U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $3.13 PER SHARE
(Title of Class)
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A or any amendment to
this Form 10-K/A. ( ).
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. The aggregate market value of the
registrant's common shares held by "non-affiliates" of the registrant, based
upon the closing sale price of its common shares on the NASDAQ SmallCap Market
System, was approximately $24,071,548. Common shares held by each officer,
director and holder of 5% or more of the registrant's outstanding common shares
have been excluded in that such persons or entities may be deemed to be
affiliates. Such determination of affiliate status is not a conclusive
determination for other purposes.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. The registrant had 1,709,377
shares outstanding as of March 19, 2001.
DOCUMENTS INCORPORTATED BY REFERENCE
Portions of the definitive proxy statement for the 2001 annual meeting of
shareholders to be filed within 120 days of the fiscal year ended December 31,
2000 are incorporated by reference into Part III of this Form 10-K/A.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 28
PART III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and Management 31
Item 13. Certain Relationships and Related Transactions 31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 31
Audited Financial Statements
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PART I
ITEM 1. BUSINESS
GENERAL
Fauquier Bankshares, Inc. ("Bankshares") was incorporated under the laws of the
Commonwealth of Virginia on January 13, 1984. Bankshares is a registered bank
holding company and owns all of the voting shares of The Fauquier Bank ("TFB").
Bankshares engages in its business through TFB, a Virginia state-chartered bank
that commenced operations in 1902. Bankshares has no significant operations
other than owning the stock of TFB. Bankshares has issued and outstanding
1,712,191 shares of common stock, par value $3.13 per share, held by
approximately 405 holders of record on December 31, 2000.
TFB has six full service branch offices located in the Virginia communities of
Warrenton, Catlett, The Plains, Sudley Road-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.
THE FAUQUIER BANK
TFB's general market area principally includes Fauquier County, western Prince
William County, and neighboring communities and is located approximately sixty
(60) miles southwest of Washington, D.C.
TFB provides a range of consumer and commercial banking services to individuals,
businesses and industries. The deposits of TFB are insured up to applicable
limits by the Bank Insurance Fund of the Federal Deposit Insurance Corporation.
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 Honor and Plus ATM
networks, thereby permitting customers to utilize the convenience of larger ATM
networks.
TFB operates a Wealth Management Division that began with the granting of Trust
powers to TFB in 1919. It is staffed with eleven professionals that provide
personalized services that include investment management, trust, estate
settlement, retirement, insurance, and brokerage services. During 2000, managed
assets increased by $7.9 million to $132.4 million, or 6.4%, when compared with
1999, with revenue declining by $19,000 to $547,000, or 3.3%, over the same time
period.
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.
As is the case with banking institutions generally, TFB's operations are
materially and significantly influenced by general economic conditions and by
related monetary and fiscal policies of financial institution regulatory
agencies, including the Board of Governors of the Federal Reserve System
("Federal Reserve"). As a Virginia-chartered bank and a member of the Federal
Reserve, TFB is supervised and examined by the Federal Reserve and the State
Corporation Commission ("SCC"). Interest rates on competing investments and
general market rates of interest influence deposit flows and costs of funds.
Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn is affected by the interest rates at which
such financing may be offered and other factors affecting local demand and
availability of funds. TFB faces strong competition in the attraction of
deposits (its primary source of lendable funds) and in the origination of loans.
See "Competition."
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As of December 31, 2000, Bankshares had total consolidated assets of $249.9
million, total consolidated deposits of $212.1 million, and total consolidated
shareholders' equity of $22.4 million.
LENDING ACTIVITIES
TFB offers a range of lending services, including real estate, consumer and
commercial loans, to individuals as well as small to medium sized businesses and
other organizations that are located in or conduct a substantial portion of
their business in TFB's market area. TFB's total loans at December 31, 2000 were
$200.4 million, or 80.2 % of total assets. The interest rates charged on loans
vary with the degree of risk, maturity, and amount of the loan, and are further
subject to competitive pressures, money market rates, availability of funds, and
government regulations. TFB has no foreign loans or loans for highly leveraged
transactions.
TFB's primary market area consists of Fauquier and Prince William Counties,
Virginia and the surrounding communities. There is no assurance that this area
will experience economic growth. Adverse conditions in any one or more of the
industries operating in Fauquier or Prince William Counties or a slow-down in
general economic conditions could have an adverse effect on Bankshares and TFB.
TFB's loans are concentrated in three major areas: commercial loans, real estate
loans, and consumer loans. Approximately 8.6% and 18.0% of TFB's loan portfolio
at December 31, 2000 consisted of commercial and consumer loans, respectively.
The majority of TFB's loans are made on a secured basis. As of December 31,
2000, approximately 70.5% of the loan portfolio consisted of loans secured by
mortgages on real estate.
LOANS SECURED BY REAL ESTATE
SINGLE FAMILY RESIDENTIAL LOANS. TFB's single-family residential mortgage loan
portfolio consists of conventional loans, with interest rates fixed for 10 years
or less and balloon loans with 3, 5, 7, or 10 year maturities and amortized for
30 years or less. As of December 31, 2000, TFB's conventional single-family
loans amounted to $74.2 million or 37.0% of the total loan portfolio.
Substantially all of TFB's single-family residential mortgage loans are secured
by properties located in TFB's service area. The majority of residential
mortgage loans originated by TFB are originated under terms and documentation
that permit the loans to be sold to the Federal Home Loan Mortgage Corporation
("FHLMC").
Loans with a fixed rate longer than 10 years are sold into the secondary market.
TFB does not retain the servicing of sold loans.
TFB requires private mortgage insurance if the principal amount of the loan
exceeds 80% of the value of the security property. TFB uses the underwriting
guidelines of the PMI provider for loans having a loan-to-value ratio in excess
of 80%. TFB also considers the income of the borrower in determining whether to
make single-family residential mortgage loans.
CONSTRUCTION LOANS. The majority of TFB's construction loans are made to
individuals to construct a primary residence. Such loans have a maximum term of
nine months, have a fixed rate of interest, and have loan-to-value ratios of 80%
or less of the appraised value upon completion. TFB requires that permanent
financing, with TFB or some other lender, be in place prior to closing any
construction loan. Construction loans are generally considered to involve a
higher degree of credit risk than single-family residential mortgage loans. The
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion.
TFB also provides construction loans and lines of credit to developers. Such
loans generally have maximum loan-to-value ratios of 80% of the appraised value
upon completion. The loans are made with a fixed rate of interest. The majority
of such loans consist of loans to selected local developers with whom TFB is
familiar to build single-family dwellings on either a pre-sold or speculative
basis. TFB limits the number of unsold units under construction. Loan proceeds
are disbursed in stages after inspections of the project indicate that
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such disbursements are for costs already incurred and which have added to the
value of the project. Construction loans include loans to developers to acquire
the necessary land, develop the site and construct the residential units. As of
December 31, 2000, TFB's construction loans totaled $12.9 million or 6.5% of the
total loan portfolio.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate comprised
$54.0 million or 26.9% of total loans and consist principally of commercial
loans for which real estate constitutes a source of collateral. These loans are
secured primarily by owner-occupied properties. Commercial real estate loans
generally involve a greater degree of risk than single-family residential
mortgage loans because repayment of such loans may be subject to a greater
extent to adverse conditions in the real estate market or the economy.
CONSUMER LOANS
The consumer loan portfolio consists primarily of loans to individuals for
various consumer purposes, but includes some business purpose loans that are
payable on an installment basis. TFB offers a wide variety of consumer loans,
which include installment loans, credit card loans, home equity loans and other
secured and unsecured credit facilities. The majority of these loans are for
terms of less than five years and are secured by liens on various personal
assets of the borrowers, but consumer loans may also be made on an unsecured
basis. Consumer loans are made at fixed and variable rates, and are often based
on up to a five-year amortization schedule.
COMMERCIAL LOANS
TFB's commercial loans include loans to individuals and small to medium sized
businesses located primarily in Fauquier and Prince William Counties for working
capital, equipment purchases, and various other business purposes. Equipment or
similar assets secure a majority of TFB's commercial loans, but these loans may
also be made on an unsecured basis. Commercial loans may be made at variable or
fixed rates of interest. Commercial lines of credit are typically granted on a
one-year basis. Other commercial loans with terms or amortization schedules
longer than one year will normally carry interest rates that vary with the prime
lending rate and other financial indexes and will become payable in full in
three to five years.
Loan originations are derived from a number of sources, including direct
solicitation by TFB's loan officers, existing customers and borrowers,
advertising and walk-in customers.
Certain credit risks are inherent in making loans. These include prepayment
risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers. In particular, longer maturities
increase the risk that economic conditions will change and adversely affect our
ability to collect. TFB attempts to minimize loan losses through various means.
In particular, on larger credits, TFB generally relies on the cash flow of a
debtor as the source of repayment and secondarily on the value of the underlying
collateral. In addition, TFB attempts to utilize shorter loan terms in order to
reduce the risk of a decline in the value of such collateral.
DEPOSIT ACTIVITIES
Deposits are the major source of TFB's funds for lending and other investment
activities. TFB considers the majority of its regular savings, demand, NOW and
money market deposit accounts to be core deposits. These accounts comprised
approximately 65.1% of TFB's total deposits at December 31, 2000. Approximately
34.9% of TFB's deposits as of December 31, 2000 were certificates of deposit.
Generally, TFB attempts to maintain the rates paid on its deposits at a
competitive level. Time deposits of $100,000 and over made up approximately
11.5% of TFB's total deposits as of December 31, 2000 and generally pay interest
at the same rates as certificates of less than $100,000. The majority of the
deposits of TFB are generated from Fauquier and Prince William Counties. TFB has
not accepted brokered deposits to date, but will continue to evaluate many
funding sources, including the use of brokered deposits, as part of its
asset/liability management.
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INVESTMENTS
TFB invests a portion of its assets in U.S. Treasury and U.S. Government
corporation and agency obligations, state, county and municipal obligations,
corporate obligations, mutual funds, FHLB stock, and equity securities. TFB's
investments are managed in relation to loan demand and deposit growth, and are
generally used to provide for the investment of excess funds at reduced yields
and risks relative to yields and risks of the loan portfolio, while providing
liquidity to fund increases in loan demand or to offset fluctuations in
deposits. TFB does not currently engage in any off-balance sheet hedging
activities.
GOVERNMENT SUPERVISION AND REGULATION
FINANCIAL SERVICES MODERNIZATION LEGISLATION. On November 12, 1999, President
Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 (the "Act"), federal legislation intended to modernize the financial
services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the Act: (i.) repeals the
historical restrictions and eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers; (ii.) provides a uniform framework for the
functional regulation of the activities of banks, savings institutions and their
holding companies; (iii.) broadens the activities that may be conducted by
national banks, banking subsidiaries of bank holding companies and their
financial subsidiaries; (iv.) provides an enhanced framework for protecting the
privacy of consumer information; (v.) adopts a number of provisions related to
the capitalization, membership, corporate governance and other measures designed
to modernize the Federal Home Loan Bank system; (vi.) modifies the laws
governing the implementation of the Community Reinvestment Act; and (vii.)
addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
Bank holding companies will be permitted to engage in a wider variety of
financial activities than permitted under prior law, particularly with respect
to insurance and securities activities. In addition, in a change from prior law,
bank holding companies will be in a position to be owned, controlled or acquired
by any company engaged in financially-related activities.
Bankshares does not believe that the Act will have a material adverse effect on
our operations in the near-term. However, to the extent that it permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of financial institutions that offer a wider variety of financial
services than Bankshares currently offers and that can aggressively compete in
the markets Bankshares currently serves.
BANK HOLDING COMPANY REGULATION. Bankshares is a one-bank holding company,
registered with the Federal Reserve under the Bank Holding Company Act of 1956
("BHC Act"). As such, Bankshares is subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve. Bankshares is required to furnish to the Federal Reserve an annual
report of its operations at the end of each fiscal year and such additional
information as the Federal Reserve may require pursuant to the BHC Act.
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
total voting shares of the bank, (ii) it or any of its subsidiaries, other than
a bank, may acquire all or substantially all of the assets of the bank, or (iii)
it may merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anti-competitive effects of the proposed
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transaction are clearly outweighed by the public interest in meeting the
convenience and needs of the community to be served. The Federal Reserve is also
required to consider the financial and managerial resources and future prospects
of the bank holding companies and banks concerned and the convenience and needs
of the community to be served. Consideration of financial resources generally
focuses on capital adequacy and consideration of convenience and needs issues
including the parties' performance under the Community Reinvestment Act of 1977
(the "CRA"), both of which are discussed below.
The BHC Act generally prohibits Bankshares from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or unsound banking
practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. Despite prior approval, the
Federal Reserve has the power to order a bank holding company or its
subsidiaries to terminate any activity or to terminate its ownership or control
of any subsidiary when it has reasonable cause to believe that continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.
Banks are subject to the provisions of the CRA. Under the terms of the CRA, the
appropriate federal bank regulatory agency is required, in connection with its
examination of a bank, to assess such bank's record in meeting the credit needs
of the community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank that
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office, or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.
BANK REGULATION. TFB is chartered under the laws of the Commonwealth of
Virginia. The Federal Deposit Insurance Corporation (the "FDIC") insures its
deposits to the extent provided by law. TFB is subject to comprehensive
regulation, examination and supervision by the Federal Reserve and to other laws
and regulations applicable to banks. Such regulations include limitations on
loans to a single borrower and to its directors, officers and employees;
restrictions on the opening and closing of branch offices; the maintenance of
required capital and liquidity ratios; the granting of credit under equal and
fair conditions; and the disclosure of the costs and terms of such credit. State
regulatory authorities also have broad enforcement powers over TFB, including
the power to impose fines and other civil or criminal penalties and to appoint a
receiver in order to conserve the assets of any such institution for the benefit
of depositors and other creditors.
Under federal law, federally insured banks are subject, with certain exceptions,
to certain restrictions on any extension of credit to their parent holding
companies or other affiliates, on investment in the stock or other securities of
affiliates, and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted. FIRREA contains major regulatory reforms, stronger
capital standards for savings and loan associations and stronger civil and
criminal enforcement provisions. FIRREA also provides that a depository
7
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled FDIC insured depository
institution, or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC insured institution in danger of default.
In 1991, the FDIC Improvement Act of 1991 ("FDICIA") was enacted. FDICIA made a
number of reforms addressing the safety and soundness of deposit insurance
funds, supervision, accounting, and prompt regulatory action, and also
implemented other regulatory improvements. Annual full-scope, on-site
examinations are required of all insured depository institutions. The cost for
conducting an examination of an institution may be assessed to that institution,
with special consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks also are precluded
from engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. FDICIA also re-codified current law restricting extensions of
credit to insiders under the Federal Reserve Act.
DIVIDENDS. Dividends from TFB constitute the primary source of funds for
dividends to be paid by Bankshares. There are various statutory and contractual
limitations on the ability of TFB to pay dividends, extend credit, or otherwise
supply funds to Bankshares, including the requirement under Virginia banking
laws that cash dividends only be paid out of undivided profits and only if such
dividends would not impair the capital of TFB. The Federal Reserve also has the
general authority to limit the dividends paid by bank holding companies and
state member banks, if such payment may be deemed to constitute an unsafe and
unsound practice. The Federal Reserve Board has indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fund fully the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition. TFB does not expect any of these laws, regulations
or policies to materially impact its ability to pay dividends.
