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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 2-25805
Fauquier Bankshares, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1288193
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer 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: 1,726,481 shares of
common stock, par value $3.13 per share, were outstanding as of October 31,
2000.
<PAGE>
Fauquier Bankshares, Inc.
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 1
Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2000 and 1999 2
Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2000 and 1999 3
Consolidated Statements of Changes in Stockholders' Equity (unaudited) for the Nine Months Ended
September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,522,189 $ 10,697,343
Interest-bearing deposits in other banks 124,723 278,123
Federal funds sold 3,750,000 14,010,000
Securities (fair value: 2000, $15,776,445; 1999, $18,752,504) 15,791,062 18,779,388
Loans, net of allowance for loan losses of $2,667,192
in 2000 and $2,284,348 in 1999 196,432,585 181,503,312
Bank premises and equipment, net 5,400,968 5,594,248
Accrued interest receivable 1,122,535 1,097,562
Other real estate 187,822 --
Other assets 4,106,255 1,247,649
------------- -------------
Total assets $ 238,438,139 $ 233,207,625
============= =============
LIABILITIES
Deposits:
Noninterest-bearing $ 41,379,236 $ 33,045,513
Interest-bearing 158,876,993 154,227,161
------------- -------------
Total deposits $ 200,256,229 $ 187,272,674
Federal Home Loan Bank advances 13,000,000 23,000,000
Dividends payable 276,493 265,770
Other liabilities 2,845,067 1,464,826
Commitments and contingent liabilities -- --
------------- -------------
Total liabilities $ 216,377,789 $ 212,003,270
------------- -------------
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding, 2000, 1,726,481 shares; 1999, 1,774,037 shares 5,403,886 5,552,736
Retained earnings 16,952,059 16,019,525
Accumulated other comprehensive (loss) (295,595) (367,906)
------------- -------------
Total shareholders' equity $ 22,060,350 $ 21,204,355
------------- -------------
Total liabilities and shareholders' equity $ 238,438,139 $ 233,207,625
============= =============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $4,259,985 $3,853,375
Interest on investment securities:
Taxable interest income 32,898 51,261
Interest income exempt from federal income taxes 25,822 29,125
Interest and dividends on securities available for sale:
Taxable interest income 142,815 313,154
Interest income exempt from federal income taxes 3,252 5,005
Dividends 58,052 33,485
Interest on federal funds sold 58,189 103,040
Interest on deposits in other banks 439 1,889
---------- ----------
Total interest income 4,581,452 4,390,334
---------- ----------
INTEREST EXPENSE
Interest on deposits 1,285,520 1,227,006
Interest on Federal Home Loan Bank advances 172,040 283,034
---------- ----------
Total interest expense 1,457,560 1,510,040
---------- ----------
Net interest income 3,123,892 2,880,294
Provision for loan losses 137,500 180,000
---------- ----------
Net interest income after
provision for loan losses 2,986,392 2,700,294
---------- ----------
OTHER INCOME
Trust Department income 145,427 124,767
Service charges on deposit accounts 366,841 296,034
Other service charges, commissions and fees 198,611 178,059
---------- ----------
Total other income 710,879 598,860
---------- ----------
OTHER EXPENSES
Salaries and employees' benefits 1,010,940 883,624
Net occupancy expense of premises 119,395 107,939
Furniture and equipment 223,180 231,464
Marketing and business development 89,838 109,200
Bank card 110,034 112,321
Professional and consulting fees 164,989 93,720
Data processing 174,675 151,276
Non-loan charge-offs 25,867 11,367
Postage 32,443 31,808
Supplies 27,124 33,277
Taxes, other than income 61,348 59,325
Telephone 42,810 50,821
Other operating expenses 212,126 226,756
