U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 2
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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 or any amendment to this
Form 10-K. ( ).
The aggregate market value of the shares of the registrant's common stock held
by "non-affiliates" of the registrant, based upon the closing sale price of its
common stock on the NASDAQ SmallCap Market System on March 21, 2002, was
approximately $38.5 million. Shares of common stock held by each officer,
director and holder of 5% or more of the registrant's outstanding common stock
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.
The registrant had 1,655,296 shares of common stock outstanding as of March 21,
2002.
Explanation
-----------
This Amendment No. 2 to the Fauquier Bankshares, Inc. Form 10-K filed with the
Securities and Exchange Commission (the "Commission") on March 26, 2002, as
amended by Amendment No. 1 filed with the Commission on March 27, 2002 (the
"Form 10-K"), is being filed solely for the purposes of correcting: (i) two
percentages relating to non-performing loans in the second paragraph under
"Asset Quality" in Management's Discussion and Analysis of Financial Condition
and Results of Operation contained in Item 7 (the "MD&A"), (ii) disclosures
relating to the 2001 to 2000 comparison of the securities portfolio valuation
account in the third paragraph under "Capital Resources and Liquidity" in the
MD&A, (iii) the figures for 2001 compared to 2000 contained in the Rate/Volume
Variance Table under "Rate/Volume Analysis" in the MD&A, and (iv) disclosures
relating to exercisable stock options in Note 12 to the consolidated financial
statements contained in Item 8.
PART II
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 accompanying notes appearing
elsewhere in this Form 10-K. In addition to the historical information contained
herein, this report on Form 10-K 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,"
"may," "will" or similar expressions. Although we believe our plans, intentions
and expectations reflected in these forward-looking statements are reasonable,
we can give no assurance that these plans, intentions, or expectations will be
achieved. Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain, and actual results, performances or
achievements could differ materially from those contemplated. Factors that could
have a material adverse effect on our operations and future prospects 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 our market area and accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements contained herein and you should not place
undue reliance on such statements, which reflect our position as of the date of
this report.
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 consolidated 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 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 YEARS ENDED DECEMBER 31, 2001 AND
DECEMBER 31, 2000
Net income of $3.5 million in 2001 was a 13.5% increase from 2000 net income of
$3.1 million. Earnings per share (EPS) on a fully diluted basis were $2.02 in
2001 compared to $1.75 in 2000. Profitability as measured by return on average
equity increased from 14.1% in 2000 to 14.7% in 2001.
On January 29, 2001, TFB recovered $358,000, net of taxes, or $0.21 per diluted
share, from its insurance carrier for losses associated with the
misappropriation of cash. Certain expenses associated with a misappropriation of
cash reduced 2000 and 1999 earnings by $86,000 and $288,000, net of tax,
respectively.
On December 6, 2001, earnings were reduced by $378,000 net of tax benefit, or
$0.22 per diluted share, due to an extraordinary expense associated with the
early payoff of the FHLB of Atlanta advances. The restructuring of TFB's balance
sheet through the early payoff of the FHLB of Atlanta borrowings resulted from
the greater-than-anticipated success of TFB's retail deposit retention campaign.
Deposits grew by $31.6 million, or 14.9%, from December 31, 2000 to December 31,
2001. The benefit of this restructuring strategy, in addition to increasing
TFB's flexibility in its asset/liability management process, is the reduction of
interest expense during 2002 and beyond. This anticipated reduction in interest
expense is projected to more than offset the one-time extraordinary expense of
the early payoff.
NET INTEREST INCOME. Total interest income grew $1.8 million or 9.9% to $19.8
million in 2001 from $18.0 million in 2000. This increase was primarily the
result of growth in loan and investment security balances. Average loan balances
increased from $193.4 million in 2000 to $208.8 million in 2001. The average
yield on loans decreased to 8.51% in 2001 compared with 8.64% in 2000. Together,
there was a $1.0 million increase in interest and fee income from loans for the
year 2001 compared with year 2000. Average investment security balances
increased $10.0 million from $16.9 million in 2000 to $26.9 million in 2001,
primarily due to the excess liquidity generated from aforementioned retail
deposit retention campaign. The tax-equivalent average yield on investments
declined from 6.08% in 2000 to 5.84% in 2001. Together, there was an increase in
interest and dividend income on security investments of $0.5 million or 54.7%,
from $1.0 million in 2000 to $1.5 million in 2001.
