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 September 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 __________
Commission File No. 0-25805
Fauquier Bankshares, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1288193
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 Courthouse Square Warrenton, Virginia 20186
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(540) 347-2700
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
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: 1,783,987 shares of common
stock, par value $3.13 per share, were outstanding as of October 27, 1999.
<PAGE>
Fauquier Bankshares, Inc.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Financial Statements 1
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 1
Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 1999 and 1998 2
Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 1999 and 1998 3
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
for the Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) for the Nine Months
Ended September 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 7
Item 3. Quantitative and Qualitative Disclosure of Market Risk 15
Part II. OTHER INFORMATION 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
FAUQUIER BANKSHARES, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,424,815 $ 9,868,240
Interest-bearing deposits in other banks 112,835 3,680,430
Federal funds sold 8,700,000 13,182,000
Securities (fair value: 1999, $30,891,626; 1998, $22,865,960) 30,892,869 22,790,801
Loans, net 183,433,617 162,272,291
Bank premises and equipment, net 5,725,314 5,879,737
Accrued interest receivable 1,636,479 1,084,500
Other real estate 122,335 56,944
Other assets 2,427,404 1,211,432
------------- -------------
Total assets $ 243,475,668 $ 220,026,375
============= =============
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 39,078,132 $ 34,438,128
Savings and interest-bearing demand deposits 105,304,128 102,176,226
Time deposits 47,196,503 42,602,788
------------- -------------
Total deposits $ 191,578,763 $ 179,217,142
Federal Home Loan advances 28,000,000 18,000,000
Dividends payable 250,567 238,910
Other liabilities 2,368,906 1,393,487
------------- -------------
Total liabilities $ 222,198,236 $ 198,849,539
------------- -------------
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding 1999, 1,787,527 shares;
1998, 1,837,770 shares $ 5,594,960 $ 5,752,220
Retained earnings 15,930,137 15,432,062
Accumulated other comprehensive income (247,665) (7,446)
------------- -------------
Total shareholders' equity 21,277,432 21,176,836
------------- -------------
Total liabilities and shareholders' equity $ 243,475,668 $ 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 SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $3,956,797 $3,399,572
Taxable interest on investment securities 51,261 83,886
Tax-exempt interest on investment securities 29,125 37,044
Taxable interest on AFS securities 306,432 259,796
Tax-exempt interest on AFS securities 11,727 34,736
Dividends 33,485 40,448
Interest on federal funds sold 103,040 56,330
Interest on deposits in other banks 1,889 2,182
---------- ----------
Total interest income $4,493,756 $3,913,994
---------- ----------
Interest Expense
Interest on deposits $1,227,006 $1,304,173
Interest on FHLB advances 283,034 95,173
Interest on federal funds purchased -- --
---------- ----------
Total interest expense $1,510,040 $1,399,346
---------- ----------
Net interest income $2,983,716 $2,514,648
Provision for loan losses 180,000 180,000
---------- ----------
Net interest income after
provision for loan losses $2,803,716 $2,334,648
OTHER INCOME
Trust department income $ 124,767 $ 139,496
Service charges on deposit accounts 296,034 295,641
Other service charges, commissions and fees 74,638 71,862
Gains on securities AFS -- 15,786
Other operating income -- --
---------- ----------
Total other income $ 495,439 $ 522,785
---------- ----------
OTHER EXPENSES
Salaries and employee benefits $ 912,302 $ 871,441
Net occupancy expense of premises 73,372 69,628
Furniture and equipment 231,464 207,546
Advertising 81,469 45,553
Bank card 112,321 73,985
Consulting 65,042 59,006
Data processing 210,062 289,614
Postage 60,767 58,313
Supplies 33,277 28,713
Taxes, other than income 93,890 86,749
Telephone 50,821 40,472
Other operating expenses 178,112 81,216
---------- ----------
Total other expense $2,102,899 $1,912,236
---------- ----------
Income before income taxes $1,196,256 $ 945,197
Income tax expense 381,000 195,169
---------- ----------
Net income $ 815,256 $ 750,028
========== ==========
Earnings per Share, basic $ 0.45 $ 0.40
========== ==========
Earnings per Share, diluted $ 0.45 $ 0.40