EFFECT OF GOVERNMENTAL POLICIES. The earnings and business of Bankshares and TFB
are affected by the policies of various regulatory authorities of the United
States, especially the Federal Reserve. The Federal Reserve, among other things,
regulates the supply of credit and deals with general economic conditions within
the United States. The instruments of monetary policy employed by the Federal
Reserve for those purposes influence in various ways the overall level of
investments, loans, other extensions of credits, and deposits, and the interest
rates paid on liabilities and received on assets.
ENFORCEMENT POWERS. Congress has provided the Federal Reserve and the FDIC with
an array of powers to enforce laws, rules, regulations and orders. Among other
things, these agencies may require that institutions cease and desist from
certain activities, may preclude persons from participating in the affairs of
insured depository institutions, may suspend or remove deposit insurance, and
may impose civil money penalties against institution-affiliated parties for
certain violations.
MAXIMUM LEGAL INTEREST RATES. Like the laws of many states, Virginia law
contains provisions that govern interest rates that may be charged by banks and
other lenders on certain types of loans. Numerous exceptions exist to the
general interest limitations imposed by Virginia law. The relative importance of
these interest limitation laws to the financial operations of TFB will vary from
time to time, depending on a number of factors, including conditions in the
money markets, the costs and availability of funds, and prevailing interest
rates.
CHANGE OF CONTROL. Federal law restricts the amount of voting stock of a bank
holding company and a bank that a person may acquire without the prior approval
of banking regulators. The overall effect of such laws is to make it more
difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of Bankshares may be less likely to
benefit from the rapid increases in stock prices that may result from tender
offers or similar efforts to acquire control of other companies. Federal law
also imposes restrictions on acquisitions of stock in a bank holding company and
a state bank. Under the federal Change in Bank Control Act and the regulations
thereunder, a person or group must give advance notice to the Federal Reserve
before acquiring control of any bank holding company. Upon receipt of such
notice, the Federal Reserve and the
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SCC, as the case may be, may approve or disapprove the acquisition. The Change
in Bank Control Act creates a rebuttable presumption of control if a member or
group acquires a certain percentage or more of a bank holding company's or
bank's voting stock, or if one or more other control factors set forth in the
act are present.
INSURANCE OF DEPOSITS. TFB's deposit accounts are insured by the FDIC up to a
maximum of $100,000 per insured depositor. The FDIC issues regulations, conducts
periodic examinations, requires the filing of reports and generally supervises
the operations of its insured banks. Any insured bank that is not operated in
accordance with or does not conform to FDIC regulations, policies and directives
may be sanctioned for non-compliance. Proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank engaging in
unsafe and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate insurance of accounts
pursuant to procedures established for that purpose.
CAPITAL REQUIREMENTS. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain all ratios well in excess of the minimums.
The current guidelines require all bank holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common
stockholders' equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangibles and excludes the allowance for loan and lease losses.
Tier 2 capital includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves
for loan and lease losses up to 1.25% of risk-weighted assets. As of December
31, 2000 (i) Bankshares' Tier 1 and total risk-based capital ratios were 12.0 %
and 13.2%, respectively, and (ii) TFB's Tier 1 and total risk-based capital
ratios were 12.0% and 13.3%, respectively.
FDICIA contains "prompt corrective action" provisions pursuant to which banks
are to be classified into one of five categories based upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require (subject to certain exceptions) the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"significantly undercapitalized" or "critically undercapitalized".
The FDIC has issued regulations to implement the "prompt corrective action"
provisions of FDICIA. In general, the regulations define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level for any capital measures; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The FDIC also, after an opportunity for
a hearing, has authority to downgrade an institution from "well capitalized" to
"adequately capitalized" or to subject an "adequately capitalized" or
"under-capitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. As of December 31, 2000, TFB had
a total risk-based capital ratio of 13.3%, a Tier 1 risk-based capital ratio of
12.0%, and a leverage ratio of 9.2%. TFB was notified by the Federal Reserve
Bank of Richmond that, at December 31, 2000, TFB was "well capitalized" under
the regulatory framework for prompt corrective action.
9
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.
COMPETITION
Bankshares encounters strong competition both in making loans and in attracting
deposits. The deregulation of the banking industry and the widespread enactment
of state laws that permit multi-bank holding companies as well as an increasing
level of interstate banking have created a highly competitive environment for
commercial banking. In one or more aspects of its business, TFB competes with
other commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries. Most of these competitors, some
of which are affiliated with bank holding companies, have substantially greater
resources and lending limits, and may offer certain services that TFB does not
currently provide. In addition, many of TFB's non-bank competitors are not
subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks. Recent federal and state legislation has
heightened the competitive environment in which financial institutions must
conduct their business, and the potential for competition among financial
institutions of all types has increased significantly.
To compete, TFB relies upon specialized services, responsive handling of
customer needs, and personal contacts by its officers, directors, and staff.
Large multi-branch banking competitors tend to compete primarily by rate and the
number and location of branches while smaller, independent financial
institutions tend to compete primarily by rate and personal service.
EMPLOYEES
As of December 31, 2000, Bankshares and TFB employed 83 full-time employees and
36 part-time employees. A collective bargaining unit does not represent the
employees. Bankshares and TFB consider relations with employees to be good.
ITEM 2. PROPERTIES
TFB owns or leases property and operates branches at the following locations:
LOCATION LEASE/OWN RENT (ANNUAL) EXPIRATION RENEWAL
-------------------------------------------------------------------------------------------------------
Main Office *
P.O. Box 561 Own N/A N/A N/A
10 Courthouse Square
Warrenton, VA 20186
Catlett Branch Office
Rt. 28 and 806 Own N/A N/A N/A
Catlett, VA 20119
Sudley Road Branch Office
8091 Sudley Rd. Lease $41,160 2004 Additional 5 yrs.
Manassas, VA 20109
New Baltimore Office
5119 Lee Highway Own N/A N/A N/A
Warrenton, VA 20187
10
The Plains Office
6464 Main Street Own N/A N/A N/A
The Plains, VA 20198
View Tree Office
216 Broadview Avenue Own N/A N/A N/A
Warrenton, VA 20186
-----------------------------------------------------------------------------------------------
* TFB and Bankshares
ITEM 3. LEGAL PROCEEDINGS
There is no pending or threatened litigation and no litigation was terminated
during the fourth quarter of the fiscal year ended December 31, 2000 that, in
the opinion of management, may materially impact the financial condition of
Bankshares or TFB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bankshares' common shares are traded over the counter on the National
Association of Securities Dealers Automated Quote ("NASDAQ") SmallCap Market
System under the symbol "FBSS". Bankshares' common shares commenced trading on
December 27, 1999.
As of December 31, 2000, there were 1,712,191 outstanding shares of common
stock, which is the only class of Bankshares capital stock. As of December 31,
2000 there were approximately 405 holders of record of Bankshares common stock.
The following sets forth the high and low sales prices for Bankshares common
shares and the amounts of any cash dividends paid for each full quarterly period
within the two most recent fiscal years:
2000 1999 Dividends Per Share
---------------- ---------------- -------------------
High Low High Low High Low
---------------- ---------------- -------------------
1st Quarter $18.50 $15.38 $19.38 $18.50 $0.15 $0.13
2nd Quarter $17.50 $15.00 $19.00 $18.00 $0.16 $0.14
3rd Quarter $18.25 $15.75 $19.00 $18.38 $0.16 $0.14
4th Quarter $16.00 $14.50 $19.38 $17.00 $0.17 $0.15
Bankshares' future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
financial condition, cash requirements, and general business conditions.
Bankshares' ability to pay cash dividends will depend entirely upon TFB's
ability to pay dividends to Bankshares.
11
Transfers of funds from TFB to Bankshares in the form of loans, advances and
cash dividends are restricted by federal and state regulatory authorities. As of
December 31, 2000, the aggregate amount of unrestricted funds that could be
transferred from TFB to Bankshares without prior regulatory approval totaled
$1.5 million.
ITEM 6: SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
At and for the Year Ended December 31,
(Dollars in thousands, except per share data) 2000 1999 1998 1997 1996
EARNINGS STATEMENT DATA:
Interest income $ 18,002 $ 17,129 $ 15,024 $ 13,575 $ 12,547
Interest expense 6,084 6,043 5,519 4,751 4,699
--------------- --------------- ----------- ----------- -----------
Net interest income 11,918 11,086 9,505 8,824 7,848
Provision for loan losses 457 695 535 465 578
--------------- --------------- ----------- ----------- -----------
Net interest income after provision
for loan losses 11,461 10,391 8,970 8,359 7,270
Noninterest income 2,842 2,433 2,202 2,217 2,207
Securities gains (losses) (111) -- 17 10 78
Noninterest expense 9,665 9,023 7,708 7,354 6,965
--------------- --------------- ----------- ----------- -----------
Income before income taxes 4,527 3,801 3,481 3,232 2,590
Income taxes 1,430 1,162 1,039 981 748
--------------- --------------- ----------- ----------- -----------
Net income $ 3,097 2,639 $ 2,442 $ 2,251 $ 1,842
============== =============== =========== =========== ===========
PER SHARE DATA: (1)
Net income per share, basic 1.76 1.46 1.31 1.18 0.96
Net income per share, diluted 1.75 1.45 1.30 1.17 0.96
Cash dividends 0.64 0.56 0.45 0.35 0.26
Average basic shares outstanding 1,755,182 1,802,165 1,857,282 1,913,008 1,912,328
Average diluted shares outstanding 1,766,773 1,818,132 1,875,641 1,921,073 1,916,513
Book value at period end 13.09 11.95 11.52 10.97 10.08
BALANCE SHEET DATA:
Total Assets $ 249,855 $ 233,208 $ 220,026 $ 184,442 $ 173,416
Loans, net 197,879 181,503 162,272 128,153 114,280
Investment securities 16,956 18,779 22,791 27,946 41,705
Deposits 212,103 187,273 179,217 161,869 152,938
Shareholders' equity 22,419 21,204 21,177 20,978 19,270
PERFORMANCE RATIOS:
Net interest margin(2) 5.56% 5.35% 5.35% 5.45% 5.16%
Return on average assets 1.32% 1.14% 1.21% 1.27% 1.09%
Return on average equity 14.13% 12.50% 11.60% 11.62% 9.86%
Dividend payout 36.09% 34.34% 34.10% 29.70% 27.00%
Efficiency ratio(3) 65.18% 63.51% 65.90% 65.80% 68.30%
ASSET QUALITY RATIOS:
Allowance for loan losses to period
end loans, net 1.27% 1.24% 1.13% 1.27% 1.18%
Nonperforming loans to allowance for
loan losses 4.74% 5.49% 35.96% 38.93% 50.03%
Net charge-offs to average loans 0.10% 0.15% 0.23% 0.22% 0.28%
CAPITAL AND LIQUIDITY RATIOS:
Leverage 9.13% 8.80% 9.70% 11.90% 11.10%
Risk Based Capital Ratios:
Tier 1 capital 11.96% 12.20% 13.10% 16.40% 16.50%
Total capital 13.21% 13.40% 14.30% 17.70% 17.70%
(1) Amounts have been restated to reflect a two-for-one stock split during 1998
and a four-for-one stock split during 1996.
(2) Net interest margin is calculated as fully taxable equivalent net interest
income divided by average earning assets and represents the Corporation's net
yield on its earning assets.
(3) Efficiency ratio is computed by dividing non-interest expense by the sum of
fully taxable equivalent net interest income and non-interest income.
12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Form 10-K. In addition to the historical information contained herein,
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 that 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
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.
INTRODUCTION
This discussion is intended to focus on certain financial information regarding
Bankshares and TFB. The purpose of this discussion is to provide the reader with
a more thorough understanding of the financial statements. This discussion
should be read in conjunction with the financial statements and accompanying
notes contained elsewhere herein.
Management is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on the liquidity,
capital resources or operations of Bankshares or TFB. Also, management is not
aware of any current recommendations by its regulatory authorities that would
have a material effect on liquidity, capital resources or operations. TFB's
internal sources of such liquidity are deposits, loan repayments and securities
available for sale. TFB's primary external source of liquidity is advances from
the Federal Home Loan Bank ("FHLB") of Atlanta.
OVERVIEW
The reported results of Bankshares are dependent on a variety of factors,
including the general interest rate environment, competitive conditions in the
industry, governmental policies and regulations and conditions in the markets
for financial assets. Net interest income is the largest component of net
income, and consists of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is primarily affected by the volume, interest
rates and composition of interest-earning assets and interest-bearing
liabilities.
13
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000 AND
DECEMBER 31, 1999
Net income of $3.1 million in 2000 was a 17.3% increase from 1999 net income of
$2.6 million. Earnings per share ("EPS") on a fully diluted basis were $1.75 in
2000 compared to $1.45 in 1999. Profitability as measured by return on average
equity increased from 12.5% in 1999 to 14.1% in 2000.
Certain expenses associated with a misappropriation of cash reduced 2000 and
1999 earnings by $86,000 and $288,000, net of tax, respectively. On February 28,
2000, the Bank was first advised by its accountants as to the possible
misappropriation of cash in the approximate amount of $437,000. The Bank
immediately reported the loss to its insurance carrier and began an aggressive
investigation of the misappropriation. The $437,000 loss, or $288,000 net of
taxes, was recorded in 1999. Based on the ongoing investigation, an additional
loss of $130,000, or $86,000 net of taxes, was recorded in 2000. On January 29,
2001, the Bank recovered $542,000, or $358,000 net of taxes, from its insurance
carrier for these losses. This recovery will be recorded as income in the first
quarter of the year ended December 31, 2001. Subject to further results of the
ongoing investigation, additional recoveries, if any, would be recorded as
income in the year received.
NET INTEREST INCOME. Total interest income grew $0.9 million or 5.1% to $18.0
million in 2000 from $17.1 million in 1999. This increase was primarily the
result of loan growth. Average loan balances increased from $174.9 million in
1999 to $193.4 million in 2000. The average yield on loans remained a relatively
stable 8.64% in 2000 compared with 8.70% in 1999. Together, this resulted in a
$1.5 million increase in interest income from loans for the year 1999 compared
with year 2000. Partially offsetting the increase in interest income from loans
was the $0. 7 million decline in investment income due to the decline in average
investment assets. Average investment balances decreased $11.5 million from
$28.4 million in 1999 to $16.9 million in 2000, primarily due to investment
maturity proceeds being reinvested into loans rather than other investments. The
tax-equivalent average yield on investments declined slightly from 6.19% in 1999
to 6.08% in 2000. The use of maturing investments to fund new loan growth, as
exhibited in 2000, is projected to significantly lessen in 2001. Loan growth
will be primarily funded by deposit growth and/or FHLB of Atlanta advances.
Average deposit balances grew $7.6 million, primarily in demand deposits and
time certificates of deposit. The average rate on interest-bearing deposits
increased from 3.24% in 1999 to 3.28% in 2000 due to the growth in costlier time
certificates of deposit, which more than offset the decline in NOW, money market
account, and savings account rates.
Net interest income for 2000 increased $0.8 million or 7.5% to $11.9 million for
the year ended December 31, 2000 from $11.1 million for the year ended December
31, 1999. This increase was accomplished through a rise in total average earning
assets from $215.2 million in 1999 to $217.7 million in 2000, as well as the
reduction in average interest-bearing liabilities from $174.4 million in 1999 to
$173.1 million in 2000. The percentage of average earning assets to total assets
decreased slightly in 2000 to 92.6% from 92.9%. The Bank's net interest margin
increased from 5.35 % in 1999 to 5.56% in 2000.
Future trends regarding net interest income are dependent on the absolute level
of market interest rates, the shape of the yield curve, the amount of lost
income from non-performing assets, the amount of prepaying loans, the mix and
amount of various deposit types, and many other factors, as well as the overall
volume of interest-earning assets. These factors are individually difficult to
predict, and when taken together, the uncertainty of future trends compounds.