Total interest expense increased $1.1 million or 18.7% from 2000 to 2001
primarily due to the growth in deposits. Average deposit balances grew $33.4
million, primarily in demand deposits and time certificates of deposit. The
average rate on interest-bearing liabilities increased slightly from 3.52% in
2000 to 3.54% in 2001 due to the fourth quarter 2000 growth in higher rate
certificates of deposit. The average rate on certificates of deposit increased
from 5.11% in 2000 to 5.57% in 2001. During the fourth quarter of 2001, many of
these higher rate certificates of deposit either repriced into lower rate
certificates of deposit, or transferred into lower rate NOW, money market
account, and savings account rates. As result, the average rate on
interest-bearing liabilities is expected to decline in 2002.
Net interest income for 2001 increased $0.6 million or 5.4% to $12.6 million for
the year ended December 31, 2001 from $11.9 million for the year ended December
31, 2000. This increase resulted from an increase in total average earning
assets from $217.7 million in 2000 to $254.6 million in 2001. The percentage of
average earning assets to total assets increased slightly in 2001 to 93.0% from
92.6%. TFB's net interest margin decreased from 5.56 % in 2000 to 5.02% in 2001.
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 may increase in
2002 as average interest-earning assets increase, together with the net interest
margin projected to increase in 2002 as a result of the fourth quarter 2001
repricing or transfer of higher cost certificates of deposit into lower cost
deposits, as well as the December 2001 payoff of the FHLB of Atlanta advances.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $350,000 for 2001
and $457,000 for 2000. The amount of the provision for loan loss for 2001 and
2000 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. During 2001, TFB refined its policies, guidelines, and methods for
determining the allowance for loan losses, and allocating the allowance among
various loan categories. Greater weight was given to the loss history by loan
category, prolonged changes in portfolio delinquency trends by loan category,
and changes in economic trends. 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 non-interest income increased by $1.1 million from
$2.7 million for 2000 to $3.8 million for 2001. Excluding the previously
discussed non-loan charge-off insurance recovery of $542,000 before taxes, total
non-interest income increased by $563,000, or 20.6%. Non-interest income is
derived primarily from non-interest fee income, which consists primarily of
fiduciary and other Wealth Management fees, service charges on deposit accounts,
and other fee income. In 2001, the increase stemmed from a $106,000 increase in
Wealth Management fees, and a $228,000 increase in service charges on deposit
accounts. Major factors in the increase in service charges on deposit accounts
were management's focus on meeting the needs of its customers with new
value-added, fee-based products such as "Courtesy Pay," as well as, the impact
of TFB's deposit base increasing 14.9% from year-end 2000 to year-end 2001.
NON-INTEREST EXPENSE. Total non-interest expenses increased $700,000, or 7.2% in
2001 from 2000. The primary component of the increase was an increase in
salaries and employees' benefits of $743,000, or 18.1%, primarily due to the
increase in full-time equivalent personnel from approximately 104 at year-end
2000 to 114 at year-end 2001, as well as customary annual salary increases and
increases in medical insurance benefits. The growth in personnel primarily
reflects the expansion of the Wealth Management Services division and the August
2001 opening of the Old Town-Manassas branch office. In addition, occupancy
expenses increased $125,000, or 26.7%, primarily due to rent and other leasehold
expenses associated with the new Old Town-Manassas office. Other operating
expenses declined from $4.3 million in 2000 to $4.1 million in 2001 due to the
absence of investigation-related expenses as a result of the misappropriation of
cash referred to above.
INCOME TAXES. Income tax expense, excluding the tax benefit generated by the
extraordinary expense on the prepayment of the FHLB of Atlanta advances,
increased by $362,000 for the year ended December 31, 2001 compared to the year
ended December 31, 2000. The effective tax rates were 31.5% for 2001 and 31.6%
for 2000. The effective tax rate differs from the statutory federal income tax
rate of 34% due to TFB's investment in tax-exempt loans and securities.
The following table presents a quarterly summary of earnings for the last two
years. In 2001, earnings exhibited an increasing profitability from recurring
sources, primarily the result of the steady and continuous growth in net
interest income and fees on deposits.