========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
2
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $11,220,088 $ 9,580,701
Taxable interest on investment securities 167,910 270,101
Tax-exempt interest on investment securities 86,451 111,055
Taxable interest on AFS securities 852,967 790,447
Tax-exempt interest on AFS securities 36,866 58,892
Dividends 109,169 114,241
Interest on federal funds sold 394,387 329,367
Interest on deposits in other banks 29,577 3,124
----------- -----------
Total interest income $12,897,415 $11,257,928
----------- -----------
Interest Expense
Interest on deposits $ 3,810,315 $ 3,878,000
Interest on FHLB advances 753,611 107,129
Interest on federal funds purchased -- 160
----------- -----------
Total interest expense $ 4,563,926 $ 3,985,289
----------- -----------
Net interest income $ 8,333,489 $ 7,272,639
Provision for loan losses 640,000 450,000
----------- -----------
Net interest income after
provision for loan losses $ 7,693,489 $ 6,822,639
OTHER INCOME
Trust department income $ 437,771 $ 414,043
Service charges on deposit accounts 879,250 778,247
Other service charges, commissions and fees 213,182 188,444
Gains on securities AFS -- 15,786
Other operating income 877 4,702
----------- -----------
Total other income $ 1,531,080 $ 1,401,222
----------- -----------
OTHER EXPENSES
Salaries and employee benefits $ 2,803,187 $ 2,521,974
Net occupancy expense of premises 314,054 264,681
Furniture and equipment 633,805 609,102
Advertising 182,936 123,835
Bank card 291,225 190,205
Consulting 265,792 225,735
Data processing 503,683 511,051
Postage 135,403 133,353
Supplies 88,465 81,480
Taxes, other than income 177,834 175,901
Telephone 165,550 131,760
Other operating expenses 732,526 692,111
----------- -----------
Total other expense $ 6,294,460 $ 5,661,188
----------- -----------
Income before income taxes $ 2,930,109 $ 2,562,673
Income tax expense 893,000 676,261
----------- -----------
Net income $ 2,037,109 $ 1,886,412
=========== ===========
Earnings per Share, basic $ 1.13 $ 1.02
=========== ===========
Earnings per Share, diluted $ 1.12 $ 1.01
=========== ===========
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME INCOME TOTAL
----- ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $5,978,150 $ 1,207,680 $ 13,887,212 $ (95,144) $ 20,977,898
Comprehensive income:
Net income 1,886,412 $1,886,412 1,886,412
Other comprehensive income net of tax:
Unrealized holding gains on
securities available for sale,
net of deferred income taxes of $57,977 112,543 --
----------
Other comprehensive income net of tax 112,543 112,543 112,543
----------
Total comprehensive income $1,998,955
==========
Cash dividends (592,887) (592,887)
Acquisition of 75,238 shares of common stock (235,194) (1,198,416) (32,607) (1,466,217)
Change in par value from $6.25 to $3.13 9,264 (9,264) --
---------- ------------ ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1998 $5,752,220 $ -- $ 15,148,130 $ 17,399 $20,917,749
========== ============ ============ ============ ===========
BALANCE, DECEMBER 31, 1998 $5,752,220 $ -- $ 15,432,062 $ (7,446) $21,176,836
Comprehensive income:
Net income 2,037,109 $2,037,109 2,037,109
Other comprehensive income (loss) net of tax:
Unrealized holding gains on
securities available for sale,
net of deferred income taxes of $(123,749) (240,219)
----------
Other comprehensive income (loss) net of tax (240,219) (240,219) (240,219)
----------
Total comprehensive income $1,796,890
==========
Cash dividends (739,398) (739,398)
Acquisition of 50,243 shares of common stock (157,260) (799,636) (956,896)
---------- ------------ ------------ ------------ -----------
Balance, September 30, 1999 $5,594,960 $ -- $ 15,930,137 $ (247,665) $21,277,432
========== ============ ============ ============ ===========
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,037,109 $ 1,886,412
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 575,805 586,402
Provision for loan losses 640,000 450,000
Provision for other real estate 6,000 30,000
(Gain) on securities available for sale -- (15,786)
Net premium amortization on investment
securities 30,095 24,497
Changes in assets and liabilities:
(Increase) in accrued interest receivable (551,979) (489,126)
(Increase) decrease in other assets (1,055,176) (995,878)
Increase (decrease) in other liabilities 975,419 719,168
------------ ------------
Net cash provided by operating activities $ 2,657,273 $ 2,195,689
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale $ 66,700 $ 2,733,244
Proceeds from maturities, calls and principal
payments of investment securities 1,095,879 2,380,727
Proceeds from maturities, calls and principal
payments of securities available for sale 4,579,670 12,105,219
Purchase of investment securities -- (499,250)