Based on management's current projections, net interest income will remain
relatively stable as interest-earning assets increase, but the net interest
margin may decrease in 2001 due to the growth in time deposits and/or FHLB of
Atlanta advances as the funding source for loan growth, rather than maturing
investment proceeds.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $457,000 for 2000
and $695,000 for 1999. The amount of the provision for loan loss for 2000 and
1999 was based upon management's continual evaluation of the adequacy of the
allowance for loan losses, which encompasses the overall risk characteristics of
the loan portfolio, trends in TFB's delinquent and non-performing loans,
estimated values of collateral, and the impact of economic conditions on
borrowers. There can be no assurances, however, that future losses will not
exceed estimated amounts, or that increased amounts of provisions for loan
losses will not be required in future periods as conditions dictate.
14
NON-INTEREST INCOME. Total other income increased by $298,000 or 12.2% from $2.4
million for 1999 to $2.7 million for 2000. Other income is primarily derived
from non-interest fee income, which consists primarily of fiduciary fees,
service charges, and other fee income. In 2000, the increase stemmed from a
$126,000 increase in other service charges, commissions and fees, and a $294,000
increase in service charges on deposit accounts. These increases were partially
offset by a $111,000 loss on sales of securities in 2000.
One major factor in the increase in service charges on deposit accounts was
management's focus on reducing the level of waivers on Not Sufficient Fund
("NSF") service charges. During 1999 approximately 33% of NSF were waived
compared with approximately 22% in 2000, which in itself increased non-interest
income $114,000.
NON-INTEREST EXPENSE. Total other operating expenses increased $642,000 or 7.1%
in 2000 from 1999. The primary component of the increase was an increase in
salaries and employees' benefits of $390,000 or 10.5%, primarily due to the
increase in full-time equivalent personnel from approximately 93 at year-end
1999 to 104 at year-end 2000, as well as normal annual salary increases. In
addition, other operating expenses increased $218,000 or 5.4%, primarily due to
investigation-related expenses as result of the misappropriation of cash, as
well as an increase in management consulting fees in connection with TFB's
strategic and succession planning processes.
INCOME TAXES. Income tax expense increased by $268,000 for the year ended
December 31, 2000 compared to the year ended December 31, 1999. The effective
tax rates were 31.6% for 2000 and 30.6% for 1999. The effective tax rate differs
from the statutory federal income tax rate of 34% due to TFB's investment in
tax-exempt securities.
The following table presents a quarterly summary of earnings for the last two
years. In 1999, quarterly income increased in the first three quarters and
declined during the fourth quarter. The reduction in fourth quarter earnings was
due primarily to the aforementioned non-recurring expenses associated with a
misappropriation of cash. In 2000, earnings exhibited stable growth,
particularly strong in the second quarter, due to increased earnings from
operations.
EARNINGS
(In Thousands)
Three Months Ended 2000
-----------------------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31
Interest income $ 4,741 $ 4,581 $ 4,401 $ 4,279
Interest expense 1,801 1,458 1,379 1,447
------- ------- ------- -------
Net interest income 2,940 3,124 3,022 2,832
Provision for loan losses 0 138 152 167
------- ------- ------- -------
Net interest income after
provision for loan losses 2,940 2,986 2,869 2,665
Other income 653 711 712 658
Other expense 2,629 2,295 2,496 2,249
------- ------- ------- -------
Income before income taxes 964 1,403 1,085 1,074
Income tax expense 298 449 342 341
------- ------- ------- -------
Net income $ 667 $ 953 $ 744 $ 733
======= ======= ======= =======
Net income per share, basic $0.39 $0.54 $0.42 $0.41
Net Income per share, diluted $0.39 $0.54 $0.41 $0.41
Three Months Ended 1999
--------------------------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31
Interest income $ 4,509 $ 4,390 $ 4,292 $ 3,938
Interest expense 1,479 1,510 1,486 1,568
------- ------- ------- --------
Net interest income 3,030 2,880 2,806 2,370
Provision for loan losses 55 180 225 235
------- ------- ------- --------
Net interest income after
provision for loan losses 2,975 2,700 2,581 2,135
Other income 624 599 613 597
Other expense 2,729 2,103 2,101 2,090
------- ------- ------- --------
Income before income taxes 871 1,196 1,093 641
Income tax expense 269 381 302 210
------- ------- ------- --------
Net income $ 602 $ 815 $ 791 $ 431
======= ======= ======= ========
Net income per share, basic $0.33 $0.45 $0.44 $0.24
Net Income per share, diluted $0.33 $0.45 $0.43 $0.24
COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
Net income of $2.6 million in 1999, was an 8.1% increase from 1998 net income of
$2.4 million. Earnings per share (EPS) on a fully diluted basis were $1.45 in
1999 compared to $1.30 in 1998. Profitability as measured by return on average
equity increased from 11.6% in 1998 to 12.5% in 1999. Certain non-recurring
expenses associated with a misappropriation of cash of $288,000, net of tax,
reduced 1999 earnings and return on average equity by 9.9% and 13.9%,
respectively.
NET INTEREST INCOME. Total interest income grew $2.1 million or 14.1% to $17.1
million in 1999 from $15.0 million in 1998. This increase was primarily the
result of loan growth. Loan receivables grew 11.9% or $19.2 million from
December 31, 1998 to December 31, 1999. Loan growth was funded by an increase in
deposits of $8.1 million, a $5 million increase in FHLB of Atlanta advances and
a reduction of $4.0 million in the investment portfolio. Total interest expense
grew by $524,000 or 9.5% to $6.0 million in 1999 from $5.5 million in 1998.
Net interest income for 1999 increased $1.6 million or 16.7% to $11.1 million
for the year ended December 31, 1999 from $9.5 million for the year ended
December 31, 1998. This increase was accomplished through an increase in total
average earning assets from $185.7 million in 1998 to $215.2 million in 1999.
The percentage of average earning assets to total assets increased slightly in
1999 to 92.9% from 92.0%. The Bank's net interest margin remained constant in
1999 at 5.35%.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $695,000 for 1999
and $535,000 for 1998. The amount of the provision for loan loss for 1999 and
1998 was determined based upon management's
15
continual evaluation of the adequacy of the allowance for loan losses, which
encompasses the overall risk characteristics of the loan portfolio, trends in
TFB's delinquent and non-performing loans, and the impact of economic conditions
on borrowers. There can be no assurances, however, that future losses will not
exceed estimated amounts or that additional provisions for loan losses will not
be required in future periods.
NON-INTEREST INCOME. Total other income increased by $214,000 or 9.7% from $2.2
million for 1998 to $2.4 million for 1999. Other income is primarily derived
from non-interest fee income, which consists primarily of fiduciary fees,
service charges, and other fee income. In 1999, the increase stemmed from an
$83,000 increase in other service charges, commissions and fees, a $143,000
increase in service charges on deposit accounts and a $10,000 increase in trust
department income. These increases were partially offset by $22,000 decrease in
gains on sales of securities and other operating income in 1999.
NON-INTEREST EXPENSE. Total other operating expenses increased $1.3 million or
17.1% in 1999 from 1998. The primary components of the increase were an increase
in salaries and employees' benefits of $532,000, partially due to the staffing
of the Manassas branch opened in 1999, and a $437,000 non-recurring
miscellaneous non-loan charge resulting from a misappropriation of cash. Also,
net occupancy and furniture and equipment expense increased by $139,000 during
1999.
INCOME TAXES. Income tax expense increased by $123,000 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. The effective
tax rates were 30.6% for 1999 and 29.9% for 1998. The effective tax rate differs
from the statutory federal income tax rate of 34% due to TFB's investment in
tax-exempt securities.
COMPARISON OF DECEMBER 31, 2000 AND DECEMBER 31, 1999 FINANCIAL CONDITION
Total assets were $249.9 million at December 31, 2000, an increase of 7.1% or
$16.6 million from $233.2 million at December 31, 1999. Balance sheet categories
reflecting significant changes included investment securities, total loans,
deposits, and Federal Home Loan Bank advances. Each of these categories is
discussed below.
INVESTMENT SECURITIES. Total investment securities were $17.0 million at
December 31, 2000, reflecting a decrease of $1.8 million from $18.8 million at
December 31, 1999. The fund proceeds resulting from the decrease were primarily
reinvested into loans. At December 31, 2000, the investment securities portfolio
was segregated into available for sale of $13.0 million and held to maturity of
$4.0 million. The valuation allowance for the available for sale portfolio had
an unrealized loss of $130,000 at December 31, 2000 compared to $557,000 at
December 31, 1999. Effective January 1, 2001, TFB adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," and transferred
securities with a book value of $3,980,000 and a market value of $3,981,000 to
the available for sale category.
LOANS. The total net loan balance after allowance for loan losses was $197.9
million at December 31, 2000, which represents an increase of $16.4 million or
9.0% from $181.5 million as of December 31, 1999. The majority of this increase
was reflected in the loans secured by 1-4 family residential real estate, which
increased $9.2 million from 1999 to 2000. In addition, loans secured by
nonresidential real estate and consumer installment loans increased $3.0 million
and $2.3 million, respectively, over the same time period. The majority of
consumer installment loans were comprised of automobile loans. TFB's loans are
made primarily to customers located within its local trade area.
DEPOSITS. For the year ended December 31, 2000, total deposits grew $24.8
million or 13.3% when compared with total deposits one year earlier. The growth
in deposits was in noninterest-bearing demand deposits that increased by $6.3
million and time deposits that increased $27.4 million. NOW accounts were
relatively stable year to year, while money market accounts and savings deposits
declined $6.2 million and $2.5 million, respectively.
FHLB ADVANCES. Amounts borrowed from the FHLB of Atlanta decreased from $23
million or 10.6% of earning assets at December 31, 1999 to $13 million or 5.6%
of earning assets at December 31, 2000. The decreased borrowings from the FHLB
were a result of strong deposit growth. The term structure of the advances
borrowed was 10 years with a 5 year call option in 2003.
16
ASSET QUALITY
Non-performing loans, in most cases, consist of loans that are 90 days or more
past due and for which the accrual of interest has been discontinued. Management
evaluates all loans that are 90 days or more past due, as well as loans that
have suffered financial distress, to determine if they should be placed on
non-accrual status. Factors considered by management include the estimated value
of collateral, if any, and other resources of the borrower that may be available
to satisfy the delinquency.
Non-accrual loans totaled approximately $121,000 or .06% of total loans at
December 31, 2000, as compared to $125,000 or .07% of total loans at December
31, 1999. Non-performing loans as a percentage of the allowance for loan losses
were 4.7% and 5.5% at December 31, 2000 and 1999, respectively.
Loans past due 90 days and accruing interest totaled $800,000 and $170,000 at
December 31, 2000 and 1999, respectively. At December 31, 2000, approximately
$749,000 of the $800,000 consisted of two loans, both secured by real estate. No
loss is anticipated on either loan.
There are no loans other than those disclosed above as either non-performing or
impaired where known information about the borrower caused management to have
serious doubts about the borrower's ability to comply with the contractual
repayment obligations. There are also no other interest-bearing assets that
would be subject to disclosure as either non-performing or impaired if such
interest-bearing assets were loans. There are no concentrations of loans to
borrowers engaged in similar activities that exceed 10% of total loans of which
management is aware.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity totaled $22.4 million at December 31, 2000 compared with
$21.2 million at December 31, 1999. The relative stability in the amount of
equity reflects management's desire to increase shareholders' return on equity
by managing the growth in equity. During the first quarter of 1998, the company
initiated a Dutch Auction self-tender offer to buy back shares directly from
shareholders. As a result of this action, Bankshares bought back 60,238 shares,
as adjusted for the two for one stock split, or 3.3% of shares outstanding on
December 31, 1997, for $1.2 million. Exclusive of the Dutch Auction, Bankshares
initiated an open market buyback program in 1998, through which it has bought
back an additional 15,000 shares at a cost of $0.3 million in 1998, 68,213
shares at a cost of $1.3 million in 1999, and 63,120 shares at a cost of $1.1
million in 2000.
The securities portfolio valuation account decreased its unrealized loss after
tax to $86,000 at December 31, 2000 compared to an unrealized loss of $368,000
at December 31, 1999.
Banking regulations have established minimum capital requirements for financial
institutions, including risk-based capital ratios and leveraged ratios. As of
December 31, 2000, the appropriate regulatory authorities have categorized
Bankshares and TFB as well capitalized under the regulatory framework for prompt
corrective action.
The primary sources of funds are deposits, repayment of loans, maturities of
investments, funds provided from operations and advances from the FHLB of
Atlanta. While scheduled repayments of loans and maturities of investment
securities are predictable sources of funds, deposit flows and loan repayments
are greatly influenced by the general level of interest rates, economic
conditions and competition. TFB uses its sources of funds to fund existing and
future loan commitments, to fund maturing certificates of deposit and demand
deposit withdrawals, to invest in other interest-earning assets, to maintain
liquidity, and to meet operating expenses. Management monitors projected
liquidity needs and determines the desirable level based in part on TFB's
commitments to make loans and management's assessment of TFB's ability to
generate funds.
Cash and amounts due from depository institutions and federal funds sold totaled
$25.6 million at December 31, 2000. These assets provide the primary source of
liquidity for TFB. In addition, management has designated a substantial portion
of the investment portfolio, approximately $13.0 million as available for sale,
and has an available line of credit with the FHLB of Atlanta with a borrowing
limit of approximately $38 million at December 31, 2000 to provide additional
sources of liquidity. At December 31, 2000, $13.0 million of the FHLB of Atlanta
line of credit was in use.
17
The following table sets forth information relating to Bankshares' average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields and rates paid for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average daily balances of assets and liabilities, respectively,
for the periods presented.
AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(In Thousands)
2000 1999
--------------------------------- -------------------------------------
Average Income/ Average Average Income/ Average
ASSETS: Balances Expense Rate Balances Expense Rate
-------- ------- ------- -------- ------- --------
Loans
Taxable $188,935 $16,357 8.66% $169,731 $14,780 8.71%
Tax-exempt (1) 4,257 345 8.11% 4,357 429 9.85%
Nonaccrual 219 -- 770 --
-------- ------- -------- -------
Total Loans 193,411 16,702 8.64% 174,858 15,209 8.70%
-------- ------- -------- -------
Securities
Taxable 14,209 841 5.92% 25,477 1,510 5.93%
Tax-exempt (1) 2,651 184 6.95% 2,888 245 8.48%
-------- ------- -------- -------
Total securities 16,860 1,025 6.08% 28,365 1,755 6.19%
-------- ------- -------- -------
Deposits in banks 105 5 5.02% 666 32 4.80%
Federal funds sold 7,331 450 6.14% 11,317 562 4.97%
-------- ------- -------- -------
Total earning assets 217,707 18,182 8.35% 215,206 $17,558 8.16%
------- -------
Less: Reserve for loan losses (2,569) (2,213)
Cash and due from banks 9,846 9,704
Bank premises and equipment, net 5,464 5,268
Other assets 4,548 3,783
-------- --------
Total Assets $234,996 $231,748
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $37,123 -- $ 33,906 --
-------- ------- -------- -------
Interest-bearing deposits
NOW accounts 37,201 415 1.12% 37,349 $544 1.46%
Money market accounts 34,969 1,185 3.39% 36,390 1,297 3.56%
Savings accounts 32,869 881 2.68% 33,220 973 2.93%
Time deposits 53,001 2,707 5.11% 46,683 2,164 4.64%
-------- ------- -------- -------
Total interest-bearing deposits 158,040 5,188 3.28% 153,642 4,978 3.24%
Federal funds purchased and securities sold
under agreements to repurchase -- -- -- --
Federal Home Loan Bank advances 15,022 896 5.96% 20,733 1,065 5.14%
-------- ------- -------- -------
Total interest-bearing liabilities 173,062 6,084 3.52% 174,375 6,043 3.47%
-------- ------- -------- -------
Other liabilities 2,899 2,348
-------- --------
Shareholders' equity 21,912 21,119
-------- --------
Total Liabilities & Shareholders' Equity $234,996 $231,748
======== ========
------- -------
Net interest spread $12,098 4.83% $11,515 4.69%
======= =======
Interest expense as a percent of average earning assets 2.79% 2.81%
Net interest margin 5.56% 5.35%
1998
--------------------------------------
Average Income/ Average
Balances Expense Rate
-------- ------- -------
ASSETS:
Loans
Taxable $141,265 $12,706 8.99%
Tax-exempt (1) 4,102 373 9.09%
Nonaccrual 724 --
-------- -------
Total Loans 146,091 13,079 8.95%
-------- -------
Securities
Taxable 24,250 1,464 6.04%
Tax-exempt (1) 4,435 323 7.28%
-------- -------
Total securities 28,685 1,787 6.23%
-------- -------
Deposits in banks 1,791 89 4.97%
Federal funds sold 9,126 493 5.40%
-------- -------
Total earning assets 185,693 15,448 8.32%
-------
Less: Reserve for loan losses (1,808)
Cash and due from banks 9,593
Bank premises and equipment, net 5,494
Other assets 2,808
--------
Total Assets $201,780
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $ 30,721 --
-------- -------
Interest-bearing deposits
NOW accounts 33,186 661 1.99%
Money market accounts 37,958 1,509 3.98%
Savings accounts 29,920 1,038 3.47%
Time deposits 40,266 1,970 4.89%
-------- -------
Total interest-bearing deposits 141,330 5,178 3.66%
Federal funds purchased and securities sold under
agreements to repurchase 3 -- 0.00%
Federal Home Loan Bank advances 6,726 341 5.07%
-------- -------
Total interest-bearing liabilities 148,059 5,519 3.73%
-------- -------
Other liabilities 1,967
--------
Shareholders' equity 21,033
--------
Total Liabilities & Shareholders' Equity $201,780
========
-------
Net interest spread $ 9,929 4.59%
=======
Interest expense as a percent of average earning assets 2.97%
Net interest margin 5.35%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
18
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest
income and interest expense of Bankshares' for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to changes in volume (changes in volume
multiplied by old rate); and changes in rates (change in rate multiplied by old
volume). Changes in rate-volume, which cannot be separately identified, are
allocated proportionately between changes in rate and changes in volume.
RATE/VOLUME VARIANCE
(In Thousands)
2000 Compared to 1999 1999 Compared to 1998
------------------------------------- -------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
------- ------- -------- ------ ------- --------
INTEREST INCOME:
Loans; taxable $ 1,577 $ 1,611 $ (34) $ 2,074 $ 2,438 $ (364)
Loans; tax-exempt (84) (10) (74) 56 24 32
Securities; taxable (669) (667) (3) 46 72 (26)
Securities; tax-exempt (61) (19) (42) (78) (148) 70
Deposits in banks (27) (28) 2 (57) (54) (3)
Federal funds sold (112) (338) 226 69 103 (34)
------- ------- ------- ------- ------- -------
Total Interest Income 624 549 75 2,110 2,435 (325)
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
NOW accounts (129) (2) (127) (117) 104 (221)
Money market accounts (112) (50) (62) (212) (60) (152)
Savings accounts (92) (10) (82) (65) 158 (223)
Time deposits 543 311 232 194 286 (92)
Federal funds purchased and securities
sold under agreements to repurchase -- -- -- -- -- --
Federal Home Loan Bank Advances (169) (402) 233 724 719 5
------- ------- ------- ------- ------- -------
Total Interest Expense 41 (153) 194 524 1,207 (683)
------- ------- ------- ------- ------- -------
Net Interest Income $ 583 $ 702 $ (119) $ 1,586 $ 1,228 $ 358
======= ======= ======= ======= ======= =======
LOAN PORTFOLIO
At December 31, 2000 and 1999 net loans accounted for 79.2% and 77.8%,
respectively, of total assets and was the largest category of Bankshares'
earning assets.
Loans are shown on the balance sheets net of unearned discounts and the
allowance for loan losses. Interest is computed by methods that result in level
rates of return on principal. Loans are charged-off when deemed by management to
be uncollectable after taking into consideration such factors as the current
financial condition of the customer and the underlying collateral and
guarantees.
Bankshares adopted FASB No. 114, "Accounting by Creditors for Impairment of a
Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." FASB No. 114, as
amended, requires that the impairment of loans that have been separately
identified for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market price of the
loans or the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected to be
provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment is to be based on
the fair value of the collateral. FASB No. 114, as amended also requires certain
disclosures about investments in impaired loans and the allowance for loan
losses and interest income recognized on loans.
Bankshares considers all consumer installment loans and residential mortgage
loans to be homogenous loans. These loans are not subject to impairment under
FASB No. 114. A loan is considered impaired when it is probable that TFB will be
unable to collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in determining
impairment include, but are not limited to, expected future cash flows,
financial condition of the borrower, and the current economic conditions. A
performing loan may be considered impaired if the factors above indicate a need
for impairment. A loan on non-accrual status may not be impaired if it is in the
process of collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less than 5% of the
required principal and interest payments generally do not indicate an impairment
situation, if in management's judgement the loan will be paid in full. Loans
that meet the regulatory definitions of doubtful or loss generally qualify as
impaired loans under FASB No. 114. Charge-offs for impaired loans occur when the
loan or portion of the loan is determined to be uncollectible, as is the case
for all loans.
Loans are placed on non-accrual status when they have been specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more, unless when such loans are well secured and in the process of
collection. Any unpaid interest previously accrued on such loans is reversed
from income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal balance.
Interest income on other non-accrual loans is recognized only to the extent of
interest payments received.
Total loans on the balance sheet are comprised of the following classifications
as of December 31, 2000, 1999, 1998, 1997, and 1996.
LOAN PORTFOLIO (In Thousands)
December 31,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- -------------- ------------- -------------
Loans secured by real estate:
Construction and land development $ 12,948 $ 11,746 $ 8,297 $ 6,998 $ 9,617
Secured by farmland 381 903 1,163 1,449 1,345
Secured by 1-4 family residential 74,167 64,921 53,430 42,120 34,145
Nonfarm, nonresidential loans 53,959 50,988 49,814 34,513 36,354
Commercial and industrial loans
(except those secured by real estate) 17,148 16,689 16,933 15,844 12,689
Agricultural loans - - - - 51
Loans to individuals (except those
secured by real estate) 36,083 33,787 30,284 24,417 21,119
All other loans 5,873 4,868 4,620 5,176 1,147
------------- ------------- -------------- ------------- -------------
Total loans 200,559 183,902 164,541 130,517 116,467
Less: Unearned discount (126) (115) (416) (709) (722)
------------- ------------- -------------- ------------- -------------
Total Loans, Net $200,433 $183,787 $164,125 $129,808 $115,745
============= ============= ============== ============= =============
The following table sets forth certain information with respect to the Bank's
non-accrual, restructured and past due loans, as well as foreclosed assets, for
the periods indicated:
NON-PERFORMING ASSETS AND LOANS CONTRACTUALLY PAST DUE
(In Thousands)
Years ended December 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Nonaccrual loans $ 121 $ 125 $ 666 $ 551 $ 733
Restructured loans 0 0 0 0 0
Other real estate owned 0 0 57 199 477
------ ------ ------ ------ ------
Total Non-Performing Assets $ 121 $ 125 $ 723 $ 750 $1,210
====== ====== ====== ====== ======
Loans past due 90 days
accruing interest $ 800 $ 170 $ 951 $ 491 $ 21
====== ====== ====== ====== ======
Allowance for loan losses to
total loans at period end 1.27% 1.24% 1.13% 1.27% 1.26%
Non-performing assets to
period end loans and other
real estate owned 0.06% 0.07% 0.33% 0.41% 0.67%
Potential Problem Loans: At December 31, 2000, Management is not aware of any
significant problem loans not included in table.
19
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF LOAN LOSS EXPERIENCE. The allowance for loan losses is maintained at
a level which, in management's judgement, is adequate to absorb probable credit
losses inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, credit
concentration, trends in historical loss experience, specific impaired loans,
and current economic conditions. Management periodically reviews the loan
portfolio to determine probable credit losses related to specifically identified
loans as well as probable credit losses inherent in the remainder of the loan
portfolio that have been incurred. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowances relating to impaired loans are charged or credited to the provision
for loan losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Additions to the allowance for loan losses, which are recorded as the provision
for loan losses on Bankshares' statements of earnings, are made monthly to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. The amount of the provision is a
function of the level of loans outstanding, the level of non-performing loans,
historical loan-loss experience, the amount of loan losses actually charged off
or recovered during a given period and current national and local economic
conditions.
At December 31, 2000, 1999, 1998, 1997, and 1996 the allowance for loan losses
was $2,554,000, $2,284,000, $1,853,000, $1,655,000, and $1,465,000,
respectively.
The following table summarizes TFB's loan loss experience for each of the last
five years ended December 31, 2000, 1999, 1998, 1997, and 1996, respectively:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)
Year Ended
December 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ----------- ----------- ----------- -----------
Allowance for Loan Losses, January 1 $2,284 $1,853 $1,655 $1,465 $1,181
------------- ----------- ----------- ----------- -----------
Loans Charged-Off:
Commercial, financial and
agricultural 247 217 108 176 128
Real estate-construction
and development 4 - - - -
Real estate-mortgage 20 - 40 - 40
Consumer 171 110 223 187 225
------------- ----------- ----------- ----------- -----------
Total Loans Charged-Off 442 327 371 363 393
------------- ----------- ----------- ----------- -----------
Recoveries:
Commercial, financial and
agricultural 45 18 6 7 51
Real estate-construction
and development - - - - -
Real estate-mortgage 177 4 - - 1
Consumer 33 41 29 81 47
------------- ----------- ----------- ----------- -----------
Total Recoveries 255 63 35 88 99
------------- ----------- ----------- ----------- -----------
Net Charge-Offs 187 264 336 275 294
------------- ----------- ----------- ----------- -----------
Provision for Loan Losses 457 695 534 465 578
------------- ----------- ----------- ----------- -----------
Allowance for Loan Losses, December 31 $2,554 $2,284 $1,853 $1,655 $1,465
============= =========== =========== =========== ===========
Ratio of Net Charge-Offs
to Average Loans: 0.10% 0.15% 0.23% 0.22% 0.27%
============= =========== =========== =========== ===========
20
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table allocates the
allowance for loan losses at December 31, 2000, 1999, 1998, 1997, and 1996 to
each loan category. The allowance has been allocated according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories of loans at the dates indicated,
although the entire allowance balance is available to absorb any actual
charge-offs that may occur.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
Allowance Percentage Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total for Loan of Total
Losses Loans Losses Loans Losses Loans
------------- ------------ ------------- ------------- ------------ -------------
Commercial $950 8.55% $895 9.08% $714 10.29%
Agricultural 0.00% 0.00% 0.00%
Real Estate:
Construction 25 6.46% 6.39% 5.04%
Secured by Farmland 0.19% 0.49% 0.71%
1-4 Family Residential 300 36.98% 264 35.32% 160 32.47%
Other Real Estate 50 26.90% 27.74% 30.27%
Consumer 1,229 17.99% 1,125 18.38% 979 18.41%
All Other Loans 2.93% 2.65% 2.81%
--------- ----------- ---------- ---------- ---------
$2,554 100.00% $2,284 100.00% $1,853 100.00%
========= =========== ========== ========== =========
1997 1996
------------------------------ ------------------------------
Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total
Losses Loans Losses Loans
------------- ------------ ------------- -------------
Commercial $777 12.14% $522 10.89%
Agricultural 0.00% 0.04%
Real Estate:
Construction 5.36% 8.26%
Secured by Farmland 1.11% 1.15%
1-4 Family Residential 274 32.27% 293 29.32%
Other Real Estate 26.44% 31.21%
Consumer 604 18.71% 650 18.13%
All Other Loans 3.97% 1.00%
--------- ----------- ----------- ---------
$1,655 100.00% $1,465 100.00%
========= =========== =========== =========
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following is a schedule of maturities and sensitivities of loans subject to
changes in interest rates as of December 31, 2000:
MATURITY SCHEDULE OF SELECTED LOANS (In Thousands)
1 Year
WIthin Within After
1 Year 5 Years 5 Years Total
------------- -------------- ------------- -------------
Commercial and industrial loans $ 4,028 $ 7,655 $ 1,265 $ 12,948
Construction Loans 9,940 6,283 925 17,148
------------- -------------- ------------- -------------
$ 13,968 $ 13,938 $ 2,190 $ 30,096
============= ============== ============= =============
For maturities over one year:
Floating rate loans $ 4,095 $ 1,478 $ 5,573
Fixed rate loans 9,843 712 10,555
-------------- ------------- -------------
$ 13,938 $ 2,190 $ 16,128
============== ============= =============
21
INVESTMENT PORTFOLIO
At December 31, 2000, 1999 and 1998, the carrying values of the major
classifications of securities were as follows:
INVESTMENT PORTFOLIO
(In Thousands)
Available for Sale (1) Held to Maturity (1)
----------------------------------- ------------------------------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------
U.S. Treasury and other U.S.
Government agencies and
Corporations $9,559 $10,151 $12,682 $1,589 $2,885 $4,230
States and political subdivisions 1,657 682 688 2,391 2,491 2,738
Mutual funds -- 810 862
Restricted investment - Federal
Home Loan Bank stock 1,150 1,150 967
FHLMC preferred stock 488 488 488
Other securities 122 122 122
------- ------- ------- ------ ------ ------
Total $12,976 $13,403 $15,809 $3,980 $5,376 $6,968
------- ------- ------- ------ ------ ------
(1) Amounts for held-to-maturity are based on amortized cost. Amounts for
available-for-sale are based on fair value
22
MATURITY OR NEXT RATE ADJUSTMENT DATE
The following is a schedule of maturities or next rate adjustment date and
related weighted average yields of securities at December 31, 2000:
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES (in Thousands)
Due in one year Due after 1 Due after 5
or less through 5 years through 10 years
------------------------ ------------------------ ---------- ----------
Amount Yield Amount Yield Amount Yield
------------ --------- ------------ --------- ---------- ----------
SECURITIES HELD TO MATURITY:
Obligations of U.S. government
corporations and agencies $ 1,287 6.38% $ 302 6.39% $ -
Obligations of states and political
subdivisions, taxable
------------ ------------ ----------
Total taxable 1,287 6.38% 302 6.39% -
Obligations of states and political
subdivisions, tax-exempt 510 6.26% 1,881 6.58% -
------------ ------------ ----------
Total 1,797 6.35% 2,183 6.56% -
------------ ------------ ----------
SECURITIES AVAILABLE FOR SALE:
Obligations of U.S. government
corporations and agencies 3,433 6.03% 4,851 6.29% 815 6.65%
Obligations of states and political
subdivisions, taxable 476 7.09% - -
Other taxable securities - - -
------------ ------------ ----------
Total taxable 3,909 6.16% 4,851 6.29% 815 6.65%
------------ ------------ ----------
Obligations of states and political
subdivisions, tax-exempt 207 9.33% - 975 8.11%
------------ ------------ ----------
Total 4,116 6.32% 4,851 6.29% 1,790 7.44%
------------ ------------ ----------
TOTAL SECURITIES: $ 5,913 6.33% $ 7,034 6.37% $ 1,790 7.44%
============ ============ ==========
Due after 10 years
and Equity Securities Total
--------------------- -------------------------
Amount Yield Amount Yield
-------- ---------- ----------- ----------
SECURITIES HELD TO MATURITY:
Obligations of U.S. government
corporations and agencies $ - $ 1,589 6.39%
Obligations of states and political
subdivisions, taxable -
-------- -----------
Total taxable - 1,589 6.39%
Obligations of states and political
subdivisions, tax-exempt - 2,391 6.51%
-------- -----------
Total - 3,980 6.46%
-------- -----------
SECURITIES AVAILABLE FOR SALE:
Obligations of U.S. government
corporations and agencies 460 6.90% 9,559 6.26%
Obligations of states and political
subdivisions, taxable - 476 7.09%
Other taxable securities 1,759 7.25% 1,759 7.25%
-------- -----------
Total taxable 2,219 7.18% 11,794 6.44%
-------- -----------
Obligations of states and political
subdivisions, tax-exempt - 1,182 8.32%
-------- -----------
Total 2,219 7.18% 12,976 6.61%
-------- -----------
TOTAL SECURITIES: $2,219 7.18% $ 16,956 6.58%
======== ===========
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis
using a federal tax rate of 34%.
