units must be made within ten (10) years of the Effective
Date.
(b) The award of Units shall be evidenced by a Unit Award Agreement in form
and substance satisfactory to the Committee in its discretion, consistent with
the provisions of this Article V.
(c) At the discretion of the Committee, a Unit Recipient, as a condition to
the award of Units, may be required to execute and deliver to the Company a
confidential information agreement approved by the Committee.
(d) A Unit Recipient shall have no rights as a shareholder of the Company
with respect to any Units until the distribution of shares of Stock in
connection therewith. No adjustment shall be made in the number of Units for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record
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date is prior to the date such Stock is distributed, except as provided in
Sections 2.3(b) and 5.6(a).
5.4 SPECIAL DISTRIBUTION RULES.
(a) Except as otherwise provided in this Section 5.4 or in an Option
Agreement, a Unit Recipient must be an Eligible Employee from the date a Unit is
awarded to him or her continuously through and including the date of
distribution of such Unit.
(b) In case of the Death or Disability of a Unit Recipient prior to the end
of any Performance Period, the number of Units awarded to the Unit Recipient for
such Performance Period shall be reduced pro rata based on the number of months
remaining in the Performance Period after the month of Death or Disability. The
remaining Units, reduced in the discretion of the Committee to the percentage
indicated by the levels of performance achieved prior to the date of Death or
Disability, if any, shall be distributed within a reasonable time after Death or
Disability. All other Units awarded to the Unit Recipient for such Performance
Period shall be canceled.
(c) If a Unit Recipient enters into Retirement prior to the end of any
Performance Period, the Units awarded to such Unit Recipient under this Article
V and not yet distributed shall be prorated to the end of the year in which such
Retirement occurs and distributed at the end of the Performance Period based
upon the Company's performance for such period.
(d) In the event of the termination of the Unit Recipient's status as an
Eligible Employee prior to the end of any Performance Period for any reason
other than Death, Disability or Retirement, all Units awarded to the Unit
Recipient with respect to any such Performance Period shall be immediately
forfeited and canceled.
(e) Upon a Unit Recipient's promotion to a higher job grade classification,
the Committee may award to the Unit Recipient the total Units, or any portion
thereof, which are associated with the higher job grade classification for the
then current Performance Period.
(f) Notwithstanding any other provision of this Plan, the Committee may
reduce or eliminate awards to a Unit Recipient who has been demoted to a lower
job grade classification, and where circumstances warrant, may permit continued
participation, proration or early distribution, or a combination thereof, of
awards which would otherwise be canceled.
5.5 DIVIDEND EQUIVALENT UNITS. On each record date for dividends on the
Common Stock, an amount equal to the dividend payable on one share of Common
Stock will be determined and credited (the "Dividend Equivalent Credit") on the
payment date to each Unit Recipient's account for each Unit which has been
awarded to the Unit Recipient and not distributed or canceled. Such amount will
be converted within the account to an additional number of Units equal to the
number of shares of Common Stock that could be purchased at Fair Market Value on
such dividend payment date. These Units will be treated for purposes of this
Article V in the same manner as those Units granted pursuant to Section 5.1.
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5.6 ADJUSTMENTS.
(a) In addition to the provisions of Section 2.3(b), if an extraordinary
change occurs during a Performance Period which significantly alters the basis
upon which the performance levels were established under Section 5.1 for that
Performance Period, to avoid distortion in the operation of this Article V, but
subject to Section 5.2, the Committee may make adjustments in such performance
levels to preserve the incentive features of this Article V, whether before or
after the end of the Performance Period, to the extent it deems appropriate in
its sole discretion, which adjustments shall be conclusive and binding upon all
parties concerned. Such changes may include, without limitation, adoption of, or
changes in, accounting practices, tax laws and regulatory or other laws or
regulations; economic changes not in the ordinary course of business cycles; or
compliance with judicial decrees or other legal authorities.
(b) At any time prior to the date of consummation of a Change in Control
Transaction, the Committee may, in its absolute discretion, determine that all
or any part of the Units theretofore awarded under this Article V shall become
immediately distributable (reduced pro rata based on the number of months
remaining in the Performance Period after the consummation of the Change in
Control Transaction) and may thereafter be distributed at any time before the
date of consummation of the Change in Control Transaction (except as otherwise
provided in Article II hereof). Except as otherwise provided in a Unit Award
Agreement, any Units that have not been distributed before the date of
consummation of the Change in Control Transaction shall terminate on such date,
unless a provision has been made in writing in connection with such transaction
for the assumption of all awards of Units theretofore made, or the substitution
for such units of awards of compensation units having comparable characteristics
under a long term incentive award plan of a successor employer corporation, or a
parent or a subsidiary thereof, with appropriate adjustments, in which event the
awards of Units theretofore made shall continue in the manner and under the
terms so provided.