---------- ----------
Total other expenses 2,294,769 2,102,898
---------- ----------
Income before income taxes 1,402,502 1,196,256
Income tax expense 445,015 381,000
---------- ----------
Net income $ 957,487 $ 815,256
========== ==========
EARNINGS PER SHARE, basic $ 0.54 $ 0.45
========== ==========
EARNINGS PER SHARE, assuming dilution $ 0.54 $ 0.45
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $12,278,922 $10,942,266
Interest on investment securities:
Taxable interest income 115,666 167,910
Interest income exempt from federal income taxes 78,003 86,451
Interest and dividends on securities available for sale:
Taxable interest income 402,231 879,330
Interest income exempt from federal income taxes 9,759 10,503
Dividends 114,367 109,169
Interest on federal funds sold 258,791 394,387
Interest on deposits in other banks 4,125 29,577
----------- -----------
Total interest income 13,261,864 12,619,593
----------- -----------
INTEREST EXPENSE
Interest on deposits 3,634,784 3,810,315
Interest on Federal Home Loan Bank advances 648,927 753,611
----------- -----------
Total interest expense 4,283,711 4,563,926
----------- -----------
Net interest income 8,978,153 8,055,667
Provision for loan losses 457,498 640,000
----------- -----------
Net interest income after
provision for loan losses 8,520,655 7,415,667
----------- -----------
OTHER INCOME
Trust Department income 403,142 437,771
Service charges on deposit accounts 1,107,274 879,250
Other service charges, commissions and fees 571,170 491,004
Other operating income -- 877
----------- -----------
Total other income 2,081,586 1,808,902
----------- -----------
OTHER EXPENSES
Salaries and employees' benefits 3,039,457 2,728,051
Net occupancy expense of premises 337,351 314,054
Furniture and equipment 631,345 633,805
Marketing and business development 255,772 264,547
Bank card 308,843 291,225
Professional and consulting 625,021 340,928
Data processing 482,732 444,897
Non-loan charge-offs 244,640 148,890
Postage 102,566 106,444
Supplies 77,742 88,465
Taxes, other than income 181,071 177,834
Telephone 127,763 165,550
Other operating expenses 625,978 589,770
----------- -----------
Total other expenses 7,040,281 6,294,460
----------- -----------
Income before income taxes 3,561,960 2,930,109
Income tax expense 1,132,000 893,000
----------- -----------
Net income $ 2,429,960 $ 2,037,109
=========== ===========
EARNINGS PER SHARE, basic $ 1.37 $ 1.13
=========== ===========
EARNINGS PER SHARE, assuming dilution $ 1.36 $ 1.12
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<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, 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 losses on securities available
for sale, net of deferred income taxes of ($123,749) -- -- -- (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
========== ===== =========== ========= ===========
BALANCE, DECEMBER 31, 1999 $5,552,736 $ -- $16,019,525 $(367,906) $21,204,355
Comprehensive income:
Net income -- -- 2,429,960 -- $2,429,960 2,429,960
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $37,251 -- -- -- 72,311 72,311 72,311
----------
Total comprehensive income -- -- -- -- $2,502,271 --
==========
Cash dividends -- -- (826,428) -- (826,428)
Acquisition of 48,830 shares of common stock (152,838) -- (689,686) -- (842,524)
Exercise of stock options 3,988 -- 18,688 -- 22,676
---------- ----- ----------- --------- -----------
BALANCE, SEPTEMBER 30, 2000 $5,403,886 $ -- $16,952,059 $(295,595) $22,060,350
========== ===== =========== ========= ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,429,960 $ 2,037,109
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 566,134 575,805
Provision for loan losses 457,498 640,000
Provision for other real estate -- 6,000
Net premium amortization on investment securities 9,985 30,095
Loss on sale of other real estate owned 5,180 --
Gain on sale of fixed assets (1,000) --
Changes in assets and liabilities:
(Increase) in accrued interest receivable (24,973) (551,979)
(Increase) in other assets (2,895,857) (1,055,176)
Increase in other liabilities 1,380,241 975,419
----------- -----------
Net cash provided by operating activities 1,927,168 2,657,273
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale -- 66,700
Proceeds from maturities, calls and principal
payments of investment securities 1,089,279 1,095,879
Proceeds from maturities, calls and principal
payments of securities available for sale 1,998,624 4,579,670
Purchase of securities available for sale -- (14,275,427)
Proceeds from sale of other real estate owned 152,901 --
Proceeds from sale of premises and equipment 1,000 --
Purchase of premises and equipment (372,854) (421,382)
Net (increase) in loans (15,732,674) (21,872,717)
----------- -----------
Net cash (used in) investing activities (12,863,724) (30,827,277)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 3,729,487 7,767,906
Net increase in certificates of deposit 9,254,068 4,593,715
Net increase in Federal Home Loan Bank advances (10,000,000) 10,000,000
Cash dividends paid (815,705) (727,741)
Issuance of common stock 22,676 --
Acquisition of common stock (842,524) (956,896)
----------- -----------
Net cash provided by financing activities 1,348,002 20,676,984
----------- -----------
Increase in cash and cash equivalents (9,588,554) (7,493,020)
CASH AND CASH EQUIVALENTS
Beginning 24,985,466 26,730,670
----------- -----------
Ending $15,396,912 $ 19,237,650
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 4,206,005 $ 4,488,932
=========== ============
Income taxes $ 1,028,620 $ 796,000
=========== ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ 345,903 $ 71,391
=========== ============
Unrealized gain (loss) on securities available for sale, net $ 109,562 $ (401,015)
=========== ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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, 2000 and December 31, 1999, and the results
of operations and cash flows for the nine months ended September 30, 2000
and 1999.
The results of operations for the nine months ended September 30, 2000
and 1999 are not necessarily indicative of the results expected for the
full year.
2. SECURITIES
The amortized cost of securities held to maturity, with unrealized gains
and losses follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
September 30, 2000
<S> <C> <C> <C> <C>
Obligations of U.S.
Government corporations
and agencies $ 1,897,993 $ - $ (14,933) $ 1,883,060
Obligations of states and political
subdivisions 2,390,714 2,071 (1,755) 2,391,030
----------- ------- --------- -----------
$ 4,288,707 $ 2,071 $ (16,688) $ 4,274,090
=========== ======= ========= ===========
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
December 31, 1999
<S> <C> <C> <C> <C>
Obligations of U.S.
Government corporations
and agencies $ 2,885,488 $ - $ (22,826) $ 2,862,662
Obligations of states and political
subdivisions 2,490,790 1,693 (5,751) 2,486,732
----------- ------- --------- -----------
$ 5,376,278 $ 1,693 $ (28,577) $ 5,349,394
=========== ======= ========= ===========
</TABLE>
The amortized cost of securities available for sale, with unrealized gains and
losses follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
September 30, 2000
<S> <C> <C> <C> <C>
Obligations of U.S.
Government corporations
and agencies $ 8,571,652 $ 5,068 $ (332,051) $ 8,244,669
Obligations of states and political
subdivisions 681,228 993 (960) 681,261
Equity securities 487,500 - - 487,500
Mutual funds 937,809 - (120,922) 816,887
Restricted investments:
Federal Home Loan
Bank stock 1,150,000 - - 1,150,000
Federal Reserve Bank
stock 72,000 - - 72,000
Community Bankers'
Bank stock 50,038 - - 50,038
----------- ------- --------- -----------
$ 11,950,227 $ 6,061 $ (453,933) $ 11,502,355
============ ======= ========== ============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
December 31, 1999
<S> <C> <C> <C> <C>
Obligations of U.S.