23
DEPOSITS
The average daily amounts of deposits and rates paid on deposits is summarized
for the periods indicated in the following table:
DEPOSITS AND RATES PAID (In Thousands)
December 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ------------------------- ----------------------------
Amount Rate Amount Rate Amount Rate
--------- -------- -------- -------- -------- ---------
Noninterest-bearing $ 37,123 $33,906 $30,721
--------- -------- --------
Interest-bearing:
NOW accounts 37,201 1.12% 37,349 1.46% 33,186 1.99%
Money market accounts 34,969 3.39% 36,390 3.56% 37,958 3.98%
Regular savings accounts 32,869 2.68% 33,220 2.93% 29,920 3.47%
Time deposits: 53,001 5.11% 46,683 4.64% 40,266 4.89%
--------- -------- --------
Total interest-bearing 158,040 3.28% 153,642 3.24% 141,330 3.66%
--------- -------- --------
Total deposits $195,163 $187,548 $172,051
========= ======== ========
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 2000:
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 AND MORE
(In Thousands)
Within Three to Six to One to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
------ -------- ------ ------ ----- -----
(Dollars in thousands)
At December 31, 2000 $1,859 $5,150 $10,678 $4,547 $2,187 $24,421
====== ====== ======= ====== ====== =======
BORROWED FUNDS
LONG-TERM BORROWINGS. Amounts and weighted average rates for long-term
borrowings for 2000, 1999 and 1998 are as follows:
BORROWED FUNDS (in Thousands)
-----------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1999
Amount Rate Amount Rate Amount Rate
----------------------- ---------------------- ------------------------
FHLB Advances $13,000 5.27% $23,000 5.57% $18,000 5.19%
SHORT-TERM BORROWINGS. This information is not required, as the average amount
of borrowings during the period did not exceed 30% of shareholders' equity.
24
CAPITAL
Bankshares and TFB are subject to various regulatory capital requirements
administered by banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
Bankshares' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Bankshares and TFB must meet
specific capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Bankshares' and TFB's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and TFB to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of Tier I Capital to
average assets (as defined in the regulations). Management believes, as of
December 31, 2000 that Bankshares and TFB meet all capital adequacy requirements
to which they are subject.
Bankshares and TFB exceeded their regulatory capital ratios, as set forth in the
following table:
RISK BASED CAPITAL RATIOS (In Thousands)
December 31,
----------------------
2000 1999
-------- --------
Tier 1 Capital:
Shareholders' Equity $ 22,504 $ 21,204
Tier 2 Capital:
Allowable Allowance for Loan Losses 2,355 2,178
-------- --------
Total Capital: $ 24,859 $ 23,382
======== ========
Risk Weighted Assets: $188,213 $174,493
Risk Based Capital Ratios:
Tier 1 to Risk Weighted Assets 11.96% 12.20%
Total Capital to Risk Weighted Assets 13.21% 13.40%
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities of Bankshares and TFB are monetary in nature. The impact of
inflation is reflected in the increased cost of operations. As a result,
interest rates have a greater impact on performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended, is required to be
adopted in years beginning after June 15, 2000. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. This
Statement establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure them at
fair value. Effective January 1, 2001, TFB adopted SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities," and transferred securities with
a book value of $3,979,645 and a market value of $3,980,765 to the available for
sale category.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
An important component of both earnings performance and liquidity is management
of interest rate sensitivity. Interest rate sensitivity reflects the potential
effect on net interest income of a movement in market interest rates. TFB is
subject to interest rate sensitivity to the degree that its interest-earning
assets mature or reprice at different time intervals than 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.
25
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 20%,
respectively. Management has maintained a risk position well within these
guideline levels during 2000.
The following tables present TFB's market value changes in equity under various
rate scenarios as of December 31, 2000 and 1999.
MARKET RISK
--------------------------------------------------------------------------------------------------------
2000 Percentage Market Minus Current
(Dollars in thousands) Change Value Change 200 pts Fair Value
--------------------------------------------------------------------------------------------------------
Federal funds sold 0.16% 24 14,712 14,688
Securities 5.31% $ 900 $ 17,857 $ 16,957
Loans receivable 5.77% 11,360 208,278 196,918
---------------- ---------------- ----------------
Total rate sensitive assets 5.37% 12,284 240,847 228,563
Other assets 0.00% - 20,332 20,332
---------------- ---------------- ----------------
Total assets 4.94% $ 12,284 $ 261,179 $ 248,895
================ ================ ================
Demand deposits 10.66% $ 3,221 $ 33,430 $ 30,209
Rate-bearing deposits 3.69% 6,118 171,977 165,859
Borrowed funds 14.04% 1,810 14,702 12,892
Other liabilities 0.00% - 2,333 2,333
---------------- ---------------- ----------------
Total liabilities 5.28% 11,149 222,442 211,293
Present Value Equity 3.02% 1,135 38,737 37,602
---------------- ---------------- ----------------
Total liabilities and equity 4.94% $ 12,284 $ 261,179 $ 248,895
================ ================ ================
-----------------------------------------------------------------------------------------
2000 Plus Market Percentage
(Dollars in thousands) 200 pts Value Change Change
-----------------------------------------------------------------------------------------
Federal funds sold 14,664 (24) -0.16%
Securities $ 16,129 $ (828) -4.88%
Loans receivable 186,597 (10,321) -5.24%
-------------- ----------------
Total rate sensitive assets 217,390 (11,173) -4.89%
Other assets 20,332 - 0.00%
-------------- ----------------
Total assets $ 237,722 $ (11,173) -4.49%
============== ================
Demand deposits $ 28,489 $ (1,720) -5.69%
Rate-bearing deposits 161,795 (4,064) -2.45%
Borrowed funds 11,333 (1,559) -12.09%
Other liabilities 2,333 - 0.00%
--------------- ----------------
Total liabilities 203,950 (7,343) -3.48%
Present Value Equity 33,772 (3,830) -10.19%
-------------- ----------------
Total liabilities and equity $ 237,722 $ (11,173) -4.49%
============== ================
-------------------------------------------------------------------------------------------------------
1999 Percentage Market Minus Current
(Dollars in thousands) Change Value Change 200 pts Fair Value
-------------------------------------------------------------------------------------------------------
Federal funds sold 0.16% $ 23 $ 14,033 $ 14,010
Securities 5.19% 974 19,727 18,753
Loans receivable 6.20% 11,210 192,039 180,829
---------------- ---------------- ----------------
Total rate sensitive assets 5.72% 12,207 225,799 213,592
Other assets 0.00% - 18,915 18,915
---------------- ---------------- ----------------
Total assets 5.25% $ 12,207 $ 244,714 $ 232,507
================ ================ ================
Rate sensitive deposits 3.17% $ 5,626 $ 183,370 $ 177,744
Borrowed funds 8.78% 1,997 24,744 22,747
Other liabilities 0.00% - 1,731 1,731
---------------- ---------------- ----------------
Total liabilities 3.77% 7,623 209,845 202,222
Present Value Equity 15.14% 4,584 34,869 30,285
---------------- ---------------- ----------------
Total liabilities and equity 5.25% $ 12,207 $ 244,714 $ 232,507
================ ================ ================
----------------------------------------------------------------------------------------
1999 Plus Market Percantage
(Dollars in thousands) 200 pts Value Change Change
----------------------------------------------------------------------------------------
Federal funds sold $ 13,987 $ (23) -0.16%
Securities 18,011 (742) -3.96%
Loans receivable 170,901 (9,928) -5.49%
---------------- ---------------
Total rate sensitive assets 202,899 (10,693) -5.01%
Other assets 18,915 - 0.00%
---------------- ----------------
Total assets $ 221,814 $(10,693) -4.60%
================ ================
Rate sensitive deposits $ 172,542 $ (5,202) -2.93%
Borrowed funds 21,891 (856) -3.76%
Other liabilities 1,731 - 0.00%
---------------- ----------------
Total liabilities 196,164 (6,058) -3.00%
Present Value Equity 25,650 (4,635) -15.30%
---------------- ----------------
Total liabilities and equity $ 221,814 $(10,693) -4.60%
================ ================
26
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
FAQUIER BANKSHARES, INC. AND SUBSIDIARIES
Warrenton, Virginia
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2000
27
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of income F-3
Consolidated statements of cash flows F-4 and F-5
Consolidated statements of changes
in shareholders' equity F-6
Notes to consolidated financial statements F7-F-30
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors of
Fauquier Bankshares, Inc. and Subsidiaries
Warrenton, Virginia
We have audited the accompanying consolidated balance sheets of
Fauquier Bankshares, Inc. and Subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the years ended December 31, 2000, 1999 and 1998. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Fauquier Bankshares, Inc. and Subsidiaries as of December 31, 2000 and 1999, and
the results of their operations and their cash flows for the years ended
December 31, 2000, 1999 and 1998, in conformity with generally accepted
accounting principles.
Winchester, Virginia
January 24, 2001
F-1
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
December 31,
------------------------------------
ASSETS 2000 1999
------------- -------------
Cash and due from banks $ 10,841,319 $ 10,697,343
Interest-bearing deposits in other banks 49,565 278,123
Federal funds sold 14,688,000 14,010,000
Securities (fair value: 2000, $16,957,101;
1999, $18,752,504) 16,955,981 18,779,388
Loans, net of allowance for loan losses of $2,554,033 in 2000
and $2,284,348 in 1999 197,878,880 181,503,312
Bank premises and equipment, net 5,257,188 5,594,248
Accrued interest receivable 1,640,550 1,097,562
Other assets 2,543,345 1,247,649
------------- -------------
Total assets $ 249,854,828 $ 233,207,625
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 39,382,364 $ 33,045,513
Interest-bearing 172,720,895 154,227,161
------------- -------------
Total deposits 212,103,259 187,272,674
Federal Home Loan Bank advances 13,000,000 23,000,000
Dividends payable 291,072 265,770
Other liabilities 2,041,558 1,464,826
Commitments and contingent liabilities -- --
------------- -------------
Total liabilities 227,435,889 212,003,270
------------- -------------
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13 per share; 8,000,000 shares authorized;
issued and outstanding, 2000, 1,712,191 shares; 1999, 1,774,037 shares 5,359,158 5,552,736
Retained earnings 17,145,324 16,019,525
Accumulated other comprehensive (loss) (85,543) (367,906)
------------- -------------
Total shareholders' equity 22,418,939 21,204,355
------------- -------------
Total liabilities and shareholders' equity $ 249,854,828 $ 233,207,625
============= =============
See Notes to Consolidated Financial Statements.
F-2
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For Each of the Three Years in the Period Ended December 31, 2000
2000 1999 1998
------------ ------------ ------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 16,584,470 $ 14,862,821 $ 12,765,916
Interest on investment securities:
Taxable interest income 142,788 213,787 364,729
Interest income exempt from federal income taxes 103,808 114,302 116,315
Interest and dividends on securities available for sale:
Taxable interest income 539,331 1,180,573 1,030,547
Interest income exempt from federal income taxes 17,778 13,757 13,998
Dividends 158,761 149,120 151,251
Interest on federal funds sold 450,492 561,842 492,677
Interest on deposits in other ba 5,251 32,478 88,862
------------ ------------ ------------
Total interest and dividend income 18,002,679 17,128,680 15,024,295
------------ ------------ ------------
INTEREST EXPENSE
Interest on deposits 5,188,371 4,977,353 5,178,122
Interest on Federal Home Loan Bank advances 895,984 1,065,369 340,579
Interest on federal funds purchased -- -- 160
------------ ------------ ------------
Total interest expense 6,084,355 6,042,722 5,518,861
------------ ------------ ------------
Net interest income 11,918,324 11,085,958 9,505,434
Provision for loan losses 457,498 695,000 534,675
------------ ------------ ------------
Net interest income after provision for loan losses 11,460,826 10,390,958 8,970,759
------------ ------------ ------------
NONINTEREST INCOME
Fiduciary service income 547,072 566,029 555,659
Service charges on deposit accounts 1,483,245 1,189,526 1,046,625
Other service charges, commissions and fees 802,293 676,675 593,832
Gain (loss) on securities available for sale (110,830) -- 16,673
Other operating income 8,969 877 5,829
------------ ------------ ------------
Total noninterest income 2,730,749 2,433,107 2,218,618
------------ ------------ ------------
NONINTEREST EXPENSES
Salaries and employees' benefits 4,108,482 3,718,435 3,186,240
Net occupancy expense of premises 467,111 437,293 336,768
Furniture and equipment 834,915 830,603 792,402
Other operating expenses 4,254,838 4,036,795 3,393,369
------------ ------------ ------------
Total noninterest expenses 9,665,346 9,023,126 7,708,779
------------ ------------ ------------
Income before income taxes 4,526,229 3,800,939 3,480,598
Income tax expense 1,429,601 1,161,999 1,039,053
------------ ------------ ------------
Net income $ 3,096,628 $ 2,638,940 $ 2,441,545
============ ============ ============
EARNINGS PER SHARE, BASIC $ 1.76 $ 1.46 $ 1.31
============ ============ ============
EARNINGS PER SHARE, ASSUMING DILUTION $ 1.75 $ 1.45 $ 1.30
============ ============ ============
See Notes to Consolidated Financial Statements.