5.7 OTHER CONDITIONS.
(a) No person shall have any claim to be granted an award of Units under
this Article V and there is no obligation for uniformity of treatment of
Eligible Employees or Unit Recipients under this Article IV.
(b) The Company shall have the right to deduct from any distribution or
payment in cash under this Article V, and the Unit Recipient or other person
receiving shares of Stock under this Article V shall be required to pay to the
Company, any Tax Withholding Liability. The number of shares of Stock to be
distributed to any individual Unit Recipient may be reduced by the number of
shares of Stock, the Fair Market Value of which on the Distribution Date (as
defined in Section 5.7(d) below) is equivalent to the cash necessary to pay any
Tax Withholding Liability, where the cash to be distributed is not sufficient to
pay such Tax Withholding Liability, or the Unit Recipient may deliver to the
Company cash sufficient to pay such Tax Withholding Liability.
(c) Any distribution of shares of Stock under this Article V may be delayed
until the requirements of any applicable laws or regulations, and any stock
exchange or Nasdaq-NMS requirements, are satisfied. The shares of Stock
distributed under this Article V shall be subject
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to such restrictions and conditions on disposition as counsel for the Company
shall determine to be desirable or necessary under applicable law.
(d) For the purpose of distribution of Units in cash, the value of a Unit
shall be the Fair Market Value on the Distribution Date. Except as otherwise
determined by the Committee, the "Distribution Date" shall be March 15th in the
year of distribution, (or the first business day thereafter) except that in the
case of special distributions the Distribution Date shall be the first business
day of the month in which the Committee determines the amount and form of the
distribution.
(e) Notwithstanding any other provision of this Article V, no Dividend
Equivalent Credits shall be made and no distributions of Units shall be made if
at the time a Dividend Equivalent Credit or distribution would otherwise have
been made:
(i) The regular quarterly dividend on the Common Stock has been
omitted and not subsequently paid or there exists any default in payment of
dividends on any such outstanding shares of capital stock of the
Corporation.
(ii) The rate of dividends on the Common Stock is lower than at the
time the Units to which the Dividend Equivalent Credit relates were
awarded, adjusted for any change of the type referred to in Section 2.3(b).
(iii) Estimated consolidated net income of the Corporation for the
twelve month period preceding the month the Dividend Equivalent Credit or
distribution would otherwise have been made is less than the sum of the
amount of the Dividend Equivalent Credits and Units eligible for
distribution under this Article V in that month plus all dividends
applicable to such period on an accrual basis, either paid, declared or
accrued at the most recently paid rate, on all outstanding shares of Common
Stock; or
(iv) The Dividend Equivalent Credit or distribution would result in a
default in any agreement by which the Corporation is bound.
(f) In the event net income available under Section 5.7(e) above for
Dividend Equivalent Credits and awards eligible for distribution under this
Article V is sufficient to cover part but not all of such amounts, the following
order shall be applied in making payments: (i) Dividend Equivalent Credits, and
then (ii) Units eligible for distribution under this Article V.
5.8 DESIGNATION OF BENEFICIARIES. A Unit Recipient may designate a
beneficiary or beneficiaries to receive all or part of the Stock and/or cash to
be distributed to the Unit Recipient under this Article V in case of Death. A
designation of beneficiary may be replaced by a new designation or may be
revoked by the Unit Recipient at any time. A designation or revocation shall be
on a form to be provided for that purpose and shall be signed by the Unit
Recipient and delivered to the Corporation prior to the Unit Recipient's Death.
In case of the Unit Recipient's Death, any amounts to be distributed to the Unit
Recipient under this Article V with respect to which a designation of
beneficiary has been made (to the extent it is valid and enforceable under
applicable law) shall be distributed in accordance with this Article V to the
designated beneficiary or beneficiaries. The amount distributable to a Unit
Recipient upon Death and not
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subject to such a designation shall be distributed to the Unit recipient estate.
If there shall be any question as to the legal right of any beneficiary to
receive a distribution under this Article V, the amount in question may be paid
to the estate of the Unit Recipient, in which event the Corporation shall have
no further liability to anyone with respect to such amount.
5.9 RESTRICTIONS ON TRANSFER. Units granted under Article V may not be
Transferred, except as provided in Section 5.8, and, during the lifetime of the
Unit Recipient to whom it was awarded, cash and stock receivable with respect to
Units may be received only by such Unit Recipient.
5.10 AMENDMENT AND DISCONTINUANCE. No award of Units may be granted under
this Article V after December 31, 2004. The Board may amend, suspend or
discontinue the provisions of this Article V at any time or from time to time.