EARNINGS
(In Thousands)
Three Months Ended 2001 Three Months Ended 2000
DEC. 31 SEP. 30 JUNE 30 MAR. 31 DEC. 31 SEP. 30 JUNE 30 MAR. 31
----------------------------------------- -----------------------------------------
Interest income $ 4,962 $ 5,019 $ 5,003 $ 4,801 $ 4,741 $ 4,581 $ 4,401 $ 4,279
Interest expense 1,622 1,887 1,903 1,817 1,801 1,458 1,379 1,447
----- ----- ----- ----- ----- ----- ----- -----
Net Interest Income 3,340 3,132 3,100 2,984 2,940 3,124 3,022 2,832
Provision for loan losses 75 75 100 100 0 138 152 167
----- ----- ----- ----- ----- ----- ----- -----
Net interest income after provision
for loan losses 3,265 3,057 3,000 2,884 2,940 2,986 2,869 2,665
Other Income 946 873 754 1,263 653 711 712 658
Other Expense 2,749 2,530 2,572 2,507 2,629 2,295 2,496 2,249
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 1,462 1,400 1,182 1,640 964 1,403 1,085 1,074
Income tax expense 464 443 371 513 298 449 342 341
----- ----- ----- ----- ----- ----- ----- -----
Income before extraordinary item 998 957 811 1,127 667 953 744 733
Extraordinary item (378) 0 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- -----
Net income 620 957 811 1,127 667 953 744 733
===== ===== ===== ===== ===== ===== ===== =====
Net income per share, basic before $ 0.59 $ 0.56 $ 0.47 $ 0.66 $ 0.39 $ 0.54 $ 0.42 $ 0.41
Extraordinary item (0.22) -- -- -- -- -- -- --
Net income per share, basic $ 0.37 $ 0.56 $ 0.47 $ 0.66 $ 0.39 $ 0.54 $ 0.42 $ 0.41
Net income per share, diluted before $ 0.57 $ 0.55 $ 0.47 $ 0.65 $ 0.39 $ 0.54 $ 0.41 $ 0.41
Extraordinary item (0.22) -- -- -- -- -- -- --
Net income per share, diluted $ 0.35 $ 0.55 $ 0.47 $ 0.65 $ 0.39 $ 0.54 $ 0.41 $ 0.41
15
COMPARISON OF OPERATING RESULTS FOR THE YEARS 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.
As previously discussed 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, TFB was first advised by its accountants as
to the possible misappropriation of cash in the approximate amount of $437,000.
TFB immediately reported the loss to its insurance carrier and began an
aggressive investigation of the misappropriation. The $437,000 loss, or
$288,000loss 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, TFB recovered $542,000, or $358,000 net
of taxes, from its insurance carrier for these losses.
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 relatively
stable at 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 in 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 resulted from an increase 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 in 2000. The percentage of average earning assets to total assets
decreased slightly in 2000 to 92.6% from 92.9%. TFB's net interest margin
increased from 5.35% in 1999 to 5.56% in 2000.
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.
NON-INTEREST INCOME. Total non-interest income increased by $298,000, or 12.2%
from $2.4 million for 1999 to $2.7 million for 2000. Non-interest 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 an $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 non-interest 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 customary annual salary increases. In
addition, other operating expenses increased $218,000, or 5.4%, primarily due to
investigation-related expenses as a 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.
16
COMPARISON OF DECEMBER 31, 2001 AND DECEMBER 31, 2000 FINANCIAL CONDITION
Total assets were $285.2 million at December 31, 2001, an increase of 14.1% or
$35.3 million from $249.9 million at December 31, 2000. Balance sheet categories
reflecting significant changes included investment securities, total loans,
deposits, and FHLB of Atlanta advances. Each of these categories is discussed
below.
INVESTMENT SECURITIES. Total investment securities were $36.9 million at
December 31, 2001, reflecting an increase of $19.9 million from $17.0 million at
December 31, 2000. The increase was the result of investing funds, generated by
retail deposit growth, primarily into mortgage-backed securities with
shorter-term durations of one to three years. TFB adopted SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2001, and transferred securities with a book value of $4.0 million
and a market value of $4.0 million to the available for sale category. At
December 31, 2001, all $36.9 million of investment securities were available for
sale. 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
gain, net of tax, of $227,000 at December 31, 2001 compared to an unrealized
loss, net of tax, of $86,000 at December 31, 2000.