Government corporations
and agencies $ 11,068,015 $ 5,376 $ (434,339) $ 10,639,052
Obligations of states and political
subdivisions 682,719 327 (894) 682,152
Mutual funds 937,809 - (127,903) 809,906
Restricted investments:
Federal Home Loan
Bank stock 1,150,000 - - 1,150,000
Federal Reserve Bank
stock 72,000 - - 72,000
Community Bankers'
Bank stock 50,000 - - 50,000
----------- ------- --------- -----------
$ 13,960,543 $ 5,703 $ (563,136) $ 13,403,110
============ ======= ========== ============
</TABLE>
3. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
2000 1999
---- ----
(Thousands)
<S> <C> <C>
Real estate loans:
Construction and land development $ 10,973 $ 11,746
Secured by farmland 696 903
Secured by 1-4 family residential 72,823 64,921
Other real estate loans 52,926 50,988
Agriculture - -
Commercial and industrial loans (except those secured by real estate) 19,005 16,689
Loans to individuals for personal expenditures 37,501 33,787
All other loans 5,320 4,868
--------- ---------
Total loans $ 199,244 $ 183,902
Less: Unearned income 144 115
Allowance for loan losses 2,667 2,284
--------- ---------
Net loans $ 196,433 $ 181,503
========= =========
</TABLE>
Analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDING ENDING
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------
2000 1999 1999
(Thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 2,284,348 $ 1,853,150 $ 1,853,150
Provision charged to operating expense 457,498 640,000 695,000
Recoveries added to the allowance 219,474 41,737 63,368
Loan losses charged to the allowance (294,127) (144,877) (327,170)
----------- ----------- -----------
Balance at end of period $ 2,667,193 $ 2,390,010 $ 2,284,348
=========== =========== ===========
</TABLE>
7
<PAGE>
Nonperforming assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(Thousands)
<S> <C> <C>
Nonaccrual loans $ 98 $ 125
Restructured loans - -
---- -----
Total non-performing loans $ 98 $ 125
Foreclosed real estate - -
---- -----
Total non-performing assets $ 98 $ 125
==== =====
</TABLE>
Total loans past due 90 days or more and still accruing were $246 thousand on
September 30, 2000 and $170 thousand on December 31, 1999.
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, 2000 SEPTEMBER 30, 1999
PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic earnings per share 1,768,418 $ 1.37 1,809,779 $ 1.13
====== ======
Effect of dilutive securities, stock options 12,472 16,542
--------- ---------
Diluted earnings per share 1,780,890 $ 1.36 1,826,321 $ 1.12
========= ====== ========= ======
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Fauquier Bankshares, Inc. ("Bankshares") was incorporated under the laws of the
Commonwealth of Virginia on January 13, 1984. Bankshares is a registered bank
holding company and owns all of the voting shares of The Fauquier Bank ("TFB").
Bankshares engages in its business through TFB, a Virginia state-chartered bank
that commenced operations in 1902. Bankshares has no significant operations
other than owning the stock of TFB. Bankshares has issued and outstanding
1,726,481 shares of commons stock, par value $3.13 per share, held by
approximately 440 shareholders of record on October 31, 2000.
TFB has six full service branch offices located in the Virginia communities of
Warrenton, Catlett, The Plains, Manassas and New Baltimore, in addition to the
main office branch located in Warrenton, Virginia. The executive offices of
Bankshares and the main office of TFB are located at 10 Courthouse Square,
Warrenton, Virginia 20186
TFB provides a range of consumer and commercial banking services to individuals,
businesses, and industries. The deposits of TFB are insured up to applicable
limits by the Bank Insurance Fund of the Federal Deposit Insurance 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, internet banking, 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 Star (formerly Honor) and Plus ATM networks,
thereby permitting customers to benefit from the convenience of larger ATM
networks. TFB operates an Investments and Trust Services Division that was
established in 1919. It is staffed with nine professionals that provide
personalized services that include investment management, trust, estate
settlement, retirement, and brokerage services.
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, 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 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 actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect 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
9
<PAGE>
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.
COMPARISION OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 1999
NET INCOME. Net income for the three months ended September 30, 2000 increased
17.5% to $957,000 from $815,000 for the three months ended September 30, 1999.
The increase in net income was due to increases in net interest income.
