UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
FAUQUIER BANKSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1288193
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 Courthouse Square Warrenton, Virginia 20186
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(540) 347-2700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _____ No ___X___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 1,793,797 shares of
common stock, par value $3.13 per share, were outstanding as of August 4, 1999.
<PAGE>
Fauquier Bankshares, Inc.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements 1
Consolidated Balance Sheets (unaudited) as of June 30, 1999 and December 31, 1998 1
Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 1999 and 1998 2
Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 1999 and 1998 3
Consolidated Statements of Changes in Stockholders' Equity (unaudited)for the Six Months Ended
June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Part II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
---------------------- ------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,472,988 $ 9,868,240
Interest-bearing deposits in other banks 138,882 3,680,430
Federal funds sold 9,711,000 13,182,000
Securities (fair value: 1999, $32,951,052; 1998, $22,865,960) 32,941,526 22,790,801
Loans, net 172,817,368 162,272,291
Bank premises and equipment, net 5,618,946 5,879,737
Accrued interest receivable 1,579,183 1,084,500
Other real estate 122,335 56,944
Other assets 1,741,748 1,211,432
---------------------- ------------------------
$ 231,143,976 $ 220,026,375
====================== ========================
Total assets
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 34,957,674 $ 34,438,128
Savings and interest-bearing demand deposits 109,249,694 102,176,226
Time deposits 45,837,222 42,602,788
---------------------- ------------------------
Total deposits $ 190,044,590 $ 179,217,142
Federal Home Loan advances 18,000,000 18,000,000
Dividends payable 251,825 238,910
Other liabilities 1,877,996 1,393,487
---------------------- ------------------------
Total liabilities $ 210,174,411 $ 198,849,539
---------------------- ------------------------
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13; authorized 8,000,000
shares; issued and outstanding 1999, 1,798,747 shares;
1998, 1,837,770 shares $ 5,630,078 $ 5,752,220
Capital surplus - -
Retained earnings 15,543,338 15,432,062
Accumulated other comprehensive income (203,851) (7,446)
---------------------- ------------------------
Total shareholders' equity 20,969,565 21,176,836
---------------------- ------------------------
Total liabilities and shareholders' equity $ 231,143,976 $ 220,026,375
====================== ========================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,772,691 $3,206,159
Interest on investment securities:
Taxable interest income 55,863 94,304
Interest income exempt from federal
income taxes 28,153 36,960
Interest and dividends on securities available
for sale:
Taxable interest income 338,738 290,337
Interest income exempt from federal
income taxes 13,392 12,064
Dividends 52,275 32,293
Interest on federal funds sold 121,896 117,020
Interest on deposits in other banks 3,866 942
---------------- -----------------
Total interest income $ 4,386,874 $3,790,079
---------------- -----------------
INTEREST EXPENSE
Interest on deposits $ 1,252,767 $1,302,374
Interest on Federal Home Loan Bank advances 233,450 11,957
Interest on federal funds purchased - 160
---------------- -----------------
Total interest expense $ 1,486,217 $1,314,491
---------------- -----------------
Net interest income $ 2,900,657 $2,475,588
PROVISION FOR LOAN LOSSES 225,000 135,000
---------------- -----------------
Net interest income after
provision for loan losses $ 2,675,657 $2,340,588
---------------- -----------------
OTHER INCOME
Trust Department income $ 132,818 $ 132,965
Service charges on deposit accounts 329,643 236,160
Other service charges, commissions
and fees 55,962 62,486
Other operating income 877 12,001
---------------- -----------------
Total other income $ 519,300 $ 443,612
---------------- -----------------
OTHER EXPENSES
Salaries and employees' benefits $ 935,515 $ 827,259
Net occupancy expense of premises 133,726 103,806