F-3
Consolidated Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 2000
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,096,628 $ 2,638,940 $ 2,441,545
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 747,145 764,862 773,863
Provision for loan losses 457,498 695,000 534,675
Provision for other real estate -- 6,000 30,000
Deferred tax (benefit) (156,891) (154,757) (40,964)
(Gain) loss on securities available for sale 110,830 -- (16,673)
(Gain) loss on other real estate (7,739) 23 (1,127)
(Gain) on sale of premises and equipment (1,230) (877) (8,590)
Amortization of security premiums and
(accretion) of discounts, net (63,001) 58,477 29,272
Changes in assets and liabilities:
(Increase) decrease in other assets (1,078,253) 304,919 (537,700)
Increase (decrease) in other liabilities 576,732 71,339 (10,284)
------------ ------------ ------------
Net cash provided by operating activities 3,681,719 4,383,926 3,194,017
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 826,979 -- 2,734,130
Proceeds from maturities, calls and principal
payments of investment securities 1,401,804 1,588,605 3,424,859
Proceeds from maturities, calls and principal
payments of securities available for sale 2,422,512 17,271,037 14,562,054
Purchase of investment securities -- -- (499,250)
Purchase of securities available for sale (2,447,894) (15,466,607) (14,932,919)
Proceeds from sale of premises and equipment 1,230 877 8,590
Proceeds from sale of other real estate owned 355,561 175,175 121,368
Purchase of premises and equipment (410,085) (479,373) (497,738)
Purchase of other investment (749,000) -- --
Improvements to other real estate owned (2,774) -- --
Net (increase) in loans (17,178,114) (20,050,275) (34,661,912)
------------ ------------ ------------
Net cash used in investing activities (15,779,781) (16,960,561) (29,740,818)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and saving accounts (2,582,805) 4,134,077 13,797,360
Net increase in certificates of deposit 27,413,390 3,921,455 3,550,678
Federal Home Loan Bank advances -- 5,000,000 18,000,000
Federal Home Loan Bank principal repayments (10,000,000) -- --
Cash dividends paid (1,092,198) (978,308) (784,188)
Issuance of common stock 22,932 42,286 --
Acquisition of common stock (1,069,839) (1,288,079) (1,498,508)
------------ ------------ ------------
Net cash provided by financing activities 12,691,480 10,831,431 33,065,342
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 593,418 (1,745,204) 6,518,541
CASH AND CASH EQUIVALENTS
Beginning 24,985,466 26,730,670 20,212,129
------------ ------------ ------------
Ending $ 25,578,884 $ 24,985,466 $ 26,730,670
============ ============ ============
See Notes to Consolidated Financial Statements.
F-4
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For Each of the Three Yeras in the Period Ended December 31, 2000
2000 1999 1998
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 5,704,615 $ 6,115,327 $ 5,432,911
=========== =========== ===========
Income taxes $ 1,467,000 $ 1,281,000 $ 1,287,248
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ 345,048 $ 124,254 $ 17,267
=========== =========== ===========
Unrealized gain (loss) on securities available for sale, net $ 427,822 $ (546,152) $ 132,876
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-5
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For Each of the Three Years in the Period Ended December 31, 2000
ACCUMULATED
OTHER
COMPRE- COMPRE-
COMMON CAPITAL RETAINED HENSIVE HENSIVE
STOCK SURPLUS EARNINGS (LOSS) INCOME TOTAL
------------ ------------ ------------ ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 $ 5,978,150 $ 1,207,680 $ 13,887,212 $ (95,144) $20,977,898
Comprehensive income:
Net income -- -- 2,441,545 -- $ 2,441,545 2,441,545
Other comprehensive income net of tax:
Unrealized holding gains on securities
available for sale, net of deferred income
taxes of $50,847 -- -- -- -- 98,702 --
Less reclassification adjustment, net
of income taxes of $5,669 -- -- -- -- (11,004) --
------------
Other comprehensive income, net of tax -- -- -- 87,698 87,698 87,698
------------
Total comprehensive income -- -- -- -- $ 2,529,243 --
============
Cash dividends ($0.45 per share) -- -- (831,797) -- (831,797)
Change in par value from $6.25 to
$3.13 per share 9,264 (9,264) -- -- --
Acquisition of 75,238 shares of
common stock (235,194) (1,198,416) (64,898) -- (1,498,508)
------------ ------------ ------------ ---------- ------------
BALANCE, DECEMBER 31, 1998 5,752,220 -- 15,432,062 (7,446) 21,176,836
Comprehensive income:
Net income -- -- 2,638,940 -- $ 2,638,940 2,638,940
Other comprehensive income (loss) net of tax,
unrealized holding losses on securities
available for sale, net of deferred income
taxes of $185,692 -- -- -- (360,460) (360,460) (360,460)
------------
Total comprehensive income -- -- -- -- $ 2,278,480 --
============
Cash dividends ($0.56 per share) -- -- (1,005,168) -- (1,005,168)
Acquisition of 68,213 shares of
common stock (213,507) -- (1,074,572) -- (1,288,079)
Exercise of stock options 14,023 -- 28,263 -- 42,286
------------ ------------ ------------ ---------- ------------
BALANCE, DECEMBER 31, 1999 5,552,736 -- 16,019,525 (367,906) 21,204,355
Comprehensive income:
Net income -- -- 3,096,628 -- $ 3,096,628 3,096,628
Other comprehensive income net of tax:
Unrealized holding gains on securities
available for sale, net of deferred income
taxes of $107,777 209,215
Add reclassification adjustment net of
income tax benefit of $37,682 73,148
------------
Other comprehensive income, net of tax -- -- -- 282,363 282,363 282,363
------------
Total comprehensive income -- -- -- -- $ 3,550,077 --
============
Cash dividends ($.64 per share) -- -- (1,117,500) -- (1,117,500)
Acquisition of 63,120 shares of
common stock (197,566) -- (872,273) -- (1,069,839)
Issuance of common stock 3,988 -- 18,944 -- 22,932
------------ ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 2000 $ 5,359,158 $ -- $ 17,145,324 $ (85,543) $ 22,418,939
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
F-6
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended December 31, 2000
NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
Fauquier Bankshares, Inc. and Subsidiaries (the Corporation)
grant commercial, financial, agricultural, residential and
consumer loans to customers in Virginia. The loan portfolio is
well diversified and generally is collateralized by assets of the
customers. The loans are expected to be repaid from cash flows or
proceeds from the sale of selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform
to generally accepted accounting principles and to the reporting
guidelines prescribed by regulatory authorities. The following is
a description of the more significant of those policies and
practices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of Fauquier Bankshares, Inc. and its wholly-owned
subsidiaries, The Fauquier Bank and Fauquier Bank Services,
Inc. In consolidation, significant intercompany accounts
and transactions have been eliminated.
SECURITIES
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to
maturity" and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities
with readily determinable fair values, are classified as
"available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and
reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity
and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings
as realized losses. Gains and losses on the sale of
securities are recorded on the trade date and are
determined using the specific identification method.
LOANS
The Corporation grants mortgage, commercial and consumer
loans to customers. A substantial portion of the loan
portfolio is represented by commercial and residential
mortgage loans. The ability of the Corporation's debtors to
honor their contracts is dependent upon the real estate and
general economic conditions in the Corporation's market
area.
Loans that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off
generally are reported at their outstanding unpaid
principal balances adjusted for the allowance for loan
losses, and any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance.
Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of
collection. Installment loans are typically charged off no
later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are
placed on nonaccrual or charged-off is reversed against
interest income. The interest on these loans is accounted
for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts
contractually due are brought current and future payments
are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular
basis by management and is based upon management's periodic
review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as
more information becomes available.
A loan is considered impaired when, based on current
information and events, it is probable that the Corporation
will be unable to collect the scheduled payments of
principal or interest when due according to the contractual
terms of the loan agreement. Factors considered by
management in determining impairment include payment
status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans
that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired.
Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan
and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record,
and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a
loan-by-loan basis for commercial and construction loans by
either the present value of expected future cash flows
discounted at the loan's effective interest rate, the
loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the
Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Premises and equipment are
depreciated over their estimated useful lives; leasehold
improvements are amortized over the lives of the respective
leases or the estimated useful life of the leasehold
improvement, whichever is less. Depreciation and
amortization are recorded on the accelerated and
straight-line methods.
Costs of maintenance and repairs are charged to expense as
incurred. Costs of replacing structural parts of major
units are considered individually and are expensed or
capitalized as the facts dictate.
INCOME TAXES
Deferred income tax assets and liabilities are determined
using the balance sheet method. Under this method, the net
deferred tax asset or liability is determined based on the
tax effects of the temporary differences between the book
and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax
rates and laws.
DEFINED BENEFIT PLAN
The Corporation has a pension plan for its employees.
Benefits are generally based upon years of service and the
employees' compensation. The Corporation funds pension
costs in accordance with the funding provisions of the
Employee Retirement Income Security Act.
EARNINGS PER SHARE
Basic earnings per share represents income available to
common shareholders divided by the weighted-average number
of common shares outstanding during the period. Diluted
earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to income
that would result from the assumed issuance. Potential
common shares that may be issued by the Corporation relate
solely to outstanding stock options, and are determined
using the treasury method.
WEALTH MANAGEMENT SERVICES DIVISION
Securities and other property held by the Wealth Management
Services Division in a fiduciary or agency capacity are not
assets of the Corporation and are not included in the
accompanying consolidated financial statements.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due
from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
OTHER REAL ESTATE
Assets acquired through, or in lieu of, loan foreclosure
are held for sale and are initially recorded at the lower
of loan balance or fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are
included in other operating expenses.
USE OF ESTIMATES
In preparing consolidated financial statements in
conformity with generally accepted accounting principles,
management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material
estimates that are particularly susceptible to significant
change in the near term relate to the determination of the
allowance for loan losses, and the valuation of foreclosed
real estate and deferred tax assets.
ADVERTISING
The Corporation follows the policy of charging the costs of
advertising to expense as incurred. Advertising expenses of
$258,997, $215,119 and $169,475 were incurred in 2000, 1999
and 1998, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period
balances to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years
beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative
instruments and hedging activities, including certain
derivative instruments embedded in other contracts, and
requires that an entity recognize all derivatives as
assets or liabilities in the balance sheet and measure
them at fair value. The Corporation adopted this Statement
effective January 1, 2001 and transferred securities with
a book value of $3,979,645 and a market value of
$3,980,765 to the available for sale category. Since the
Corporation does not use derivative instruments and
strategies, the adoption of the Statement did not have any
effect on earnings or financial position.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. SECURITIES
The amortized cost of securities held to maturity, with
unrealized gains and losses follows:
DECEMBER 31, 2000
----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
=========== =========== =========== ===========
Obligations of U.S.
Government corporations
and agencies $ 1,588,984 $ 991 $ (4,838) $ 1,585,137
Obligations of states and
political subdivisions 2,390,661 5,103 (136) 2,395,628
----------- ----------- ----------- -----------
$ 3,979,645 $ 6,094 $ (4,974) $ 3,980,765
=========== =========== =========== ===========
DECEMBER 31, 1999
----------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
=========== =========== =========== ===========
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
=========== =========== =========== ===========
The amortized cost and fair value of securities, held to maturity
by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because issuers may have the
right to call or prepay obligations without penalties.
2000
--------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
Due in one year or less $ 510,079 $ 510,015
Due after one year through five years 1,880,582 1,885,613
Due after five through ten years 1,567,941 1,564,159
Due after ten years 21,043 20,978
---------- ----------
$3,979,645 $3,980,765
========== ==========
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost of securities available for sale, with
unrealized gains and losses follows:
DECEMBER 31, 2000
--------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ------------ ------------ ------------
Obligations of U.S.
Government corporations
and agencies $ 9,706,764 $ 9,609 $ (157,327) $ 9,559,046
Obligations of states and
political subdivisions 1,639,644 18,108 -- 1,657,752
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
FHLMC preferred
stock 487,500 -- -- 487,500
------------ ------------ ------------ ------------
$ 13,105,946 $ 27,717 $ (157,327) $ 12,976,336
============ ============ ============ ============
DECEMBER 31, 1999
--------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ------------ ------------ ------------
Obligations of U.S.
Government corporations
and agencies $ 10,580,515 $ 5,376 $ (434,339) $ 10,151,552
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
FHLMC preferred stock 487,500 -- -- 487,500
------------ ------------ ------------ ------------
$ 13,960,543 $ 5,703 $ (563,136) $ 12,915,610
============ ============ ============ ============
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities available for
sale, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations without
penalties.
2000
---------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
Due in one year or less $ 615,903 $ 616,484
Due after one year through five years 2,253,585 2,212,259
Due after five years through ten years 2,840,894 2,829,085
Due after ten years 5,636,026 5,558,970
Equity securities 1,759,538 1,759,538
----------- -----------
$13,105,946 $12,976,336
=========== ===========
For the years ended December 31, 2000 and 1998, proceeds from
sales of securities available for sale amounted to $826,979 and
$2,734,130, respectively. Gross realized gains amounted to
$54,249 in 1998. Gross realized losses amounted to $110,830 and
$37,576, respectively. The tax provision (benefit) applicable to
these net realized gains and losses amounted to $(37,682) and
$5,669, respectively. There were no sales of securities available
for sale for the year ended December 31, 1999.
The carrying value of securities pledged to secure deposits and
for other purposes amounted to $7,609,612 and $3,567,940 at
December 31, 2000 and 1999, respectively.
NOTE 3. LOANS
A summary of the balances of loans follows:
DECEMBER 31,
------------------------------
2000 1999
-------- --------
(Dollars in Thousands)
Mortgage loans on real estate:
Construction and land development $ 12,948 $ 11,746
Secured by farmland 381 903
Secured by 1 to 4 family residential 74,167 64,921
Other real estate loans 53,959 50,988
Commercial and industrial loans (except
those secured by real estate) 17,148 16,689
Consumer installment loans 36,083 33,787
All other loans 5,873 4,868
-------- --------
Total loans 200,559 183,902
Less: Unearned income 126 115
Allowance for loan losses 2,554 2,284
-------- --------
Net loans $197,879 $181,503
======== ========
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses follows:
2000 1999 1998
----------- ----------- -----------
Balance at beginning of year $ 2,284,348 $ 1,853,150 $ 1,654,917
Provision charged to operating expense 457,498 695,000 534,675
Recoveries added to the allowance 254,698 63,368 35,032
Loan losses charged to the allowance (442,511) (327,170) (371,474)
----------- ----------- -----------
Balance at end of year $ 2,554,033 $ 2,284,348 $ 1,853,150
=========== =========== ===========
Information about impaired loans is as follows:
2000 1999
-------- --------
Impaired loans for which an allowance
has been provided $ -- $ 75,933
Impaired loans for which no allowance
has been provided -- --
-------- --------
Total impaired loans $ -- $ 75,933
======== ========
Allowance provided for impaired loans,
included in the allowance for loan losses $ -- $ 7,593
======== ========
2000 1999 1998
-------- -------- --------
Average balance in impaired loans $ 12,804 $330,980 $545,286
======== ======== ========
Interest income recognized $ -- $ 10,519 $ 15,853
======== ======== ========
No additional funds are committed to be advanced in connection
with impaired loans.
Nonaccrual loans excluded from impaired loan disclosure under
FASB 114 amounted to $121,057, $49,534 and $126,704 at December
31, 2000, 1999 and 1998, respectively. If interest on these loans
had been accrued, such income would have approximated $3,509,
$1,421 and $6,064 for 2000, 1999 and 1998, respectively.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Corporation has granted
loans to executive officers, directors, their immediate families
and affiliated companies in which they are principal
shareholders, which amounted to $4,788,426 at December 31, 2000
and $4,184,901 at December 31, 1999. During 2000, total principal
additions were $1,109,012 and total principal payments were
$505,487.
NOTE 6. BANK PREMISES AND EQUIPMENT, NET
A summary of the cost and accumulated depreciation of premises
and equipment follows:
2000 1999
----------- -----------
Land $ 864,667 $ 864,667
Buildings and improvements 5,967,455 5,786,079
Furniture and equipment 6,008,597 5,779,964
----------- -----------
12,840,719 12,430,710
Less accumulated depreciation and amortization 7,583,531 6,836,462
----------- -----------
$ 5,257,188 $ 5,594,248
=========== ===========
Depreciation and amortization charged to operations totaled
$747,145, $764,862 and $773,863 in 2000, 1999 and 1998,
respectively.