5.11 COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section
16 of the 1934 Act, transactions under this Article V are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the 1934
Act. To the extent any provision of this Article V or action by the Board or the
Committee fails so to comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
ARTICLE VI
STOCK APPRECIATION RIGHTS
6.1 GRANTS OF SARS.
(a) Eligible Employees may be granted SARs under this Article VI. SARs will
be deemed granted only upon (i) authorization by the Committee and (ii) the
execution and delivery of a SAR Agreement by the Eligible Employee to whom the
SARs are to be granted (the "SAR Recipient") and a duly authorized officer of
the Corporation. SARs will not be deemed granted merely upon authorization by
the Committee. The aggregate number of SARs granted hereunder shall not exceed
the total number of shares of Stock provided in the Plan Pool.
(b) Each grant of SARs pursuant to this Article VI shall be evidenced by a
SAR Agreement between the Corporation and the SAR Recipient, in form and
substance satisfactory to the Committee in its sole discretion, consistent with
this Article VI.
6.2 TERMS AND CONDITIONS OF SARS.
(a) All SARs must be granted within ten (10) years of the Effective Date.
(b) Each SAR issued pursuant to this Article VI shall have an initial base
value (the "Base Value") equal to the Fair Market Value of a share of Common
Stock on the date of issuance of the SAR.
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(c) In its discretion and subject to the provisions of Section 6.2(b) (as
to the establishment of the initial Base Value of a SAR), the Committee may
establish that the Base Value of a SAR shall be adjusted, upward or downward, on
a quarterly basis, based upon the market value performance of the Common Stock
in comparison with the aggregate market value performance of the Index or
Indices utilized under Section 3.2(b).
(d) At the discretion of the Committee, a SAR Recipient, as a condition to
the granting of a SAR, must execute and deliver to the Corporation a
confidential information agreement approved by the Committee.
(e) Except as otherwise provided herein, each SAR Agreement may specify the
period or periods of time within which each SAR or portion thereof will first
become exercisable (the "SAR Vesting Period"). Such SAR Vesting Periods will be
fixed by the Committee in its discretion, and may be accelerated or shortened by
the Committee in its discretion.
(f) A SAR Recipient shall have no rights as a shareholder of the
Corporation with respect to any shares of Stock underlying such SAR. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such Stock is fully paid for, except as
provided in Sections 2.3(b) and 6.2(c).
6.3 RESTRICTIONS ON TRANSFER OF SARS. SARs granted under this Article VI
may not be Transferred, except as provided in Section 6.7, and during the
lifetime of the SAR Recipient to whom it was granted, may be exercised only by
such SAR Recipient.
6.4 EXERCISE OF SARS.
(a) A SAR Recipient (or his or her executors or administrators, or heirs or
legatees) shall exercise a SAR by giving written notice of such exercise to the
Corporation. SARs may be exercised only upon the completion of the SAR Vesting
Period, if any, applicable to such SAR (the date such notice is received by the
Corporation being referred to herein as the "SAR Exercise Date").
(b) Within ten (10) business days of the SAR Exercise Date applicable to a
SAR exercised in accordance with Section 6.4(a), the SAR Recipient shall be paid
in cash the difference between the Base Value of such SAR (as adjusted, if
applicable under Section 6.2(c), as of the most recently preceding quarterly
period) and the Fair Market Value of the Common Stock as of the SAR Exercise
Date, as such difference is reduced by the Company's Tax Withholding Liability
arising from such exercise.
6.5 TERMINATION OF SARS. The Committee shall determine in its discretion,
and each SAR Agreement shall state, the expiration date or dates of each SAR,
but such expiration date shall be not later than ten (10) years after the date
such SAR is granted (the "SAR Period"). The Committee, in its discretion, may
extend the expiration date or dates of a SAR Period after such date was
originally set; provided, however, such expiration date may not exceed the
maximum expiration date described in this Section 6.5(a).
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6.6 CHANGE IN CONTROL TRANSACTION. At any time prior to the date of
consummation of a Change in Control Transaction, the Committee may, in its
absolute discretion, determine that all or any part of the SARs theretofore
granted under this Article VI shall become immediately exercisable in full and
may thereafter be exercised at any time before the date of consummation of the
Change in Control Transaction (except as otherwise provided in Article II
hereof). Except as provided in an SAR Agreement, any SAR that has not been fully
exercised before the date of consummation of the Change in Control Transaction
shall terminate on such date, unless a provision has been made in writing in
connection with such transaction for the assumption of all SARs theretofore
granted, or the substitution for such SARs of grants of stock appreciation
rights having comparable characteristics under a stock appreciation rights plan
of a successor employer corporation or bank, or a parent or a subsidiary
thereof, with appropriate adjustments, in which event the SARs theretofore
granted shall continue in the manner and under the terms so provided.