Furniture and equipment 191,266 194,384
Advertising 79,320 51,983
Bank card 115,347 35,639
Consulting 136,095 92,391
Data processing 142,873 83,507
Postage 32,262 32,648
Supplies 27,355 21,301
Taxes, other than income 31,840 46,932
Telephone 73,039 36,064
Other operating expenses 203,112 453,216
---------------- -----------------
Total other expenses $ 2,101,750 $1,979,130
---------------- -----------------
Income before income taxes $ 1,093,207 $ 805,070
Income tax expense 302,000 300,761
---------------- -----------------
Net income $ 791,207 $ 504,309
================ =================
EARNINGS PER SHARE, basic $ 0.44 $ 0.27
================ =================
EARNINGS PER SHARE, assuming dilution $ 0.43 $ 0.27
================ =================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE, 1999 AND 1998
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
--------------------- ---------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,263,291 $ 6,181,129
Taxable interest on investment securities 116,649 186,215
Tax-exempt interest on investment securities 57,326 74,011
Taxable interest on AFS securities 546,535 530,651
Tax-exempt interest on AFS securities 25,139 24,156
Dividends 75,684 73,793
Interest on federal funds sold 291,347 273,037
Interest on deposits in other banks 27,688 942
--------------------- ---------------------
Total interest income $ 8,403,659 $ 7,343,934
--------------------- ---------------------
INTEREST EXPENSE
Interest on deposits $ 2,583,309 $ 2,573,827
Interest on FHLB advances 470,577 11,957
Interest on federal funds purchased - 160
--------------------- ---------------------
Total interest expense $ 3,053,886 $ 2,585,943
--------------------- ---------------------
Net interest income $ 5,349,773 $ 4,757,991
Provision for loan losses 460,000 270,000
--------------------- ---------------------
Net interest income after
provision for loan losses $ 4,889,773 $ 4,487,991
OTHER INCOME
Trust department income $ 313,004 $ 274,547
Service charges on deposit accounts 583,216 482,606
Other service charges, commissions and fees 138,544 116,582
Gains on securities AFS 0 -
Other operating income 877 4,702
--------------------- ---------------------
Total other income $ 1,035,641 $ 878,437
--------------------- ---------------------
OTHER EXPENSES
Salaries and employee benefits $ 1,890,885 $ 1,650,533
Net occupancy expense of premises 240,682 195,053
Furniture and equipment 402,341 401,556
Advertising 101,467 78,282
Bank card 178,904 116,220
Consulting 200,750 166,729
Data processing 293,621 221,437
Postage 74,636 75,040
Supplies 55,188 52,767
Taxes, other than income 83,944 89,152
Telephone 114,729 91,288
Other operating expenses 554,414 610,894
--------------------- ---------------------
Total other expense $ 4,191,561 $ 3,748,951
--------------------- ---------------------
Income before income taxes $ 1,733,853 $ 1,617,476
Income tax expense 512,000 481,092
--------------------- ---------------------
Net income $ 1,221,853 $ 1,136,384
===================== =====================
EARNINGS PER SHARE, BASIC $ 0.67 $ 0.61
===================== =====================
EARNINGS PER SHARE, DILUTED $ 0.62 $ 0.61
===================== =====================
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON CAPITAL RETAINED
STOCK SURPLUS EARNINGS
---------------- ---------------- --------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 5,978,150 $ 1,207,680 $ 13,887,212
Comprehensive income:
Net income 1,136,384
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $16,858
Other comprehensive income (loss) net of tax
Total comprehensive income
Cash dividends (389,082)
Acquisition of 30,119 shares of common stock (188,244) (993,715)
Change in par value from $6.25 to $3.13 9,264 (9,264)
---------------- ---------------- --------------------
BALANCE, JUNE 30, 1998 $ 5,799,170 $ 204,701 $ 14,634,514
================ ================ ====================
BALANCE, DECEMBER 31, 1998 $ 5,752,220 $ - $ 15,432,062
Comprehensive income:
Net income 1,221,853
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $(101,178)
Other comprehensive income (loss) net of tax
Total comprehensive income
Cash dividends (488,831)
Acquisition of 39,023 shares of common stock (122,142) (621,746)
---------------- ---------------- --------------------