NET INTEREST INCOME. Growth in interest income and a decline in interest expense
resulted in an increase in net interest income of $244,000 or 8.5% to $3.12
million for the three months ended September 30, 2000 compared to $2.88 million
for the three months ended September 30, 1999. Total interest income grew
$191,000 or 4.4% to $4.58 million for the three months ended September 30, 2000
compared to $4.39 million for the three months ended September 30, 1999. The
increase was a result of increases in loan originations, with increased interest
and fees on loans of $407,000 or 10.6%, which was partially offset by a $169,000
reduction in interest income from the securities portfolio. The securities
portfolio was reduced by allowing securities to mature and reinvesting the funds
in higher yielding loans. Total interest expense decreased $52,000 or 3.5% to
$1.46 million for the three months ended September 30, 2000 from $1.51 million
for the three months ended September 30, 1999. This was due to reduced interest
expense of $111,000 on Federal Home Loan Bank advances which was partially
offset by additional interest expense on deposits of $59,000.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $138,000 for the
three months ended September 30, 2000 compared to $180,000 for the three months
ended September 30, 1999. The amount of the provision for loan losses for the
third quarter of 2000 and 1999 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. In addition, of the adequacy of loan loss reserves is reviewed
annually by an independent third party. 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.
TOTAL OTHER INCOME. Total other income increased 18.7% to $711,000 for the three
months ended September 30, 2000 from $599,000 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: service charges,
trust fees, and fee income. The primary increase was in service charges on
deposit accounts and was due mostly to improved collection of assessed service
charges.
TOTAL OTHER EXPENSES. Total other expenses increased 9.1% or $192,000 for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999. The increase was primarily because of an additional $127,000
in salaries and benefits due to additions in staff and normal salary and benefit
increases. Additionally, professional fees were up $71,000 mostly related to
personnel related consulting expenses.
COMPARISION OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AND SEPTEMBER 30, 1999
NET INCOME. Net income for the nine months ended September 30, 2000 increased
19.3% to $2.43 million from $2.04 million for the nine months ended September
30, 1999. The increase in net income was due primarily to an increase in net
interest income.
NET INTEREST INCOME. Net interest income rose $922,000 or 11.5% to $8.98 million
for the nine months ended September 30, 2000 compared to $8.06 million for the
nine months ended September 30, 1999. Total interest income grew $642,000 or
5.1% to $13.3 million as a result of increases in loan originations, with
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increased interest and fees on loans of $1.34 million, that were partially
offset by a decrease of $533,000 in interest income from reduced securities. The
securities portfolio was reduced by allowing securities to mature and
reinvesting the funds in higher yielding loans. Total interest expense declined
$280,000 or 6.1% stemming from reduced expense on interest bearing deposits and
Federal Home Loan Bank advances funded by reducing federal funds sold.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $457,000 for the
nine months ended September 30, 2000 compared to $640,000 for the nine months
ended September 30, 1999. The reduction was due in part to a sizable loan
recovery. The loan loss provision for the first three quarters of 2000 and 1999
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. In
addition, the adequacy of loan loss reserves is reviewed annually by an
independent third party. 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.
TOTAL OTHER INCOME. Total other income increased by $273,000 or 15.1% to $2.08
million for the nine months ended September 30, 2000 from $1.81 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:
service charges, other fee income, and trust income. The increase in the first
three quarters of 2000 resulted from increases in net service charges on deposit
accounts of $228,000 due mostly to improved collection of assessed charges.
Other service charges and fees were up $80,000 primarily because of increased
loan volume.
TOTAL OTHER EXPENSES. Total other expenses increased 11.9 % or $746,000 for the
nine months ended September 30, 2000 compared to the nine months ended September
30, 1999. The increase was primarily because salaries and benefits rose
$311,000, professional fees rose $284,000, and non-loan chargeoffs were up
$96,000. The increase in professional fees was due primarily to expenses
associated with the investigation of a misappropriation of funds in 1999. The
misappropriated funds are expected to be fully recovered through settlement of
the insurance claim.
COMPARISON OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 FINANCIAL CONDITION
Assets totaled $238.4 million at September 30, 2000, an increase of 2.2% or $5.2
million from $233.2 million at December 31, 1999. Balance sheet categories
reflecting significant changes include loans, federal funds sold, deposits, and
Federal Home Loan Bank advances. Each of these categories is discussed below.