Purchase of securities available for sale (14,275,427) (12,349,087)
Proceeds from sale of other real estate owned -- 102,974
Purchase of premises and equipment (421,382) (374,421)
Net (increase) in loans (21,872,717) (26,479,630)
------------ ------------
Net cash (used in) investing activities $(30,827,277) $(22,380,224)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts $ 7,767,906 $ 5,384,225
Net increase (decrease) in certificates of deposit 4,593,715 1,914,210
Proceeds from FHLB advances 10,000,000 13,000,000
Cash dividends paid (727,741) (612,990)
Acquisition of common stock (956,896) (1,433,610)
------------ ------------
Net cash provided by financing activities $ 20,676,984 $ 18,251,835
------------ ------------
Increase (decrease) in cash and cash equivalents $ (7,493,020) $ (1,932,700)
CASH AND CASH EQUIVALENTS
Beginning 26,730,670 20,212,129
------------ ------------
Ending $ 19,237,650 $ 18,279,429
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest $ 4,488,932 $ 3,980,371
============ ============
Income taxes $ 796,000 $ 887,000
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES:
Other real estate acquired in settlement of loans $ 71,391 $ 17,267
============ ============
Unrealized gain (loss) on securities available for sale, net $ (401,015) $ 170,520
============ ============
</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 September 30, 1999 and December 31, 1998, and the results
of operations and cash flows for the nine months ended September 30, 1999
and 1998.
The results of operations for the nine months ended September 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 September 30, 1999 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and obligations
of U.S. government corporations and
agencies $ 3,132,719 $ 146 $ (8,412) $ 3,124,453
Obligations of states and political
subdivisions 2,735,820 7,196 (173) 2,742,843
----------- ----------- ----------- -----------
$ 5,868,539 $ 7,342 $ (8,585) $ 5,867,296
=========== =========== =========== -----------
</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
September 30, 1999 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- -----
SEPTEMBER 30, 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities and obligations
of U.S. government corporations and
agencies $14,801,350 $ 16,296 $ (287,752) $14,529,894
Obligations of states and political
subdivisions 683,215 6 (385) 682,836
Corporate bonds 6,991,004 -- (8,518) 6,982,486
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Mutual funds 937,809 -- (118,195) 819,614
Restricted investment -
Federal Home Loan Bank stock 1,400,000 -- -- 1,400,000
Equity securities 609,500 -- -- 609,500
----------- ----------- ----------- -----------
$25,422,878 $ 16,302 $ (414,850) $25,024,330
=========== =========== =========== ===========
</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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 12,594 $ 8,297
Secured by farmland 909 1,163
Secured by 1-4 family residential 60,860 53,430
Other real estate 52,096 49,814
Commercial and industrial loans (except those secured by real estate) 19,590 16,933
Loans to individuals for personal expenditures 35,105 30,284
All other loans 4,894 4,620
--------- ---------
Total loans $ 186,048 $ 164,541
Less: Unearned income 224 416
Allowance for loan losses 2,390 1,853
--------- ---------
Net loans $ 183,434 $ 162,272
========= =========
</TABLE>
The following schedule summarizes the changes in the allowance for loan
losses:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDING ENDING
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
(THOUSANDS)
<S> <C> <C>
Balance at beginning of year $ 1,853 $ 1,655
Provision charged against income 640 450
Recoveries 42 21
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Loans charged off 145 212
------- -------
Balance at end of year $ 2,390 $ 1,914
======= =======
</TABLE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(Thousands)
<S> <C> <C>
Nonaccrual loans $ 152 $ 539
Restructured loans -- --
------- -------
Total non-performing loans $ 152 $ 539
Foreclosed real estate 122 57
------- -------
Total non-performing assets $ 274 $ 596
======= =======
</TABLE>
Total loans past due 90 days or more and still accruing were $510
thousand on September 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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic earnings per share 1,809,779 $ 1.13 1,857,282 $ 1.31
====== ======
Effect of dilutive securities, stock options 16,542 18,359
------ ------
Diluted earnings per share 1,826,321 $ 1.12 1,875,641 $ 1.30
========= ====== ========= ======
</TABLE>
6
<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 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.