BALANCE, JUNE 30, 1999 $ 5,630,078 $ - $ 15,543,338
================ ================ ====================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME INCOME TOTAL
------------------- ------------------- -----------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ (95,144) $ 20,977,898
Comprehensive income:
Net income $ 1,136,384 1,136,384
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $16,858 32,725 -
-------------------
Other comprehensive income (loss) net of tax 32,725 32,725 32,725
-------------------
Total comprehensive income $ 1,169,109
===================
Cash dividends (389,082)
Acquisition of 30,119 shares of common stock (1,181,959)
Change in par value from $6.25 to $3.13 -
--------------------- -----------------
BALANCE, JUNE 30, 1998 $ (62,419) $ 20,575,966
===================== =================
BALANCE, DECEMBER 31, 1998 $ (7,446) $ 21,176,836
Comprehensive income:
Net income $ 1,221,853 1,221,853
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $(101,178) (196,405) -
-------------------
Other comprehensive income (loss) net of tax (196,405) (196,405) (196,405)
-------------------
Total comprehensive income $ 1,025,448
===================
Cash dividends (488,831)
Acquisition of 39,023 shares of common stock (743,888)
--------------------- -----------------
BALANCE, JUNE 30, 1999 $(203,851) $ 20,969,565
===================== =================
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 31,
-------------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,221,853 $ 1,136,384
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 371,717 389,619
Provision for loan losses 460,000 270,000
Provision for other real estate 6,000 -
Net premium amortization on investment
securities 14,501 18,756
Changes in assets and liabilities:
(Increase) in accrued interest receivable (494,683) (486,313)
(Increase) decrease in other assets (429,138) (563,124)
Increase (decrease) in other liabilities 484,510 395,670
----------------- -----------------
Net cash provided by operating activities $ 1,634,760 $ 1,160,992
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale $ 66,700 $ 498,732
Proceeds from maturities, calls and principal
payments of investment securities 766,407 1,695,707
Proceeds from maturities, calls and principal
payments of securities available for sale 2,479,511 7,118,356
Purchase of investment securities - (499,250)
Purchase of securities available for sale (13,775,427) (12,122,264)
Purchase of premises and equipment (110,926) (263,376)
Net (increase) in loans (11,076,468) (19,478,633)
----------------- -----------------
Net cash (used in) investing activities $(21,650,203) $(23,050,728)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts $ 7,593,014 $ 10,528,768
Net increase (decrease) in certificates of deposit 3,234,434 849,505
Proceeds from FHLB advances - 8,000,000
Cash dividends paid (475,917) (376,578)
Acquisition of common stock (743,888) (1,181,959)
----------------- -----------------
Net cash provided by financing activities $ 9,607,643 $ 17,819,736
----------------- -----------------
Increase (decrease) in cash and cash equivalents $(10,407,800) $ (4,070,000)
CASH AND CASH EQUIVALENTS
Beginning 26,730,670 20,212,129
----------------- -----------------
Ending $ 16,322,870 $ 16,142,129
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 3,012,088 $ 2,550,816
================= =================
Income taxes $ 355,000 $ 575,000
================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans $ 71,391 $ 180,000
================= =================
Unrealized gain (loss) on securities available for sale, net $ (311,333) $ 49,584
================= =================
</TABLE>
5
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated statements include the accounts of Fauquier Bankshares,
Inc. and subsidiaries, The Fauquier Bank and Fauquier Bank Services, Inc.
All significant intercompany balances and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
positions as of June 30, 1999 and December 31, 1998, and the results of
operations and cash flows for the six months ended June 30, 1999 and
1998.
The results of operations for the six months ended June 30, 1999 and 1998
are not necessarily indicative of the results expected for the full year.