LOANS. Net loans were $196.4 million at September 30, 2000, which is an increase
of $14.9 million or 8.2% from $181.5 million at December 31, 1999. The rise is
attributable to increased loan originations resulting from more effective
utilization of relationship banking.
FEDERAL FUNDS SOLD. Federal funds sold were $3.8 million at September 30, 2000,
compared to $14.0 million at December 31, 1999. The reduction was used to fund
new loans and reduce borrowings from the Federal Home Loan Bank.
DEPOSITS. On September 30, 2000, total deposits reflected an increase of $13.0
million or 6.9% to $200.3 million from $187.3 million at December 31, 1999. The
growth was in both non-interest bearing deposits, which increased $8.3 million,
and interest bearing deposits, which rose $4.6 million. The increases were due
in part to recovery of deposits which were withdrawn at the end of 1999 in
anticipation of Y2K needs. In addition, deposits were generated through several
special offerings of certificates of deposit.
FEDERAL HOME LOAN BANK ADVANCES. Federal Home Loan Bank advances were $13
million at September 30, 2000, which represents a decrease of $10 million or
43.5% from $23 million at December 31, 1999. Advances were repaid primarily from
a reduction in cash and due from banks, being held for potential Y2K needs, and
reduced federal funds sold.
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SHAREHOLDERS EQUITY
Total shareholders equity was $22.0 million at September 30, 2000 compared to
$21.2 million at December 31, 1999, an increase of $856,000 or 4.0%. This was
due primarily to an increase in retained earnings of $933,000 to $17.0 million
at September 30, 2000 from $16.0 million at December 31, 1999. The increase was
the result of income for the first three quarters, net of dividends paid to
shareholders, and the acquisition of 48,830 shares of common stock. The
repurchase of common stock reflects management's desire to increase
shareholders' return on equity by minimizing growth in equity.
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 Federal Home
Loan Bank 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 $15.4 million at September 30, 2000. 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 $37 million at September 30,
2000 to provide additional sources of liquidity.
As of September 30, 2000, 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, 2000 (i)
Bankshares' Tier 1 and total risk-based capital ratios were 11.9% and 13.2%,
respectively, and (ii) TFB's Tier 1 and total risk-based capital ratios were
11.9% and 13.2%, 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 that becomes
"significantly undercapitalized" or "critically undercapitalized."
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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 granting 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, 2000, TFB had a total risk-based capital ratio of 13.2%, a Tier 1 risk-based
capital ratio of 11.9%, and a leverage ratio of 9.6%. At September 30, 2000 TFB
was "well capitalized," under the regulatory framework for prompt corrective
action provided by the Federal Reserve Bank of Richmond.
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.
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 extent 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 interest rate risk is best measured by
simulation modeling.
The earnings simulation model forecasts annual net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effect on net interest income and
present value equity under varying market rate assumptions.
TFB monitors exposure to gradual changes 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% and 10%,
respectively. Management has maintained a risk position well within these
guideline levels during the first three quarters of 2000.
There have been no material changes in market risk since 1999 year end.
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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.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
(3)(i) Articles of Incorporation of Fauquier Bankshares, Inc.
(including amendments)*
(3)(ii) Bylaws of Fauquier Bankshares, Inc.*
(10)(i) Fauquier Bankshares, Inc. Omnibus Stock Ownership and Long
Term Incentive Plan, Amended and Restated Effective
January 1, 2000**
(11) Statement regarding computation of per share earnings
(filed herewith)
(27) Financial Data Schedule (filed herewith)
* 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.
** Incorporated by reference to Bankshares' definitive proxy statement for the
2000 annual meeting of shareholders, filed with the Securities and Exchange
Commission on April 14, 2000.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FAUQUIER BANKSHARES, INC.
Dated: November 13, 2000 /s/ C. Hunton Tiffany
--------------------------------------------
C. Hunton Tiffany
President and Chief Executive Officer
Dated: November 13, 2000 /s/ Randy K. Ferrell
--------------------------------------------
Randy K. Ferrell
Senior Vice President and Chief Financial Officer
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