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
7
<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 SEPTEMBER 30, 1999
AND SEPTEMBER 30, 1998
Net Income. Net income for the three months ended September 30, 1999
increased 8.7% to $815,000 from $750,000 for the three months ended September
30, 1998. The increase in net income was primarily due to increases in net
interest income that more than offset increases in total other expenses and
decreases in total other income.
Net Interest Income. Net interest income increased $470,000 or 18.7% to
$2.98 million for the three months ended September 30, 1999 compared to $2.51
million for the three months ended September 30, 1998. The increase was
primarily due to growth in total interest income of $580,000 as compared to an
increase in total interest expense of only $111,000.
Interest Income. Total interest income grew $580,000 or 14.8% to $4.49
million for the three months ended September 30, 1999 compared to $3.91 million
for the three months ended September 30, 1998. The increase was a result of
increases in loan originations. Interest and fees on loans increased $557,000 or
16.4%.
Interest Expense. Total interest expense increased $111,000 or 7.9% to
$1.51 million for the three months ended September 30, 1999 from $1.40 million
for the three months ended September 30, 1998. This was due to an increase in
interest expenses on Federal Home Loan Bank advances of $188,000 that was only
partially offset by a decrease in interest expense on deposits.
Provision for Loan Losses. The provision for loan losses was $180,000 for
the three months ended September 30, 1999 and for the three months ended
September 30, 1998. The amount of the provision for loan loss for the third
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.
8
<PAGE>
Other Income. Total other income decreased by $28,000 or 5.2% from $523,000
for the three months ended September 30, 1998 to $495,000 for the three months
ended September 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 decrease resulted from reduced gains
on securities AFS of $16,000 and a reduction in trust department income of
$15,000 which were not offset by increases in service charges on deposit
accounts and other service charges, commissions and fees.
Other Expenses. Total other expenses increased 10.0% or $191,000 for the
three months ended September 30, 1999 compared to the three months ended
September 30, 1998. During that same periods salaries and benefits increased
$41,000, bank card expenses increased $38,000 and other operating expenses
increased $97,000.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
Net Income. Net income for the nine months ended September 30, 1999
increased 8.0% to $2.04 million from $1.89 million for the nine months ended
September 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 $1.06 million or 14.6%
to $8.33 million for the nine months ended September 30, 1999 compared to $7.27
million for the nine months ended September 30, 1998. The increase was primarily
due to growth in total interest income of $1.64 million as compared to an
increase in total interest expense of only $579,000.
Interest Income. Total interest income grew $1.64 million or 14.5% to $12.9
million for the nine months ended September 30, 1999 compared to $11.3 million
for the nine months ended September 30, 1998. The increase was a result of
increases in loan originations. Interest and fees on loans increased $1.64
million or 17.1%.
Interest Expense. Total interest expense increased $579,000 or 14.5% to
$4.56 million for the nine months ended September 30, 1999 from $3.99 million
for the nine months ended September 30, 1998. This was primarily due to an
increase in interest expenses on Federal Home Loan Bank advances of $646,000.
Provision for Loan Losses. The provision for loan losses was $640,000 for
the nine months ended September 30, 1999 and $450,000 for the nine months ended
September 30, 1998. The amount of the provision for loan loss for the first nine
months 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,
9
<PAGE>
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. Other income increased by $130,000 or 9.3% from $1.40 million
for the nine months ended September 30, 1998 to $1.53 million for the nine
months ended September 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 increase was the result of
increases in trust department income of $24,000, service charges on deposit
accounts of $101,000 and other service charges, commissions and fees of $25,000,
that more than offset decreases in other areas.