2. INVESTMENT SECURITIES
Amortized costs and fair values of securities being held to maturity as
of June 30, 1999 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------- --------------- --------------- ----------------
JUNE 30, 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $3,461,745 $ 1,248 $ (7,073) $ 3,455,920
Obligations of states and political
subdivisions 2,736,576 15,351 - 2,751,927
---------------- --------------- --------------- ----------------
$6,198,321 $ 16,599 $ (7,073) $ 6,207,847
================ =============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------- --------------- --------------- ----------------
DECEMBER 31, 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>
Amortized costs and fair values of securities available for sale as of
June 30, 1999 and December 31, 1998, are as follows:
6
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------- --------------- --------------- ----------------
JUNE 30, 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $14,873,143 $ 27,556 $(206,829) $14,693,870
Obligations of states and political
subdivisions 683,669 954 - 684,623
Corporate bonds 9,047,950 - (17,903) 9,030,047
Mutual funds 937,809 (112,644) 825,165
Restricted investment -
Federal Home Loan Bank stock 900,000 - - 900,000
Equity securities 609,500 - - 609,500
---------------- --------------- --------------- ----------------
$27,052,071 $ 28,510 $(337,376) $26,743,205
================ =============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------- --------------- --------------- ----------------
DECEMBER 31, 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>
3. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- ----------------
(Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 11,646 $ 8,297
Secured by farmland 1,139 1,163
Secured by 1-4 family residential 58,074 53,430
Other real estate 49,443 49,814
Commercial and industrial loans (except those secured by real estate) 18,706 16,933
Loans to individuals for personal expenditures 31,090 30,284
All other loans 5,192 4,620
--------------- ----------------
Total loans $ 175,290 $ 164,541
Less: Unearned income 256 416
Allowance for loan losses 2,217 1,853
--------------- ----------------
Net loans $ 172,817 $ 162,272
=============== ================
</TABLE>
The following schedule summarizes the changes in the allowance for loan
losses:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDING ENDING
JUNE 30, JUNE 30, DECEMBER 31,
1999 1998 1998
--------------- --------------- ----------------
(Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,853 $ 1,655 $ 1,655
Provision charged against income 460 270 535
Recoveries 25 10 35
Loans charged off 121 135 372
--------------- --------------- ----------------
Balance at end of year $ 2,217 $ 1,800 $ 1,853
=============== =============== ================
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- ----------------
(Thousands)
<S> <C> <C>
Nonaccrual loans $ 574 $ 539
Restructured loans - -
--------------- ----------------
Total non-performing loans $ 574 $ 539
Foreclosed real estate 122 57
--------------- ----------------
Total non-performing assets $ 696 $ 596
=============== ================
</TABLE>
Total loans past due 90 days or more and still accruing were $536
thousand on June 30, 1999 and $951 thousand on December 31, 1998.
4. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of
shares of diluted potential common stock. Weighted average number of
shares for all periods reported have been restated giving effect to stock
splits.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Basic earnings per share 1,818,156 $ 0.67 1,857,282 $ 1.31
================
Effect of dilutive securities, stock options 16,918 18,359
---------------- ---------------
Diluted earnings per share 1,835,074 $ 0.62 1,875,641 $ 1.30
================ =============== ================
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
GENERAL
Fauquier Bankshares, Inc. ("Bankshares") was incorporated under the
laws of the Commonwealth of Virginia on Janu2ary 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 throu2gh TFB, a
Virginia state-chartered bank that commenced operations in 1902. Bankshares has
no significant operations other than owning the stock of TFB.
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.
The revenues of TFB are primarily derived from interest on, and fees
received in connection with, real estate and other loans, and from interest and
dividends from investment and mortgage-backed securities, and short-term
investments. The principal sources of funds for TFB's lending activities are its
deposits, repayment of loans, and the sale and maturity of investment
securities, and borrowings from the Federal Home Loan Bank of Atlanta. The
principal expenses of TFB are the interest paid on deposits, and operating and
general administrative expenses.
TFB's general market area principally includes Fauquier County and
neighboring communities and is located approximately sixty (60) miles southwest
of Washington, D.C.
SAFE HARBOR STATEMENT FOR FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies, and
expectations of Bankshares, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. Bankshares' ability to predict results or the
8
<PAGE>
actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse affect on the operations and future
prospects of Bankshares include, but are not limited to, changes in: interest
rates, general economic conditions, legislative/regulatory changes, monetary and
fiscal policies of the U.S. Government, including policies of the U.S. Treasury
and the Board of Governors of the Federal Reserve System, the quality or
composition of the loan or investment portfolios, demand for loan products,
deposit flows, competition, demand for financial services in Bankshares' market
area and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
NET INCOME. Net income for the three months ended June 30, 1999
increased 56.9% to $791,000 from $504,000 for the three months ended June 30,
1998. The increase in net income was primarily due to increases in net interest
income and total other income that more than offset increases in total other
expenses and provisions for loan losses.
NET INTEREST INCOME. Net interest income increased $425,000 or 17.2% to
$2.90 million for the three months ended June 30, 1999 compared to $2.48 million
for the three months ended June 30, 1998. The increase was primarily due to
growth in total interest income of $597,000 as compared to an increase in total
interest expense of only $172,000.