NOTE 7. DEPOSITS
The aggregate amount of time deposits, in denominations of
$100,000 or more at December 31, 2000 and 1999 was $24,420,250
and $12,952,343, respectively.
At December 31, 2000, the scheduled maturities of time deposits
are as follows:
2001 $51,128,187
2002 15,905,896
2003 1,201,129
2004 112,356
2005 5,590,065
-----------
$73,937,633
===========
F-15
NOTE 8. EMPLOYEE BENEFIT PLANS
The following tables provide a reconciliation of the changes in
the defined benefit plan's obligations and fair value of assets
over the three-year period ending December 31, 2000, computed as
of October 1st of each respective year:
2000 1999 1998
----------- ----------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning $ 3,339,553 $ 3,086,296 $ 2,768,023
Service cost 178,513 193,629 191,082
Interest cost 248,451 229,513 205,697
Actuarial (gain) loss 40,973 19,907 (26,214)
Benefits paid (70,580) (189,792) (52,292)
----------- ----------- -----------
Benefit obligation, ending $ 3,736,910 $ 3,339,553 $ 3,086,296
----------- ----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning $ 3,679,064 $ 3,154,626 $ 3,111,184
Actual return on plan assets 831,151 714,230 (65,365)
Employer contributions 30,628 -- 161,099
Benefits paid (70,580) (189,792) (52,292)
----------- ----------- -----------
Fair value of plan assets, ending $ 4,470,263 $ 3,679,064 $ 3,154,626
----------- ----------- -----------
FUNDED STATUS $ 733,353 $ 339,511 $ 68,330
Unrecognized net actuarial (gain) (1,170,638) (726,229) (298,972)
Unrecognized net obligation at transition (208,761) (227,740) (246,719)
Unrecognized prior service cost 85,435 93,201 100,967
----------- ----------- -----------
Accrued benefit cost included in other liabilities $ (560,611) $ (521,257) $ (376,394)
=========== =========== ===========
The following table provides the components of net periodic
benefit cost for the plan for the years ended December 31, 2000,
1999 and 1998:
2000 1999 1998
--------- --------- ---------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 178,513 $ 193,629 $ 191,082
Interest cost 248,451 229,513 205,697
Expected return on plan assets (328,706) (267,066) (277,721)
Amortization of prior service cost 7,766 7,766 7,766
Amortization of net obligation
at transition (18,979) (18,979) (18,979)
Recognized net actuarial gain (17,063) -- (15,236)
--------- --------- ---------
Net periodic benefit cost $ 69,982 $ 144,863 $ 92,609
========= ========= =========
F-16
The assumptions used in the measurement of the Corporation's
benefit obligation are shown in the following table:
2000 1999 1998
-------- -------- --------
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 5.0% 5.0% 5.0%
The Corporation has a defined contribution retirement plan under
Code Section 401(k) of the Internal Revenue Service covering
employees who have completed 6 months of service and who are at
least 18 years of age. Under the plan, a participant may
contribute an amount up to 15% of their covered compensation for
the year, subject to certain limitations. The Corporation may
also make, but is not required to make, a discretionary matching
contribution. The amount of this matching contribution, if any,
is determined on an annual basis by the Board of Directors. The
Corporation made contributions to the plan for the years ended
December 31, 2000, 1999 and 1998 of $72,922, $63,057 and $61,566,
respectively.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
As members of the Federal Reserve System, the Corporation's
subsidiary bank is required to maintain certain average reserve
balances. For the final weekly reporting period in the years
ended December 31, 2000 and 1999, the aggregate amounts of daily
average required balances were approximately $4,044,000 and
$3,462,000, respectively.
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as guarantees,
commitments to extend credit, etc., which are not reflected in
the accompanying financial statements. The Corporation does not
anticipate losses as a result of these transactions.
See Note 15 with respect to financial instruments with
off-balance-sheet risk.
F-17
Note 10. Income Taxes
The components of the net deferred tax assets included in other
assets are as follows:
2000 1999
-------- --------
Deferred tax assets:
Allowance for loan losses $734,545 $625,995
Accrued pension obligation 190,114 166,320
Interest on nonaccrual loans 1,193 1,797
Allowance on other real estate owned -- 652
Securities available for sale 44,067 189,528
-------- --------
969,919 984,292
-------- --------
Deferred tax liabilities:
Accumulated discount accretion 1,711 1,416
Accumulated depreciation 268,820 294,918
-------- --------
270,531 296,334
-------- --------
Net deferred tax assets $699,388 $687,958
======== ========
Allocation of federal income taxes between current and deferred
portions is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Current tax expense $ 1,586,492 $ 1,316,756 $ 1,080,017
Deferred tax (benefit) (156,891) (154,757) (40,964)
----------- ----------- -----------
$ 1,429,601 $ 1,161,999 $ 1,039,053
=========== =========== ===========
The reasons for the difference between the statutory federal
income tax rate and the effective tax rates are summarized as
follows:
2000 1999 1998
----------- ----------- -----------
Computed "expected" tax expense $ 1,538,918 $ 1,292,319 $ 1,183,403
Decrease in income taxes
resulting from:
Tax-exempt interest income (106,799) (116,442) (109,185)
Other (2,518) (13,878) (35,165)
----------- ----------- -----------
$ 1,429,601 $ 1,161,999 $ 1,039,053
=========== =========== ===========
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. EARNINGS PER SHARE
The following 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. Potential
dilutive common stock had no effect on income available to common
shareholders.
2000 1999 1998
--------------------- --------------------- -----------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
Basic earnings per share 1,755,182 $ 1.76 1,802,165 $ 1.46 1,857,282 $ 1.31
======== ======== ========
Effect of dilutive securities,
stock options 11,591 15,967 18,359
--------- --------- ---------
Diluted earnings per share 1,766,773 $ 1.75 1,818,132 $ 1.45 1,875,641 $ 1.30
========= ======== ========= ======== ========= ========
Options on 80,060 shares and 61,978 shares of common stock were
not included in computing diluted EPS in 2000 and 1999,
respectively, because their effects were antidilutive.
NOTE 12. STOCK OPTION PLANS
STOCK-BASED COMPENSATION PLAN
In 1998, the Corporation adopted an incentive stock option plan
under which options may be granted to certain key employees for
purchase of the Corporation's stock. The effective date of the
plan was April 21, 1998 with a ten-year term. The plan reserves
for issuance 200,000 shares of the Corporation's common stock.
The stock option plan requires that options be granted at an
exercise price equal to at least 100% of the fair market value of
the common stock on the date of the grant; however, for those
individuals who own more than 10% of the stock of the
Corporation, the option price must be at least 110% of the fair
market value on the date of grant. Such options are generally not
exercisable until three years from the date of issuance and
generally require continuous employment during the period prior
to exercise. The options will expire in no more than ten years
after the date of grant. The plan was amended and restated
effective January 1, 2000, to include non-employee directors and
added an additional 90,000 shares to be available to directors.
DIRECTOR COMPENSATION PLANS
The Corporation maintains Nonemployee Director Stock Option
Plans. Under the plan expiring in 1999, each director that was
not an employee of the Corporation or its subsidiary received an
option grant covering 1,120 shares of Corporation common stock on
April 1 of each year during the five-year term of the plan. The
first grant under the plan was made on May 1, 1995. The exercise
price of awards was fixed at the fair market value of the shares
on the date the option is granted. During the term of the plan, a
total of 60,480 options for shares of common stock were granted.
Effective January 1, 2000, the Omnibus Stock Ownership and
Long-Term Incentive Plan for employees was amended and restated
to include non-employee directors. The plan has a ten-year term
and the first grant under the plan was made May 24, 2000. The
exercise price of awards is fixed at the fair market value of the
shares on the date the option is granted. During the term of the
plan, a total of 90,000 options for shares of common stock may be
granted. The plan provides for an annual
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issuance of 1,867 options to non-employee directors during their
initial three-year term to achieve a total share holding of
5,600. The annual issuance of options to nonemployee directors
subsequent to their initial three-year term requires Board action
each year with a recommended level of 1,000 options per
nonemployee director per year. The options granted under both
Plans are not exercisable for six months from the date of grant
except in the case of death or disability. Options that are not
exercisable at the time a director's services on the Board
terminates for reason other than death, disability or retirement
in accordance with the Corporation's policy will be forfeited.
Grants under the plans are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, no compensation
cost has been recognized for grants under the plans. Had
compensation cost for the stock-based compensation plans been
determined based on the grant date fair value of awards (the
method described in FASB No. 123), reported net income and
earnings per share would have been reduced to the pro forma
amounts shown below:
December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Net income As reported $ 3,096,628 $ 2,638,940 $ 2,441,545
Pro forma $ 2,872,942 $ 2,511,546 $ 2,287,520
Earnings per share As reported $ 1.76 $ 1.46 $ 1.31
Pro forma $ 1.64 $ 1.39 $ 1.27
Earnings per share - As reported $ 1.75 $ 1.45 $ 1.30
assuming dilution Pro forma $ 1.63 $ 1.38 $ 1.22
The fair value of each grant is estimated at the grant date using
the Black-Scholes Option-Pricing Model with the following
weighted average assumptions:
December 31,
--------------------------------------------------
2000 1999 1998
-------- -------- --------
Dividend yield 0.65% 0.60% 0.58%
Expected life 10 years 10 years 10 years
Expected volatility 18.38% 17.88% 15.65%
Risk-free interest rate 6.70% 6.50% 4.50%
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status for both the Stock-Based Compensation
Plans and the Director Compensation Plan is presented below:
2000 1999 1998
------------------------- -------------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------- -------- --------- -------- --------- --------
Outstanding at January 1 94,458 $ 19.93 67,257 $ 21.00 38,080 $ --
Granted 39,848 16.25 31,681 19.00 29,177 21.00
Exercised -- (4,480) - -
------- ------ -------
Outstanding at December 31 134,306 $ 18.46 94,458 $ 19.93 67,257 $ 21.00
======= ====== =======
Exercisable at end of year 70,347 56,000 49,280
Weighted-average fair value
per option of options granted
during the year $ 7.34 $ 6.83 $ 5.90
The status of the options outstanding as of December 31, 2000 for
both the Stock-Based Compensation and Director Compensation Plans
is as follows:
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Weighted Weighted
Remaining Average Average
Contractual Number Exercise Number Exercise
Life Outstanding Price Exercisable Price
----------- ----------- --------- ----------- ---------
4.33 years 8,960 $ 8.75 8,960 $ 8.75
5.25 years 11,200 10.13 11,200 10.13
6.25 years 12,320 12.50 12,320 12.50
7.25 years 11,200 20.00 11,200 20.00
7.66 years 17,977 21.00 -- --
8.25 years 12,320 19.50 12,320 19.50
8.66 years 20,481 19.00 -- --
9.6 years 39,848 16.25 14,347 16.25
------- -------
134,306 $16.54 70,347 $14.80
======= =======
The Corporation also maintains a Director Deferred Compensation
Plan (the "Deferred Compen- sation Plan"). This plan provides
that any non-employee director of the Corporation or the Bank may
elect to defer receipt of all or any portion of his or her
compensation as a director. A participating director may elect to
have amounts deferred under the Deferred Compensation Plan held
in a deferred cash account, which is credited on a quarterly
basis with interest equal to the highest rate offered by the Bank
at the end of the preceding quarter. Alternatively, a participant
may elect to have a deferred stock account in which deferred
amounts are treated as if invested in the Corporation's common
stock at the fair market value on the date of deferral. The value
of a stock account will increase and decrease based upon the fair
market value of an equivalent number of shares of common stock.
In addition, the deferred amounts deemed invested in common stock
will
be credited with dividends on an equivalent number of shares.
Amounts considered invested in the Corporation's common stock are
paid, at the election of the director, either in cash or in whole
shares of the common stock and cash in lieu of fractional shares.
Directors may elect to receive amounts contributed to their
respective accounts in one or up to five installments.
F-21
NOTE 13. FEDERAL HOME LOAN BANK ADVANCES
The Corporation's fixed-rate debt of $13,000,000 at December 31,
2000 matures through 2008. At December 31, 2000 and 1999, the
interest rates ranged from 4.89 percent to 5.51 percent and from
4.89 percent to 5.95 percent, respectively. At December 31, 2000
and 1999, the weighted average interest rates were 5.27 percent
and 5.57 percent, respectively.
Advances on the line are secured by all of the Corporation's
first lien loans on one-to-four unit single-family dwellings. As
of December 31, 2000, the book value of these loans totaled
approximately $69,978,000. The amount of the available credit is
limited to seventy-five percent of qualifying collateral. Any
borrowings in excess of the qualifying collateral requires
pledging of additional assets.
The contractual maturities of Federal Home Loan Bank advances are
as follows:
December 31,
---------------------------------
2000 1999
----------- -----------
Due in 2000 $ -- $10,000,000
Due in 2008 13,000,000 13,000,000
----------- -----------
$13,000,000 $23,000,000
=========== ===========
An advance dated June 19, 1998 has an imbedded call option that
gives the Federal Home Loan Bank the option to call after 1 year
and quarterly thereafter. The remaining advances also have
imbedded call options that give the Federal Home Loan Bank the
option to call only on the five-year anniversary date.
NOTE 14. DIVIDEND LIMITATIONS ON AFFILIATE BANK
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of
December 31, 2000, the aggregate amount of unrestricted funds,
which could be transferred from the banking subsidiary to the
parent corporation, without prior regulatory approval, totaled
$1,498,251.
F-22
NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is party to credit-related financial instruments
with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Corporation's exposure to credit loss is represented by the
contractual amount of these commitments. The Corporation follows
the same credit policies in making commitments and as it does for
on-balance-sheet instruments.
At December 31, 2000 and 1999, the following financial
instruments were outstanding whose contract amounts represent
credit risk:
2000 1999
----------- -----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $54,509,321 $54,736,121
Standby letters of credit $ 6,341,922 $ 5,183,606
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates
each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the
Corporation, is based on management's credit evaluation of the
customer.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments
for possible future extensions of credit to existing customers.
These lines of credit are uncollateralized and usually do not
contain a specified maturity date and may not be drawn upon to
the total extent to which the Corporation is committed.
Standby letters of credit are conditional commitments issued by
the Corporation to guarantee the performance of a customer to a
third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
The Corporation generally holds collateral supporting those
commitments if deemed necessary.
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
F-23
CASH, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market
prices or dealer quotes. For other securities held as
investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
LOAN RECEIVABLES
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans
(e.g., one-to-four family residential), credit card loans,
and other consumer loans are based on quoted market prices
of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan
characteristics. Fair values for other loans (e.g.,
commercial real estate and investment property mortgage
loans, commercial and industrial loans) are estimated using
discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for
nonperforming loans are estimated using discounted cash
flow analyses or underlying collateral values, where
applicable.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair
value.
DEPOSIT LIABILITIES
The fair values disclosed for demand deposits (e.g.,
interest and noninterest checking, passbook savings, and
certain types of money market accounts) are, by definition,
equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated
expected monthly maturities on time deposits.
FEDERAL HOME LOAN BANK ADVANCES
The fair values of the Corporation's Federal Home Loan Bank
advances are estimated using discounted cash flow analyses
based on the Corporation's current incremental borrowing
rates for similar types of borrowing arrangements.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value
also considers the difference between current levels of
interest rates and the committed rates.
F-24
The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
At December 31, 2000 and 1999, the carrying amounts of loan
commitments and standby letters of credit approximated fair
values.