Other Expenses. Other expenses increased 11.2% or $633,000 for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998. The majority of this increase resulted from increases in salaries and
benefits of $281,000, bank card expenses of $101,000 and net occupancy expense
of premises of $49,000.
COMPARISON OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION
Total assets were $243 million at September 30, 1999, an increase of 10.7%
or $23 million from $220 million at December 31, 1998. Balance sheet categories
reflecting significant changes include loans, deposits, and Federal Home Loan
advances. Each of these categories is discussed below.
Loans. Net loans were $183.4 million at September 30, 1999, which
represents an increase of $21.2 million or 13.1% from $162.3 million at December
31, 1998.
Deposits. On September 30, 1999, total deposits had increased $12.4 million
or 6.9% to $191.6 million from $179.2 million at December 31, 1998. Most of the
growth was in non-interest bearing demand deposits, which increased $4.6 million
and time deposits, which grew $4.6 million.
Federal Home Loan Advances. Federal Home Loan advances were $28 million at
September 30, 1999, which represents an increase of $10 million or 55.6% from
$18 million at December 31, 1998.
Shareholder's Equity. Total shareholders equity was $21.3 million at
September 30, 1999 compared to $21.2 million at December 31, 1998 an increase of
$101,000 or 0.48%. The relative stability in equity reflects management's desire
to increase shareholders' return on equity by minimizing growth in equity. This
was accomplished through the acquisition of 50,533 shares of common stock.
10
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds are deposits, repayment of loans, maturities
of investments, funds provided from operations and advances from the FHLB of
Atlanta.
While scheduled repayments of loans and maturities of investment securities
are predictable sources of funds, deposit flows and loan repayments are greatly
influenced by the general level of interest rates, economic conditions and
competition. TFB uses its funds for existing and future loan commitments,
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses. Management 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 $19.2 million at September 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 $36 million at September 30,
1999 to provide additional sources of liquidity.
As of September 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 September 30, 1999 (i)
Bankshares' Tier 1 and total risk-based capital ratios were 11.5% and 12.8%,
respectively, and (ii) TFB's Tier 1 and total risk-based capital ratios were
11.6% and 12.8%, respectively.
11
<PAGE>
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 September 30, 1999, TFB had
a total risk-based capital ratio of 12.8%, a Tier 1 risk-based capital ratio of
11.6%, and a leverage ratio of 9.1%. 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 at the beginning of 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
12
<PAGE>
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
1997, 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 regularly updated
on their implementation. Officers and associates have been provided internal
newsletters 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 TFB that they are fully compliant. The
remaining vendors have advised TFB that they are in the testing and validation
stage 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, seminars,
and presentations at local community meetings. A special Y2K mailing was sent to
all customers and shareholders in October 1999. TFB has begun to place
advertisements in the local newspapers indicating TFB's Y2K readiness, and radio
spot announcements are scheduled beginning in November 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.
13
<PAGE>
In the third phase, upgrades and replacement systems for all hardware and
software were ordered, installed and are operational. Through September 30,
1999, approximately $250,000 was spent on Y2K remediation efforts. It is
expected that an additional $20,000 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. Staff members have received training and the contingency plans have
been tested. Testing will continue through the balance of the year.
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 has been accomplished
successfully. 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 has been
substantially accomplished, and replacements were totally in-place by September
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. In late August 1999, TFB 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.
TFB is on schedule and in compliance with regulatory guidelines and
requirements.
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 applications made to
outside sources to 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.
14
<PAGE>
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 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.
None.
15
<PAGE>
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 (11) - Not applicable
Exhibit (27) - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K:
None.
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: November 12, 1999 By /s/ C. Hunton Tiffany
----------------------------------
C. Hunton Tiffany
President and Chief Executive Officer
Date: November 12, 1999 By /s/ Diane B. Coppage
----------------------------------
Diane B. Coppage
Senior Vice President and Treasurer
16
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