INTEREST INCOME. Total interest income grew $597,000 or 15.8% to $4.39
million for the three months ended June 30, 1999 compared to $3.79 million for
the three months ended June 30, 1998. The increase was a result of increases in
loan originations.
Interest and fees on loans increased $567,000 or 17.7%.
INTEREST EXPENSE. Total interest expense increased $172,000 or 13.1% to
$1.48 million for the three months ended June 30, 1999 from $1.31 million for
the three months ended June 30, 1998. This was primarily due to an increase in
interest expenses on Federal Home Loan Bank advances of $221,000.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $225,000
for the three months ended June 30, 1999 and $135,000 for the three months ended
June 30, 1998. The amount of the provision for loan loss for the second quarter
of 1999 and 1998 was determined based upon management's continual evaluation of
the adequacy of the allowance for loan losses, which encompasses the overall
risk characteristics of the loan portfolio, trends in TFB's delinquent and
non-performing loans, and the impact of economic conditions on borrowers. There
can be no assurance, 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 $76,000 or 17.1% from
$443,000 for the three months ended June 30, 1998 to $519,000 for the three
months ended June 30, 1999. 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. The bulk of the increase was derived from
service charges on deposit accounts of $93,000, which more than offset decreases
in other service charges, commission and fees and other operating income.
9
<PAGE>
OTHER EXPENSES. Other expenses increased 6.2% or $123,000 for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998.
During that same periods salaries and benefits increased $108,000, while all
other expenses increased $15,000.
INCOME TAXES. Income tax expense increased by $1,200 for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND JUNE 30, 1998
NET INCOME. Net income for the six months ended June 30, 1999 increased
7.5% to $1,222,000 from $1,136,000 for the six months ended June 30, 1998. The
increase in net income was primarily due to increases in net interest income and
total other income that more than offset increases in total other expenses and
provisions for loan losses.
NET INTEREST INCOME. Net interest income increased $592,000 or 12.4% to
$5.35 million for the six months ended June 30, 1999 compared to $4.76 million
for the six months ended June 30, 1998. The increase was primarily due to growth
in total interest income of $1.06 million as compared to an increase in total
interest expense of only $468,000.
INTEREST INCOME. Total interest income grew $1.06 million or 14.4% to
$8.40 million for the six months ended June 30, 1999 compared to $7.34 million
for the six months ended June 30, 1998. The increase was a result of increases
in loan originations. Interest and fees on loans increased $1.08 million or
17.5%.
INTEREST EXPENSE. Total interest expense increased $468,000 or 18.1% to
$3.1 million for the six months ended June 30, 1999 from $2.6 million for the
six months ended June 30, 1998. This was primarily due to an increase in
interest expenses on Federal Home Loan Bank advances of $459,000.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $460,000
for the six months ended June 30, 1999 and $270,000 for the six months ended
June 30, 1998. The amount of the provision for loan loss for the second quarter
of 1999 and 1998 was determined based upon management's continual evaluation of
the adequacy of the allowance for loan losses, which encompasses the overall
risk characteristics of the loan portfolio, trends in TFB's delinquent and
non-performing loans, and the impact of economic conditions on borrowers. There
can be no assurance, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.
10
<PAGE>
OTHER INCOME. Total other income increased by $157,000 or 17.9% from
$878,000 for the six months ended June 30, 1998 to $1,036,000 for the six months
ended June 30, 1999. 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 the six months ended June 30, 1999,
income in all categories increased. The bulk of the increase was derived from
service charges on deposit accounts, which contributed $101,000 and trust
department income, which contributed $38,000.
OTHER EXPENSES. Other expenses increased 11.8% or $443,000 for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998.
During that same period salaries and benefits increased $240,000, while all
other expenses increased $203,000.
INCOME TAXES. Income tax expense increased by $31,000 for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998.
COMPARISON OF JUNE 30, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION
Total assets were $231 million at June 30, 1999, an increase of 5.0% or
$11 million from $220 million at December 31, 1998. Balance sheet categories
reflecting significant changes include securities, loans, and deposits. Each of
these categories is discussed below.