The estimated fair values of the Corporation's financial
instruments are as follows:
2000 1999
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -----
(Thousands) (Thousands)
Financial assets:
Cash and short-term
investments $ 10,891 $ 10,891 $ 10,975 $ 10,975
Federal funds sold 14,688 14,688 14,010 14,010
Securities 16,956 16,957 18,779 18,753
Loans, net 197,879 196,918 181,503 180,829
Accrued interest receivable 1,641 1,641 1,098 1,098
Financial liabilities:
Deposits $212,103 $196,068 $187,273 $177,744
FHLB advances 13,000 12,892 23,000 22,747
Accrued interest payable 710 710 330 330
The Corporation assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal
operations. As a result, the fair values of the Corporation's
financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the
Corporation. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest
rate risk. However, borrowers with fixed rate obligations are less
likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to
withdraw funds before maturity in a rising rate environment and
less likely to do so in a falling rate environment. Management
monitors rates and maturities of assets and liabilities and
attempts to minimize interest rate risk by adjusting terms of new
loans and deposits and by investing in securities with terms that
mitigate the Corporation's overall interest rate risk.
F-25
NOTE 17. OTHER OPERATING EXPENSES
The principal components of "Other operating expenses" in the
Consolidated Statements of Income are:
2000 1999 1998
---------- ---------- ----------
Advertising and business development $ 381,204 $ 337,503 $ 258,446
Bank card 408,342 401,617 312,622
Data processing 644,911 581,729 489,814
Non-loan charge-offs 443,194 607,319 176,636
Postage and supplies 253,206 265,319 249,732
Professional and consulting fees 855,637 598,423 407,491
Taxes, other than income 235,193 231,279 233,740
Telephone 175,538 233,360 176,292
Other (no items exceed 1% of total revenue) 857,613 780,246 1,088,596
---------- ---------- ----------
$4,254,838 $4,036,795 $3,393,369
========== ========== ==========
NOTE 18. CONCENTRATION RISK
The Corporation maintains its cash accounts in several
correspondent banks. The total amount by which cash on deposit in
those banks exceeds the federally insured limits is approximately
$6,022,058 at December 31, 2000.
NOTE 19. CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are
subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Corporation's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet
specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings,
and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December
31, 2000 and 1999, that the Corporation and the Bank met all
capital adequacy requirements to which they are subject.
F-26
As of December 31, 2000, the most recent notification from the
Federal Reserve Bank categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, an institution must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or
events since that notification that management believes have
changed the institution's category.
The Corporation's and Subsidiary's actual capital amounts and
ratios are also presented in the table. No amount was deducted
from capital for interest-rate risk.
MINIMUM
TO BE WELL
CAPITALIZED UNDER
MINIMUM CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
----------------------- ------------------------ -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------ -------- ------
As of December 31, 2000: (Amount in Thousands)
Total Capital (to Risk
Weighted Assets):
Consolidated $ 24,859 13.2% $ 15,057 8.0% N/A N/A
The Fauquier Bank $ 24,939 13.3% $ 15,057 8.0% $ 18,821 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 22,504 12.0% $ 7,259 4.0% N/A N/A
The Fauquier Bank $ 22,584 12.0% $ 7,529 4.0% $ 11,293 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 22,504 9.1% $ 9,864 4.0% N/A N/A
The Fauquier Bank $ 22,584 9.2% $ 9,864 4.0% $ 12,330 5.0%
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 23,382 13.4% $ 13,939 8.0% N/A N/A
The Fauquier Bank $ 23,497 13.5% $ 13,939 8.0% $ 17,423 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 21,204 12.2% $ 6,969 4.0% N/A N/A
The Fauquier Bank $ 21,319 12.2% $ 6,969 4.0% $ 10,454 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 21,204 8.8% $ 9,630 4.0% N/A N/A
The Fauquier Bank $ 21,319 8.9% $ 9,630 4.0% $ 12,038 5.0%
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. SUBSEQUENT EVENT
On February 28, 2000, the Bank was first advised by its
accountants as to the possible misappropriation of cash in the
approximate amount of $437,000. The Bank immediately reported the
loss to its insurance carrier and began an aggressive
investigation of the misappropriation. The $437,000 loss was
recorded in the year ended December 31, 1999. Based on the
ongoing investigation, an additional loss of $130,000 was
recorded in the year ended December 31, 2000.
On January 29, 2001, the Bank recovered $542,000, net of
deductible, from its insurance carrier for losses resulting from
a misappropriation of cash discovered in early 2000. This
recovery will be recorded as income in the first quarter of the
year ended December 31, 2001.
NOTE 21. PARENT CORPORATION ONLY FINANCIAL STATEMENTS
FAUQUIER BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 2000 and 1999
December 31,
----------------------------------
2000 1999
------------ ------------
ASSETS
Cash on deposit with subsidiary bank $ 46,624 $ 37,387
Investment in subsidiaries, at cost,
plus equity in undistributed net income 22,498,032 21,318,595
Dividend receivable 291,072 265,770
------------ ------------
Total assets $ 22,835,728 $ 21,621,752
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividend payable $ 291,072 $ 265,770
Other liabilities 125,717 151,627
------------ ------------
416,789 417,397
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 5,359,158 5,552,736
Retained earnings, which are substantially
distributed earnings of subsidiaries 17,145,324 16,019,525
Accumulated other comprehensive (loss) (85,543) (367,906)
------------ ------------
22,418,939 21,204,355
------------ ------------
Total liabilities and shareholders' equity $ 22,835,728 $ 21,621,752
============ ============
F-28
FAUQUIER BANKSHARES, INC.
(Parent Corporation Only)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 2000
2000 1999 1998
----------- ----------- -----------
REVENUE,
dividends from subsidiaries $ 2,237,339 $ 2,315,247 $ 2,306,438
----------- ----------- -----------
EXPENSES
Legal and professional fees 35,613 105,153 51,104
Directors' fees 6,632 11,959 4,047
Miscellaneous 15,003 28,149 15,313
----------- ----------- -----------
Total expenses 57,248 145,261 70,464
----------- ----------- -----------
Income before income tax (benefit)
and equity in undistributed net
income of subsidiaries 2,180,091 2,169,986 2,235,974
Income tax (benefit) (19,464) (49,389) (23,958)
----------- ----------- -----------
Income before equity in
undistributed net income
of subsidiaries 2,199,555 2,219,375 2,259,932
Equity in undistributed net income
of subsidiaries 897,073 419,565 181,613
----------- ----------- -----------
Net income $ 3,096,628 $ 2,638,940 $ 2,441,545
=========== =========== ===========
F-29
FAUQUIER BANKSHARES, INC.
(Parent Corporation Only)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 2000
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,096,628 $ 2,638,940 $ 2,441,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (897,074) (419,565) (181,613)
(Increase) in undistributed dividends
receivable from subsidiaries (25,302) (26,860) (47,609)
(Increase) decrease in other assets -- 23,959 (9,353)
Increase (decrease) in other liabilities (25,910) 15,459 49,182
----------- ----------- -----------
Net cash provided by operating activities 2,148,342 2,231,933 2,252,152
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (1,092,198) (978,308) (784,188)
Issuance of common stock 22,932 42,286 --
Acquisition of common stock (1,069,839) (1,288,079) (1,498,508)
----------- ----------- -----------
Net cash used in financing activities (2,139,105) (2,224,101) (2,282,696)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents 9,237 7,832 (30,544)
CASH AND CASH EQUIVALENTS
Beginning 37,387 29,555 60,099
----------- ----------- -----------
Ending $ 46,624 $ 37,387 $ 29,555
=========== =========== ===========
F-30
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Bankshares executive officers is contained herein. All
other information concerning Bankshares required by this item is contained in
Bankshares' definitive proxy statement for the 2001 annual meeting of
shareholders, to be filed within 120 days of the fiscal year ended December 31,
2000 and is incorporated herein by reference.
CLASS I
POSITION HELD WITH COMPANY
AND/OR PRINCIPAL OCCUPATIONS FIRST YEAR
AND DIRECTORSHIPS DURING THE AS OFFICER
NAME PAST FIVE YEARS OF COMPANY AGE
----- ---------------------------------- ---------- ---
C. Hunton Tiffany Chairman of the Board of 1984 61
Bankshares and TFB; President
Fauquier Bank Services, Inc.;
President of Bankshares since
1984; President of the TFB since
1982; Director of TFB since 1974
Randy K. Ferrell Senior Vice President of Bankshares; 1994 50
Executive Vice President of TFB,
Commercial and Retail Banking and
Management Information Systems
Division since 2001
29
Rosanne T. Gorkowki Senior Vice President of Bankshares; 1999 55
Senior Vice President of TFB, Human
Resources and Administration Division since
2000.
Eric P. Graap Senior Vice President and Chief Financial 2000 48
Officer of Bankshares; Senior Vice
President and Chief Financial Officer
of TFB; since 2000.
Gary R. Shook Senior Vice President of Bankshares; 1995 40
Senior Vice President of TFB,
Wealth Management Division;
since 2001.
C. Hunton Tiffany has been an employee of TFB since 1965. He was elected to
TFB's Board in 1974 and to Bankshares' Board in 1984. He has served as President
of TFB since 1982 and Bankshares since 1984, and is currently Chairman of both
Boards of Directors. Mr. Tiffany is President and a Director of Fauquier Bank
Services, Inc., a subsidiary of TFB. Mr. Tiffany serves on the Executive,
Investment, Long Range Planning Committee and Trust Committees.
Randy K. Ferrell joined TFB in September 1994. He serves as Executive Vice
President of TFB, and heads the Commercial and Retail Banking and Management
Information Systems Division, and he serves as Executive Vice President of
Bankshares. Mr. Ferrell is a member of Senior Management, and also serves on the
Asset/Liability Management Committee of TFB. Mr. Ferrell is an Executive Vice
President and Director of Fauquier Bank Services, Inc., a subsidiary of TFB. He
oversees all aspects of the lending and retail branching functions. He
participates in presentations to the Boards of TFB and Bankshares, and leads the
presentation of new loans and analysis of the loan portfolio at the Executive
Committee meetings.
Rosanne T. Gorkowski joined TFB in 1999. She serves as Senior Vice President,
Human Resoures and Administration of Bankshares. As head of Human Resources and
Administration Division, she is responsible for managing the human resources and
administration functions, including compensation and performance management,
benefits, training, EEO/AAP, employee relations, facilities, and purchasing.
From 1994 to 1997, Mrs. Gorkowski was Managing Partner of Windsong Associates, a
management consulting firm specializing in Human Resource services. From 1997 to
1999, she was director of Human Resources for Walcoff Associates, Inc., an
information technology company. Mrs. Gorkowski is a member of Senior Management,
and also serves on the Human Resources, Asset/Liability Management and Strategic
Planning Committees of TFB. She participates in presentations to the Boards of
TFB and Bankshares.
Eric P. Graap joined TFB in 2000. He serves as Senior Vice President and Chief
Financial Officer of TFB and Senior Vice President and Chief Financial Officer
of Bankshares. As head of Support Services Division, he directs the activities
of the Accounting, Data Processing and Investment departments and is responsible
for the integrity of the financial systems of the organization. From 1994 to
2000, Mr. Graap was employed at The Community Development Corporation, a
community development financial intermediary located in New York City, as Chief
Financial Officer and Treasurer. Mr. Graap is a member of Senior Management, and
also serves on the Asset/Liability Management and Strategic Planning Committees
of TFB. He participates in presentations to the Boards of TFB and Bankshares.
Gary R. Shook joined TFB in January 1995. He serves as Senior Vice President,
and heads the Wealth Management Division, including the Investment Sales and
Trust Services areas, and Senior Vice President of Bankshares. Mr. Shook serves
as a Senior Vice President and Director of Fauquier Bank Services, Inc., a
30
subsidiary of TFB. Mr. Shook participates in presentations to the Boards of TFB
and Bankshares, and reports to the Trust Committee of the Board of Directors on
all trust activities. He is a member of Senior Management and serves on the
Asset/Liability Management and Strategic Planning Committees of TFB.
COMMITTEES OF THE BOARD
During the year ended December 31, 2000, the Board of Directors acted as a
Committee of the whole as to all matters. The three Committees of the Company
are the Executive, Audit and Committee on Board Governance.
MEETINGS OF BOARD OF DIRECTORS
During the year ended December 31, 2000, the Board of Directors of Bankshares
held nine meetings.
ITEM 11: EXECUTIVE COMPENSATION
Information relating to executive compensation is contained in Bankshares'
definitive proxy statement for the 2001 annual meeting of shareholders to be
filed within 120 days of the fiscal year ended December 31, 2000 and is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in Bankshares' definitive proxy
statement for the 2001 annual meeting of shareholders to be filed within 120
days of the fiscal year ended December 31, 2000 and is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in Bankshares' definitive proxy
statement for the 2001 annual meeting of shareholders to be filed within 120
days of the fiscal year ended December 31, 2000 and is incorporated herein by
reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K
(a) (1) - Financial Statements
The following consolidated financial statements of Fauquier Bankshares Inc. and
subsidiaries are filed as part of this document under Item 8. Financial
Statements and Supplementary Data.
Independent Auditor's Report on the Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2000 and December 31, 1999
Consolidated Statements of Income - Years ended December 31, 2000, 1999
and 1998
Consolidated Statements of Cash Flow - Years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity - December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements - Years ended December 31,
2000, 1999 and 1998
(a) (2) - Financial Statement Schedules
31
All schedules to the Consolidated Financial Statements required by Article 9 of
Regulation S-X are omitted since they are either not applicable or the required
information is set forth in the consolidated financial statements or notes
thereto.
(a) (3) - Exhibits
EXHIBIT NUMBER
(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
(21) Subsidiaries of the Registrant (Incorporated herein by
reference to Part I of this Form 10-K)
* 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 and amended June 10, 1999.
** Incorporated by reference to Bankshares' definitive proxy statement for the
2001 annual meeting of shareholders to be filed within 120 days of the fiscal
year ended December 31, 2000.
(b) Reports on Form 8-K Filed in the fourth quarter of 2000
None.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ C. Hunton Tiffany
-----------------------------
C. Hunton Tiffany
President and Chief Executive Officer
Dated: April 03, 2001
/s/ Eric P. Graap
--------------------------
Eric P. Graap
Senior Vice President and Chief Financial Officer
Dated: April 03, 2001
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ C. Hunton Tiffany
--------------------------- President, Chief Executive Officer, April 03, 2001
C. Hunton Tiffany Director
/s/ Alexander G. Green, Jr.
--------------------------- Director April 03, 2001
Alexander G. Green, Jr.
/s/ Stanley C. Haworth
--------------------------- Director April 03, 2001
Stanley C. Haworth
/s/ John J. Norman, Jr.
--------------------------- Director April 03, 2001
John J. Norman, Jr.
/s/ Douglas C. Larson
--------------------------- Director April 03, 2001
Douglas C. Larson
/s/ C.H. Lawrence, Jr.
--------------------------- Director April 03, 2001
C.H. Lawrence, Jr.
/s/ D. Harcourt Lees, Jr.
--------------------------- Director April 03, 2001
D. Harcourt Lees, Jr.
/s/ Randolph T. Minter
--------------------------- Director April 03, 2001
Randolph T. Minter
/s/ B.S. Montgomery
--------------------------- Director April 03, 2001
B.S. Montgomery
/s/ H.P. Neale
--------------------------- Director April 03, 2001
H.P. Neale
/s/ Pat H. Nevill
--------------------------- Director April 03, 2001
Pat H. Nevill
/s/ Henry M. Ross
--------------------------- Director April 03, 2001
Henry M. Ross
/s/ H. Frances Stringfellow
--------------------------- Director April 03, 2001
H. Frances Stringfellow
33