6.7 DESIGNATION OF BENEFICIARIES. A SAR Recipient may designate a
beneficiary or beneficiaries to receive all or part of the cash to be paid to
the SAR Recipient under this Article VI in case of Death. A designation of
beneficiary may be replaced by a new designation or may be revoked by the SAR
Recipient at any time. A designation or revocation shall be on a form to be
provided for that purpose and shall be signed by the SAR Recipient and delivered
to the Corporation prior to the SAR Recipient's Death. In case of the SAR
Recipient's Death, the amounts to be distributed to the SAR Recipient under this
Article VI with respect to which a designation of beneficiary has been made (to
the extent it is valid and enforceable under applicable law) shall be
distributed in accordance with this Article VI to the designated beneficiary or
beneficiaries. The amount distributable to a SAR Recipient upon Death and not
subject to such a designation shall be distributed to the SAR Recipient's
estate. If there shall be any question as to the legal right of any beneficiary
to receive a distribution under this Article VI, the amount in question may be
paid to the estate of the SAR Recipient in which event the Corporation shall
have no further liability to anyone with respect to such amount.
6.8 AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue the provisions of this Article VI at any time or from time to time.
No such action may alter or impair any SAR previously granted under this Article
VI without the consent of the applicable SAR Recipient.
6.9 COMPLIANCE WITH RULE 16B-3. With respect to persons subject to Section
16 of the 1934 Act, transactions under this Article VI are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the 1934
Act. To the extent any provision of this Article VI or action by the Board or
the Committee fails so to comply, it shall be deemed null and void, is the
extent permitted by law and deemed advisable by the Committee.
ARTICLE VII
MISCELLANEOUS
7.1 APPLICATION OF FUNDS. The proceeds received by the Corporation from the
sale of Stock pursuant to the exercise of Rights will be used for general
corporate purposes.
21
<PAGE>
7.2 NO OBLIGATION TO EXERCISE RIGHT. The granting of a Right shall impose
no obligation upon the recipient to exercise such Right.
7.3 TERM OF PLAN. Except as otherwise specifically provide herein, Rights
may be granted pursuant to this Plan from time to time within ten (10) years
from the Effective Date.
7.4 CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part of, and shall not serve as a
basis for, interpretation or construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, and the singular number
shall include the plural, and vice versa, whenever such meanings are
appropriate.
7.5 EXPENSES OF ADMINISTRATION OF PLAN. All costs and expenses incurred in
the operation and administration of this Plan shall be borne by the Corporation
or by one or more Subsidiaries. The Corporation shall also indemnify, defend and
hold each member of the Committee harmless against all claims, expenses and
liabilities arising out of or related to the exercise of the Committee's powers
and the discharge of the Committee's duties hereunder.
7.6 GOVERNING LAW. Without regard to the principles of conflicts of laws,
the laws of the Commonwealth of Virginia shall govern and control the validity,
interpretation, performance and enforcement of this Plan.
7.7 INSPECTION OF PLAN. A copy of this Plan, and any amendments thereto,
shall be maintained by the Secretary of the Corporation and shall be shown to
any Eligible Employee or other proper person making inquiry about it.
22
<PAGE>
AMENDMENT TO AGREEMENT
This Amendment to Agreement entered into as of the 13th day of June, 1997
by and between THE FAUQUIER BANK, a Virginia banking corporation (the "Bank"),
and C. Hunton Tiffany, (the "Executive").
RECITALS
1. The Bank and Executive entered into an Agreement dated as of the 16th
day of November, 1994, the ('Original Agreement) which provides for compensation
and other benefits to the Executive in certain events, a copy of which is
attached hereto as Exhibit A; and
2. The parties desire to amend such Agreement;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Paragraph 1 of the Original Agreement is hereby amended to read as
follows:
CHANGE OF CONTROL: For purposes of this Agreement, a Change of Control of
the Bank occurs if, after the date of this Agreement, (i) any person, including
a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934
(but excluding any group of which the Executive is a member), becomes the owner
or beneficial owner of securities of the Bank or of Fauquier Bankshares, Inc.
(the "Holding Company") having 20% or more of the combined voting power of the
then outstanding Bank or Holding Company securities that may be cast for the
election of the Bank or Holding Company directors other than a result of an
issuance of securities initiated by the Bank or Holding Company, as long as the
majority of the Board of Directors approving the purchases is a majority at the
time the purchases are made; or (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a safe of assets, contested election, or any combination of these
events, the persons who were directors of the Bank or Holding Company before
such events cease to constitute a majority of the Bank's or Holding Company's
Board, or any successor's board, within two years of the last of such
transactions. For purposes of this Agreement, the Control Change Date is the
date on which an event described in (i) or (ii) occurs. if a Change of Control
occurs an account of a series of transactions, the Control Change Date is the
date of the last of such transactions.