LOANS. Total net loan balance after allowance for loan losses was $207.5 million
at December 31, 2001, which represents an increase of $9.6 million or 4.8% from
$197.9 million as of December 31, 2000. The majority of the increase was in
commercial real estate loans, which increased $8.9 million from 2000 to 2001. In
addition, construction loans secured by real estate increased $3.9 million over
the same time period. TFB's loans are made primarily to customers located within
its local trade area.
DEPOSITS. For the year ended December 31, 2001, total deposits grew $31.6
million or 14.9% when compared with total deposits one year earlier. The growth
in deposits was primarily in noninterest-bearing deposits, which increased by
$11.3 million and interest-bearing deposits, which increased by $20.4 million.
FHLB ADVANCES. Amounts borrowed from the FHLB of Atlanta increased from $13
million at December 31, 2000 to $15 million at December 31, 2001. The term
structure on $10 million of the advances was 5 years with a 2-year call option
in May 2003. The remaining $5 million has a term structure of 10 years with a
5-year call option in October 2003.
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-performing loans totaled approximately $913,000, or .43% of total loans at
December 31, 2001, as compared with $121,000, or .06% of total loans at December
31, 2000. Non-performing loans as a percentage of the allowance for loan losses
were 3.20% and 4.7% at December 31, 2001 and 2000, respectively.
Loans that are 90 days past due and accruing interest totaled $541,000 and
$800,000 at December 31, 2001 and 2000, respectively. At December 31, 2001,
approximately $488,000 of the $541,000 consisted of three loans, all secured by
real estate. No loss is anticipated on these three loans.
There are no loans other than those disclosed above as either non-performing or
impaired where known information about the borrower has 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. To management's knowledge, no concentration
of loans to borrowers engaged in similar activities exceeds 10% of total loans.
17
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity totaled $24.2 million at December 31, 2001 compared with
$22.4 million at December 31, 2000. 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 repurchase shares directly from
shareholders. As a result of this action, Bankshares repurchased 60,238 shares,
as adjusted for the two for one stock split, or 3.2% of shares outstanding on
December 31, 1998, for $1.2 million. Exclusive of the Dutch Auction, Bankshares
initiated an open market buyback program in 1998, through which it repurchased
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; 63,120 shares at a cost of $1.1 million in 2000;
and 38,958 shares at a cost of $0.9 million in 2001.
On January 18, 2002, the board of directors of Bankshares approved the company's
participation during 2002, in the approximate amount of $4,000,000, in a pool of
subordinated debt securities to be issued by Bankshares and other financial
institutions to a trust in a method generally referred to, as a trust preferred
financing. Bankshares anticipates the closing of this transaction in late March
2002. When and if any trust-preferred securities are sold, Bankshares intends to
use the proceeds for the purpose of expansion and the repurchase of additional
shares of its common stock. Under applicable regulatory guidelines, trust
preferred securities can be treated as Tier 1 capital for purposes of the
Federal Reserve's capital guidelines for bank holding companies as long as the
trust preferred securities and all other cumulative preferred securities of the
bank holding company together do not exceed 25% of Tier 1 capital.
The securities portfolio valuation account increased its unrealized gain after
tax to $227,000 at December 31, 2001 compared to an unrealized loss of $86,000
at December 31, 2000.
As discussed above under "Government Supervision and Regulation," banking
regulations have established minimum capital requirements for financial
institutions, including risk-based capital ratios and leveraged ratios. As of
December 31, 2001, the appropriate regulatory authorities have categorized
Bankshares and TFB as "well capitalized."
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 funding 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
$30.2 million at December 31, 2001 compared with $25.6 million at December 31,
2000. These assets provide the primary source of liquidity for TFB. In addition,
management has designated the entire investment portfolio, approximately $36.9
million, as available for sale, and has an available line of credit with the
FHLB of Atlanta with a borrowing limit of approximately $44.6 million at
December 31, 2001 to provide additional sources of liquidity. At December 31,
2001, $15.0 million of the FHLB of Atlanta line of credit was in use.
CERTAIN STATISTICAL INFORMATION
The information contained on page 12 of this Report on Form 10-K in Item 6,
"Selected Financial Data" is incorporated herein by reference.