SECURITIES. The carrying value of investment securities held by TFB
amounted to $32.9 million at June 30, 1999, reflecting an increase of $10.1
million from $22.8 million at December 31, 1998 due to management's intention of
transferring excess fed funds and cash and due from banks to higher yielding
investments.
LOANS. Net loans were $172.8 million at June 30, 1999, which represents
an increase of $10.6 million or 6.5% from $162.2 million at December 31, 1998.
DEPOSITS. On June 30, 1999, total deposits had increased $10.8 million
or 6.0% to $190.0 million from $179.2 million at December 31, 1998. Most of the
growth was in savings and interest-bearing demand deposits, which increased $7.0
million and time deposits, which grew $3.2 million.
SHAREHOLDER'S EQUITY. Total shareholders equity was $21.0 million at
June 30, 1999 compared to $21.2 million at December 31, 1998 a decrease of
$207,000 or 0.94%. The decrease in equity reflects management's desire to
increase shareholders' return on equity by minimizing growth in equity. This was
accomplished through the acquisition of 39,023 shares of common stock.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds are deposits, repayment of loans,
maturities of investments, funds provided from operations and advances from the
FHLB of Atlanta.
11
<PAGE>
While scheduled repayments of loans and maturities of investment securities are
predictable sources of funds, deposit flows and loan repayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. TFB uses its funds for existing and future loan commitments,
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses. Management monitors projected liquidity needs and determines the
desirable level based in part on TFB's commitments to make loans and
management's assessment of TFB's ability to generate funds. Cash and amounts due
from depository institutions, interest-bearing deposits in other banks and
federal funds sold totaled $16.3 million at June 30, 1999. These assets provide
the primary source of liquidity for TFB. In addition, management has designated
a substantial portion of the investment portfolio, 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 June 30, 1999 to provide
additional sources of liquidity.
As of June 30, 1999 the appropriate regulatory authorities have
categorized Bankshares and TFB as well capitalized under the regulatory
framework for prompt corrective action.
CAPITAL REQUIREMENTS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies. The resulting capital ratios represent
qualifying capital as a percentage of total risk-weighted assets and off-balance
sheet items. The guidelines are minimums, and the federal regulators have noted
that banks and bank holding companies contemplating significant expansion
programs should not allow expansion to diminish their capital ratios and should
maintain all ratios well in excess of the minimums. The current guidelines
require all bank holding companies and federally regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common stockholder's equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
excludes the allowance for loan and lease losses. Tier 2 capital includes the
excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets. As of June 30, 1999 (i) Bankshares'
Tier 1 and total risk-based capital ratios were 12.06% and 13.31%, respectively,
and (ii) TFB's Tier 1 and total risk-based capital ratios were 12.07% and
13.32%, 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".
12
<PAGE>
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 June 30, 1999, TFB had a
total risk-based capital ratio of 13.32%, a Tier 1 risk-based capital ratio of
12.07%, and a leverage ratio of 9.25%. TFB was notified by the Federal Reserve
Bank of Richmond that, at December 31, 1998, TFB was "well capitalized" under
the regulatory framework for prompt corrective action.
Additionally, FDICIA requires, among other things, that (i) only a
"well capitalized" depository institution may accept brokered deposits without
prior regulatory approval and (ii) the appropriate federal 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.
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.
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
13
<PAGE>
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. Approximately 95% of TFB's vendors
for critical applications have informed TB that they are fully complaint. The
remaining vendors have advised TFB that they are in the testing and validation
state of the process.
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. A special Y2K mailing is being sent to all customers and shareholders
in September 1999. TFB plans to place advertisements in the local newspapers
beginning in October 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-nine percent are in place and operational. The
remainder will be put into service prior to September 30, 1999.
Through June 30, 1999, approximately $225,000 was spent on Y2K
remediation efforts. It is expected that an additional $25,000 will be required
to complete this project.
14
<PAGE>
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.
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. Both vendors have provided TFB with third
party validation test 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 were 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. TFB has
submitted substantial data to the Federal Reserve reporting contingency plans,
business resumption plans, liquidity plans, customer awareness planning, and
testing results for an off-site examination in August 1999.
In the sixth phase, which is being implemented throughout the balance
of 1999, systems, contingency plans, and business resumption plans will be
re-tested and refined.