2. Paragraph 3(ii)(b) of the original Agreement is hereby deleted and
Paragraph 3(ii)(c) is hereby redesignated as Paragraph 3(ii)(b).
THE FAUQUIER BANK
By: /s/ Randy D. Ferrell
-----------------------------
/s/ C. Hunton Tiffany
--------------------------------
Executive
<PAGE>
AGREEMENT
THIS AGREEMENT, entered into as of the 16th day of November, 1994, by and
between THE FAUQUIER BANK, a Virginia banking corporation (the "Bank"), and C.
HUNTON TIFFANY (the "Executive").
WITNESSETH:
WHEREAS , the Board of Directors of the Bank has approved this Agreement
and authorized its execution and delivery on the Bank's behalf to the Executive;
and
WHEREAS, the Executive is presently a key executive officer of the Bank
whose continued dedication, availability, advice and counsel to the Bank is
deemed important to the Board of Directors of the Bank, the Bank and its
shareholders; and
WHEREAS, the services of the Executive, his experience and knowledge of the
affairs of the Bank, and his reputation and contacts in the industry are
extremely valuable to the bank; and
WHEREAS, the Bank wishes to attract and retain such well-qualified
Executives, and it is in the best interest of the Bank and of the Executive; and
WHEREAS, the Bank considers the establishment and maintenance of a sound
and vital management to be part of its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank and its
shareholders;
NOW, THEREFORE, to assure the Bank of the Executive's continued dedication,
the availability of his advice and counsel to the Board of Directors of the
Bank, and to induce the Executive to remain and continue in the employ of the
Bank and for other good and valuable consideration, the receipt and adequacy
whereof each party hereby acknowledges, the Bank and the Executive hereby agree
that the following terms and conditions of employment shall control and take
effect only in the event there is a change of control:
1. CHANGE OF CONTROL: For purposes of this Agreement, a Change of Control
occurs if, after the date of this Agreement, (i) any person, including a "group"
as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 (but
excluding any group of which the Executive is a member), becomes the owner or
beneficial owner of Bank securities having 20% or more of the combined voting
power of the then outstanding Bank securities that may be cast for the election
of the Bank's directors other than a result of an issuance of securities
initiated by the Bank, or open market purchases approved by the Board of
Directors, as long as the majority of the Board of Directors approving the
<PAGE>
purchases is a majority at the time the purchases are made; or (ii) as the
direct or indirect result of, or in connection with, a tender or exchange offer,
a merger or other business combination, a sale of assets, contested election, or
any combination of these events, the persons who were directors of the Bank
before such events cease to constitute a majority of the Bank's Board, or any
successor's board, within two years of the last of such transactions. For
purposes of this Agreement, the Control Change Date is the date on which an
event described in (i) or (ii) occurs. If a Change of Control occurs on account
of a series of transactions, the Control Change Date is the date of the last of
such transactions.
2. TERMINATION AFTER CHANGE OF CONTROL: If, after such a Change of Control
shall have occurred, the Executive's employment is terminated, then the
Executive shall be entitled to receive the payments specified in this Agreement
unless such termination is for Cause or the Executive terminates employment
without Good Reason.
(i) The Bank may terminate the Executive's employment for Cause. For the
purposes of this Agreement, "Cause" shall mean the Executive's gross negligence
or willful misconduct, which is detrimental to the best interests, of the Bank's
business operations. For purposes of this paragraph, no act, or failure to act
an the Executive's part shall be considered "willful" unless done, or omitted to
be done, by him not in good faith and without reasonable belief that his act or
omission was in the best interest of the Bank; provided that any act or omission
to act on the Executive's behalf in reliance upon an opinion of counsel to the
Bank or counsel to the Executive shall not be deemed to he willful.
Notwithstanding the foregoing, the Executive shall not he deemed to have been
terminated for Cause unless and until there shall have been delivered to him a
copy of a certification by a majority of the outside members of the Board of
Directors of the Bank finding that, in the good faith opinion of such majority,
the Executive was guilty of conduct which is deemed to be Cause within the
meaning of the first sentence of this paragraph and specifying the particulars
thereof in detail, after reasonable notice to the Executive and an opportunity
for him, together with his counsel, to be heard before such majority.