18
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)
2001 2000 1999
------------------------------- ------------------------------- ------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate Balances Expense Rate
-------- ------- ------- -------- ------- ------- -------- ------- -------
ASSETS:
Loans
Taxable 202,854 17,330 8.54% $188,935 $16,357 8.66% $169,731 $14,780 8.71%
Tax-exempt (1) 4,969 436 8.77% 4,257 345 8.11% 4,357 429 9.85%
Nonaccrual 980 -- 219 -- 770 --
---------- --------- ---------- --------- ---------- ---------
Total Loans 208,803 17,766 8.51% 193,411 16,702 8.64% 174,858 15,209 8.70%
---------- --------- ---------- --------- ---------- ---------
Securities
Taxable 23,569 1,334 5.66% 14,209 841 5.92% 25,477 1,510 5.93%
Tax-exempt (1) 3,288 235 7.13% 2,651 184 6.95% 2,888 245 8.48%
---------- ---------- ---------- ---------- ---------- ----------
Total securities 26,857 1,567 5.84% 16,860 1,025 6.08% 28,365 1,755 6.19%
---------- ---------- ---------- ---------- ---------- ----------
Deposits in banks 91 3 3.16% 105 5 5.02% 666 32 4.80%
Federal funds sold 18,839 676 3.59% 7,331 450 6.14% 11,317 562 4.97%
---------- --------- ---------- --------- ---------- ---------
Total earning assets 254,591 20,011 7.86% 217,707 18,182 8.35% 215,206 $17,558 8.16%
--------- --------- ---------- ---------
Less: Reserve for loan losses (2,778) (2,569) (2,213)
Cash and due from banks 11,917 9,846 9,704
Bank premises and equipment,
net 5,621 5,464 5,268
Other assets 4,355 4,548 3,783
---------- ---------- ----------
Total Assets 273,705 $234,996 $231,748
========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits
Demand deposits 43,628 -- $37,123 -- $33,906 --
---------- --------- ---------- --------- ---------- --------
Interest-bearing deposits
NOW accounts 39,980 262 0.66% 37,201 415 1.12% 37,349 $544 1.46%
Money market accounts 36,307 1,049 2.89% 34,969 1,185 3.39% 36,390 1,297 3.56%
Savings accounts 32,137 695 2.16% 32,869 881 2.68% 33,220 973 2.93%
Time deposits 76,469 4,256 5.57% 53,001 2,707 5.11% 46,683 2,164 4.64%
---------- --------- ---------- --------- --------- ---------
Total interest-bearing
deposits 184,893 6,262 3.39% 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 18,874 957 5.07% 15,022 896 5.96% 20,733 1,065 5.14%
--------- --------- --------- ---------- --------- ---------
Total interest-bearing
liabilities 203,767 7,219 3.54% 173,062 6,084 3.52% 174,375 6,043 3.47%
--------- --------- --------- ---------- --------- ---------
Other liabilities 2,445 2,899 2,348
--------- --------- ---------
Shareholders' equity 23,865 21,912 21,119
--------- --------- ---------
Total Liabilities &
Shareholders' Equity $273,705 $234,996 $231,748
========== --------- ========== ---------- ============ ---------
Net interest spread $12,793 4.32% $12,098 4.83% $11,515 4.69%
========= ========== =========
Interest expense as a percent
of average earning assets 2.84% 2.79% 2.81%
Net interest margin 5.02% 5.56% 5.35%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
19
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 (change 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)
2001 Compared to 2000 2000 Compared to 1999
--------------------------------------------- ------------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
----------- ------------ ------------- ----------- ------------- ------------
INTEREST INCOME:
Loans; taxable $ 973 $ 1,205 $ (232) $ 1,577 $ 1,611 $ (34)
Loans; tax-exempt 91 58 32 (84) (10) (74)
Securities; taxable 493 554 (61) (669) (667) (3)
Securities; tax-exempt 51 44 7 (61) (19) (42)
Deposits in banks (2) (1) (1) (27) (28) 2
Federal funds sold 226 706 (480) (112) (338) 226
----------- ------------ ------------- ----------- ------------- ------------
Total Interest Income 1,832 2,566 (734) 624 549 75
----------- ------------ ------------- ----------- ------------- ------------
INTEREST EXPENSE:
NOW accounts (153) 31 (184) (129) (2) (127)
Money market accounts (136) 45 (181) (112) (50) (62)
Savings accounts (186) (20) (166) (92) (10) (81)
Time deposits 1,549 1,199 350 543 311 232
Federal funds purchased and securities
sold under agreements to repurchase -- -- -- -- -- --
Federal Home Loan Bank Advances 61 230 (169) (169) (402) 233
----------- ------------ ------------- ----------- ------------- ------------
Total Interest Expense 1,135 1,485 (360) 41 (153) 195
----------- ------------ ------------- ----------- ------------- ------------
Net Interest Income $ 697 $ 1,081 $ (384) $ 583 $ 702 $ (120)
=========== ============ ============= =========== ============= ============
LOAN PORTFOLIO
At December 31, 2001 and 2000, net loans accounted for 72.7% and 79.2%,
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 Statement No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement has been amended by FASB Statement No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." FASB Statement 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 Statement
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.