Liquidity alternatives have been evaluated, and sources identified
insure alternative funding for a worst-case scenario of funds shortage.
Liquidity will be monitored on a regular basis. Insurance risks have been
evaluated and discussed with TFB's insurance carriers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
An important component of both earnings performance and liquidity is
management of interest rate sensitivity. Interest rate sensitivity reflects the
potential effect on net interest income of a movement in market interest rates.
TFB is subject to interest rate sensitivity to the degree that its
interest-earning assets mature or reprice at 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
15
<PAGE>
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 1999.
PART II. OTHER INFORMATION
ITEM 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Bankshares held its Annual Meeting of Shareholders on April 20, 1999. A
quorum of shareholders were present, consisting of a total of 1,512,468 shares,
all represented by proxy. At the Annual Meeting, the Shareholders approved and
ratified the acts and proceedings of all officers, directors, and committees of
Bankshares since April 21, 1998. Class III directors Alexander G. Green, Jr.,
Douglas C. Larson, D. Harcourt Lees, Jr., and Randolph T. Minter were elected to
three-year terms. The following Class I and Class II directors whose terms
expire in years 2000 and 2001continued in office: Stanley C. Haworth, C.H.
Lawrence, Jr., Brian S. Montgomery, H. Paul Neale, Pat H. Nevill, John J.
Norman, Jr., Henry M. Ross and C. Hunton Tiffany. The shareholders also ratified
the appointment of Yount, Hyde & Barbour, CPA as independent auditors of the
Bank for the year ending December 31, 1999.
The vote on each matter was as follows.
16
<PAGE>
1. Ratifying acts and proceedings since April 21, 1998.
TOTAL
-----
1,512,468
2. For Directors
TOTAL
-----
Alexander G. Green, Jr. 1,502,528
Douglas C. Larson 1,507,248
D. Harcourt Lees, Jr. 1,502,528
Randolph T. Minter 1,492,688
3. Ratification of the appointment of Yount, Hyde & Barbour, CPA as the
independent auditors for the Bank.
TOTAL
-----
1,512,468
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit (3)(i) - Articles of Incorporation of Fauquier Bankshares,
Inc. (including amendments), incorporated by reference to Bankshares Securities
Exchange Act of 1934 ("Exchange Act") Registration Statement on Form 10, filed
with the Securities and Exchange Commission on April 16, 1999.
Exhibit (3)(ii) - Bylaws of Fauquier Bankshares, Inc.,
incorporated by reference to Bankshares Exchange Act Registration Statement on
Form 10, filed with the Securities and Exchange Commission on April 16, 1999.
Exhibit (10)
Fauquier Bankshares, Inc. Non-Employee Director Stock
Option Plan, incorporated by reference to Bankshares Exchange Act Registration
Statement on Form 10, filed with the Securities and Exchange Commission on April
16, 1999.
Fauquier Bankshares, Inc. Director Deferred
Compensation Plan, incorporated by reference to Bankshares Exchange Act
Registration Statement on Form 10, filed with the Securities and Exchange
Commission on April 16, 1999.
Fauquier Bankshares, Inc. Omnibus Stock Ownership and
Long Term Incentive Plan, incorporated by reference to Bankshares Exchange Act
Registration Statement on Form 10, filed with the Securities and Exchange
Commission on April 16, 1999.
Agreement with C. Hunton Tiffany, incorporated by
reference to Bankshares Exchange Act Registration Statement on Form 10, filed
with the Securities and Exchange Commission on April 16, 1999.
Exhibit (11) - Not applicable
Exhibit (21) - Subsidiaries of the Registrant, incorporated by
reference to Bankshares Exchange Act Registration Statement on
Form 10, filed with the Securities and Exchange Commission on April 16, 1999.
Exhibit (27) - Financial Data Schedule
(b) Reports on Form 8-K:
None.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAUQUIER BANKSHARES, INC.
Date: August 16, 1999 By /s/ C. Hunton Tiffany
-----------------
C. Hunton Tiffany
President and Chief Executive Officer
Date: August 16, 1999 By /s/ Diane B. Coppage
-----------------
Diane B. Coppage
Senior Vice President and Treasurer
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