(ii) The Executive may terminate his employment for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean:
(a) The assignment of duties to the Executive by the Bank which are
materially different from the Executive's duties immediately prior to the Change
of Control, or (ii) result in the Executive having significantly less authority
and/or responsibility than he had prior to the Change of Control, without his
express written consent;
2
<PAGE>
(b) The removal of the Executive from or any failure to re-elect him
to the aforesaid position(s), except in connection with a termination of his
employment by the Bank for Cause;
(c) A reduction by the Bank of the Executive's base salary as in
effect on the date of the Change of Control or as the same may be increased from
time to time thereafter, or a failure by the Bank to increase such as salary
each year after such Change of Control by an amount which at least equals, on a
percentage basis, the percentage increase, if any, in the cost of living as set
forth in the Consumer Price index for the area in which the principal office of
the Bank is located (1967=100) published by the Bureau of Labor Statistics ot
the United States Department of Labor over the preceding year, unless the
failure to so increase the Executive's salary is waived in writing by the
Executive;
(d) The failure of the Bank to provide the Executive with
substantially the same fringe benefits that were provided to him immediately
prior to the Change of Control, or with a package of fringe benefits that,
though one or more of such benefits may vary from those in effect immediately
prior to such Change of Control, is substantially comparable in all material
respects to such fringe benefits taken as a whole;
(e) The failure of the Bank to obtain the assumption of and agreement
to perform this Agreement by any successor as contemplated in paragraph 5(iii)
hereof; or
(f) The relocation of the Bank's principal executive offices outside
of Warrenton, Virginia, without the consent of Executive.
(iii) Notwithstanding the provisions of paragraph 2(i) and 2(ii), following
a Change of Control the Bank may terminate the Executive's employment without
cause at any time in any otherwise lawful manner, subject to the Bank's
providing to the Executive the payments and benefits specified in paragraph
3(ii).
(iv) Termination by either party shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a notice which shall indicate the specific
termination provision(s) in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of employment under the provision so indicated.
(v) "Date of Termination" shall mean the date specified in the Notice of
Termination, which shall be not less than thirty (30) nor more than ninety (90)
days after such Notice of
3
<PAGE>
Termination is given; provided, that if within thirty (30) days after any Notice
of Termination is given pursuant to paragraph 2(i) or 2(ii) the party receiving
such Notice of Termination notifies the other party that a dispute exists
concerning the termination, then pending the resolution of any such dispute the
Bank shall continue to pay the Executive the same base salary as and when due
and payable, and provide him the same or substantially comparable fringe
benefits that he was paid and provided immediately prior to the delivery of the
Notice of Termination. If a termination by the Bank pursuant to paragraph 2(i)
above is challenged by the Executive and the termination is ultimately
determined to be justified, then all sums paid by the Bank to the Executive
pursuant to this paragraph 2(v), plus the cost to the Bank of providing the
Executive such fringe benefits from the date of such termination to the date of
the resolution of such dispute, shall be promptly repaid by the Executive to the
Bank with interest at the rate charged from time to time by The Fauquier Bank,
to its most substantial customers for unsecured parties of credit. Should it
ultimately be determined that a termination by the Bank pursuant to paragraph
2(i) above was not justified, or that a termination by the Executive pursuant to
paragraph 2(ii) above was for Good Reason, then the Executive shall be entitled
to retain all sums paid to him pending the resolution of such dispute and he
shall be entitled to receive in addition the payments and other benefits
provided for in paragraph 3(ii), and the Date of Termination shall be the date
on which the dispute is finally settled, either by mutual written agreement of
the parties, or by a final judgment.
3. TERMINATION PROVISIONS. (i) If the Executive's employment shall be
terminated for Cause pursuant to paragraph 2(i), and if such termination is
challenged by the Executive and the challenge is resolved in favor of the Bank,
the Bank shall have no further obligation to the Executive.
(ii) If within (3) years after a Change of Control of the Bank, (1) the
Bank shall terminate the Executive's employment in accordance with the
provisions of paragraph 2(i) hereof, and if such termination is challenged by
the Executive and the challenge is resolved in favor of the Executive, or (2)
the Executive shall terminate his employment pursuant to paragraph 2(ii) hereof
at any time during the period beginning with a Change of Control and ending
three (3) years after the Change of Control, then, except as provided in Section
6 of this Agreement,
(a) On or before the Executive's last day of employment with the Bank,
the Bank shall pay to the Executive as compensation for services rendered to the
Bank a cash amount (subject to any applicable payroll or other taxes required to
be withheld) equal to 2.99 times the highest annual compensation paid to the
Executive by the Bank for any six months ending with the Executive's
termination, provided that, at the option of the
4
<PAGE>
Executive, the cash amount required to be paid hereby shall be paid by the Bank
in equal monthly installments over the six (6) months succeeding the Date of
Termination, payable on the first day of each such month. For purposes of this
paragraph 3(ii), highest annual compensation shall include only base salary and
cash bonuses paid to Executive.