20
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, expect 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
if the shortfall in payment is insignificant. A delay of less than 30 days or a
shortfall of less than 5% of the required principal and interest payments
generally is considered "insignificant" and would 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 Statement 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.
Bankshares considers all consumer installment loans and residential mortgage
loans to be homogenous loans. These loans are not subject to impairment under
FASB Statement No. 114.
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 the 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, 2001, 2000, 1999, 1998, and 1997.
LOAN PORTFOLIO (IN THOUSANDS)
December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------- ------------- ------------ ------------
Loans secured by real estate:
Construction and land development $ 16,851 $ 12,948 $ 11,746 $ 8,297 $ 6,998
Secured by farmland 2,220 381 903 1,163 1,449
Secured by 1-4 family residential 72,692 74,167 64,921 53,430 42,120
Nonfarm, nonresidential loans 62,845 53,959 50,988 49,814 34,513
Commercial and industrial loans
(except those secured by real estate) 15,154 17,148 16,689 16,933 15,844
Loans to individuals (except those
secured by real estate) 34,640 36,083 33,787 30,284 24,417
All other loans 5,962 5,873 4,868 4,620 5,176
------------ ------------- ------------- ------------ ------------
Total loans 210,364 200,559 183,902 164,541 130,517
Less: Unearned discount 54 126 115 416 709
------------ ------------- ------------- ------------ ------------
Total Loans, Net $ 210,310 $ 200,433 $ 183,787 $ 164,125 $ 129,808
============ ============= ============= ============ ============
21
The following table sets forth certain information with respect to TFB'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,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ------------- ------------ ------------ ------------
Nonaccrual loans $ 913 $ 121 $ 125 $ 666 $ 551
Restructured loans 0 0 0 0 0
Other real estate owned 0 0 0 57 199
------------- ------------- ------------ ------------ ------------
Total Non-Performing Assets $ 913 $ 121 $ 125 $ 723 $ 750
============= ============= ============ ============ ============
Loans past due 90 days
accruing interest $ 541 $ 800 $ 170 $ 951 $ 491
============= ============= ============ ============ ============
Allowance for loan losses to
total loans at period end 1.36% 1.27% 1.24% 1.13% 1.27%
Non-performing assets to
period end loans and other
real estate owned 0.43% 0.06% 0.07% 0.44% 0.58%
Potential Problem Loans: At December 31, 2001, Management is not aware of any
significant problem loans not included in table.
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 remains subject to change.
Additions to the allowance for loan losses, recorded as the provision for loan
losses on Bankshares' statements of income, 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, 2001, 2000, 1999, 1998, and 1997 the allowance for loan losses
was $2,857,000, $2,554,000, $2,284,000, $1,853,000, and $1,655,000,
respectively.