(b) In addition to the benefits to which the Executive is entitled
under the retirement plans or programs of the Bank in effect as of the date
first above written or any successor plans or programs in effect on the Date of
Termination of the Executive's employment, the Bank shall pay the Executive a
cash amount equal to the actuarial equivalent of the retirement pension to which
the Executive would have been entitled under the terms of such retirement plan
or programs, without regard to "vesting" thereunder, had the Executive
accumulated three (3) additional years of continuous service (after any
termination pursuant to this Agreement) at the Executive's base salary rate in
effect on the Date of Termination under such retirement plans or programs
reduced by the single sum actuarial equivalent of any amounts to which the
Executive is entitled pursuant to the provisions of said retirement plans and
programs. For purposes of this paragraph 3(ii)(b), "actuarial equivalent" shall
be determined using the same methods and assumptions utilized under the Bank's
retirement plans and programs immediately prior to the Change of Control. The
Bank's obligation under this paragraph 3(ii)(b) may be satisfied by a lump sum
payment in cash or by the purchase of an annuity owned by and payable to the
Executive, which annuity shall provide for payment comparable to payments which
the Executive would receive pursuant to the aforementioned retirement plans or
programs. The payment shall be made or the annuity shall be purchased and
delivered to the Executive within thirty (30) days following termination;
provided, however, that at the Executive's option, payment may be deferred until
a later time if in the Executive's opinion, a deferral would result in a more
advantageous income or estate tax treatment.
(c) The Bank shall maintain in full force and effect, for the
continued benefit of the Executive for a three-year period after the Date of
Termination, all employee benefit plans and programs or arrangements in which
the Executive was entitled to participate immediately prior to the Date of
Termination, provided that the Executive's continued participation is possible
under the general terms and provisions of such plans and programs. In the event
that the Executive's participation in any such plan or program is barred, the
Bank shall arrange to provide the Executive with benefits substantially similar
to those which the Executive was entitled to receive under such plans and
programs.
(iii) In the event that the Executive terminates his employment at any time
after a Change of Control for other than
5
<PAGE>
Good Reason, or Good Reason is alleged but ultimately determined pursuant to
paragraph 2(v) to be not justifiable, then the Bank shall have no further
obligation to the Executive.
4. STOCK OPTIQNS: Upon a Change of Control, all stock options granted to
the Executive under any of the Bank's Stock Option Plans, or any successor
thereto, shall become immediately exercisable with respect to all or any portion
of the shares covered thereby regardless of whether such options are otherwise
exercisable. The Bank shall reimburse the Executive for any federal income tax
liability incurred by the Executive in connection with the exercise of such
options which would not have otherwise been incurred by the Executive in the
absence of such options becoming immediately available upon a Change of Control,
such reimbursement to be submitted to the Executive within ten (10) days of
written notification to the Bank by the Executive of the exact amount of such
additional tax liability.
At any time subsequent to seven (7) days after the public announcement of a
Change of Control, any or all stock options granted to the Executive under the
Bank's Stock Option Plans, or any successor thereto, held by the Executive for
more than six months ("Cancelable Options") may, upon the written approval of a
majority of disinterested, non-employee members of the Board of Directors, be
cancelled by the Bank in exchange for the payment to the Executive of cash in an
amount equal to the aggregate spread between the average exercise price of the
Cancelable Options and the higher of: (a) the average of the closing prices of
the Bank's shares as reported in the daily newspaper for the thirty (30)
business days immediately preceding the public announcement of the Change of
Control, or (b) the highest price per share actually paid in connection with the
Change of Control of the Bank.
5. LITIGATION - OBLIGATIONS - SUCCESSORS: Notwithstanding the requirements
of paragraph 13 hereof, if litigation shall be brought to challenge, enforce or
interpret any provision contained in this Agreement, and such litigation does
not end with judgment in favor of the Bank, the Bank hereby agrees to indemnify
the Executive for his reasonable attorney's fees and disbursements incurred in
such litigation, and hereby agrees to pay post-judgement interest on any money
judgment obtained by the Executive calculated at the rate charged from time to
time by The Fauquier Bank, to its most substantial customers for unsecured lines
of credit from the date that payment(s) to him should have been made under the
judgment to date of payment.
(ii) The Bank's obligation to pay the Executive the compensation and
benefits and to make the arrangements provided in this Agreement shall be
absolute and unconditional and shall not be affected by any circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense or
6
<PAGE>
other right which the Bank may have against him or anyone else, All amounts
payable by the Bank under this Agreement shall be paid without notice or demand
except as provided in paragraph 4 hereof. Except as expressly provided in
paragraph 2(v), each and every payment made hereunder by the Bank shall be final
and the Bank will not seek to recover all or any part of such payment from the
Executive or from whosoever may be entitled thereto, for any reason whatsoever.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise.
(iii) The Bank will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Bank, or either one of them, by agreement in form
and substance satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in its entirety. Failure of the Bank to obtain such
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from the Bank in
the same amount and on the same terms as he would be entitled if he had
terminated his employment for Good Reason pursuant to subparagraph 2(ii) above,
except that for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of Termination. As
used in this Agreement, "Bank" shall mean the Bank as hereinabove defined and
any successor to its respective business and/or assets as aforesaid which
executes and delivers the Agreement provided for in this paragraph 5 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
6. LIMITATION OF BENEFITS: It is the intention of the parties that no
payment be made or benefit provided to the Executive pursuant to this Agreement
that would constitute an "excess parachute payment" within the meaning of
Section 28OG of the Internal Revenue Code of 1986, as amended (the "Code") and
any regulations thereunder, thereby resulting in a loss of an income tax
deduction by the Bank or the imposition of an excise tax on the Executive under
Section 4999 of the Code. If the independent accounts serving as auditors for
the Bank on the date of a Change of Control (or any other accounting firm
designated by the Bank) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits on a
Change of Control, would be nondeductible by the Company under Section 28OG of
the code, then the payments scheduled under this Agreement will be reduced to
one dollar less than the maximum amount which may be paid without causing any
such payment or benefit to be nondeductible. The determination made as to the
reduction of benefits or payments required hereunder by the independent
accountants shall be binding on the parties. The Executive shall have the right
to
7
<PAGE>
designate within a reasonable period, which payments or benefits will be
reduced; provided, however, that if no direction is received from the Executive,
the Bank shall implement the reductions in its discretion.
7. NOTICES: For the purposes of this Agreement, notices or other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: C. Hunton Tiffany
Post Office Box 467
Warrenton, VA 22186
If to the Bank: The Fauquier Bank
10 Courthouse Square
P. 0. Drawer 561
Warrenton, Virginia 22186
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this Agreement
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Executive and on behalf of the
Bank by such officer as may be specifically designated by the Board of Directors
of the Bank. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provision or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Virginia.
9. INVALIDITY - ENFORCEABILITY: The invalidity or enforceability of any
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect. Any provision in this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating or affecting
the remaining provisions hereof, and any such prohibition or unenforceability
8
<PAGE>
in any jurisdiction shall not invalidate or render unenforceable such provision
in any other jurisdiction.
10. CHANGE OF CONTROL TERM: The terms of this Agreement shall automatically
renew and be extended for three (3) years following the date of the Change of
Control.
11. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
Executive should die while any amounts would still be payable to him under this
Agreement, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is not such designee, to his estate.
12. HEADINGS: Descriptive headings contained in this Agreement are for
convenience only and shall not control or affect the meaning of construction of
any provision hereof.
13. ARBITRATION: Any dispute, controversy or claim arising under or in
connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the rules of the American Arbitration Association then in
effect. Judgement may be entered on the arbitrator's award in any court having
jurisdiction. Unless otherwise provided in the rules of the American Arbitration
Association, the arbitrators shall, in their award, allocate between the parties
the costs of arbitration, which shall include reasonable attorneys' fees and
expenses of the parties, as well as the arbitrator's fees and expenses, in such
proportions as the arbitrators deem just.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
"EXECUTIVE"
/s/ C. Hunton Tiffany
------------------------------------
C. HUNTON TIFFANY
THE FAUQUIER BANK
By: /s/ Randy D. Ferrell
---------------------------------
9
<PAGE>
STATE OF VIRGINIA }
} To-Wit
County of Fauquier }
Sworn and subscribed before me on this 16th day of November, 1994, by C.
Hunton Tiffany.
/s/ Francis Stringfellow
----------------------------------------
Notary Public
My commission expires: May 31, 1995
STATE OF VIRGINIA }
} To-Wit
County of Fauquier }
Sworn and subscribed before me on this 16th day of November, 1994, by Randy
K. Ferrell, Senior Vice President of The Fauquier Bank.
/s/ Francis Stringfellow
----------------------------------------
Notary Public
My commission expires: May 31, 1995
10
<PAGE>
STATE OF VIRGINIA }
} To-Wit
County of Fauquier }
Sworn and subscribed before me on this 16th day of November, 1994, by C.
Hunton Tiffany.
/s/ Francis Stringfellow
----------------------------------------
Notary Public
My commission expires: May 31, 1995
STATE OF VIRGINIA }
} To-Wit
County of Fauquier }
Sworn and subscribed before me on this 16th day of November, 1994, by Randy
K. Ferrell, Senior Vice President of The Fauquier Bank.
/s/ Francis Stringfellow
----------------------------------------
Notary Public
My commission expires: May 31, 1995
11
SUBSIDIARIES OF THE REGISTRANT
The Fauquier Bank, a Commonwealth of Virginia chartered bank.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001083643
<NAME> Fauquier Bankshares, Inc.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<INVESTMENTS-CARRYING> 6,967,854
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<TOTAL-ASSETS> 220,026,375
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0
0
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