22
The following table summarizes TFB's loan loss experience for each of the last
five years ended December 31, 2001, 2000, 1999, 1998, and 1997, respectively:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)
Year Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------- -------------
Allowance for Loan Losses, January 1 $ 2,554 $ 2,284 $ 1,853 $ 1,655 $ 1,465
------------ ------------ ------------ ------------- -------------
Loans Charged-Off:
Commercial, financial and
agricultural 91 247 217 108 176
Real estate-construction
and development 0 4 0 0 0
Real estate-mortgage 100 20 0 40 0
Consumer 86 171 110 223 187
------------ ------------ ------------ ------------- -------------
Total Loans Charged-Off $ 277 $ 442 $ 327 $ 371 $ 363
------------ ------------ ------------ ------------- -------------
Recoveries:
Commercial, financial and
agricultural 193 45 18 6 7
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 0 177 4 0 0
Consumer 37 33 41 29 81
------------ ------------ ------------ ------------- -------------
Total Recoveries $ 230 $ 255 $ 63 $ 35 $ 88
------------ ------------ ------------ ------------- -------------
Net Charge-Offs $ 47 $ 187 $ 264 $ 336 $ 275
------------ ------------ ------------ ------------- -------------
Provision for Loan Losses $ 350 $ 457 $ 695 $ 534 $ 465
------------ ------------ ------------ ------------- -------------
Allowance for Loan Losses, December 31 $ 2,857 $ 2,554 $ 2,284 $ 1,853 $ 1,655
============ ============ ============ ============= =============
Ratio of Net Charge-Offs
to Average Loans: 0.02% 0.10% 0.15% 0.23% 0.22%
============ ============ ============ ============= =============
23
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table allocates the
allowance for loan losses at December 31, 2001, 2000, 1999, 1998, and 1997 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. During 2001, TFB refined its policies, guidelines,
and methods for determining the allowance for loan losses, and allocating the
allowance among various loan categories. Greater weight was given to the loss
history by loan category, prolonged changes in portfolio delinquency trends by
loan category, and changes in economic trends. As a result, the allocation of
the allowance for loan losses in 2001 may not be comparable to prior periods.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)
2001 2000 1999
---------------------------- ---------------------------- ----------------------------
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 $ 1,982 7.21% $ 950 8.55% $ 895 9.08%
Agricultural 0.00% 0.00% 0.00%
Real Estate:
Construction 8.01% 25 6.46% 6.39%
Secured by Farmland 1.06% 0.19% 0.49%
1-4 Family Residential 448 34.56% 300 36.98% 264 35.32%
Other Real Estate 29.88% 50 26.90% 27.74%
Consumer 427 16.45% 1,229 17.99% 1,125 18.38%
All Other Loans 2.83% 2.93% 2.65%
------------ ------------ ------------ ------------ ------------ ------------
$ 2,857 100.00% $ 2,554 100.00% $ 2,284 100.06%
============ ============ ============ ============ ============ ============
1998 1997
-------------------------------- --------------------------------
Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total
Losses Loans Losses Loans
------------ ------------ ------------ ------------
Commercial $ 714 10.29% $ 777 12.14%
Agricultural 0.00% 0.00%
Real Estate:
Construction 5.04% 5.36%
Secured by Farmland 0.71% 1.11%
1-4 Family Residential 160 32.47% 274 32.27%
Other Real Estate 30.27% 26.44%
Consumer 979 18.41% 604 18.71%
All Other Loans 2.81% 3.97%
------------ ------------ ------------ ------------
$ 1,853 100.00% $ 1,655 100.00%
============ ============ ============ ============
24
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, 2001:
MATURITY SCHEDULE OF SELECTED LOANS
(In Thousands)
1 Year
Within Within After
1 Year 5 Years 5 Years Total
------------ ------------ ------------ ------------
Commercial and industrial loans 8,009 6,735 410 15,154
Construction Loans 10,651 5,734 466 16,851
------------ ------------ ------------ ------------
$ 18,660 $ 12,469 $ 876 $ 32,005
============ ============ ============ ============
For maturities over one year:
Floating rate loans $ 494 $ 0 $ 494
Fixed rate loans 11,975 876 12,851
------------ ------------ ------------
$ 12,469 $ 876 $ 13,345
============ ============ ============
INVESTMENT PORTFOLIO
At December 31, 2001, 2000 and 1999, the carrying values of the major
classifications of securities were as follows:
INVESTMENT PORTFOLIO
(In Thousands)
Available for Sale (1) Held to Maturity (1)
------------------------------------------- -------------------------------------------
2001 2000 1999 2001 2000 1999
------------ ----------- ------------ ------------ ----------- ------------
U.S. Treasury and other U.S.
Government agencies and
Corporations $ 26,844 $ 9,559 $ 10,639 $ 0 $ 1,589 $ 2,885
Obligations of states and political
subdivisions 3,103 1,657 682 -- 2,391 2,491
Corporate Bonds 5,229 -- - -- -- --
Mutual funds -- -- 810
Restricted investment - Federal
Home Loan Bank stock 1,150 1,150 1,150
FHLMC preferred stock 460 488 -
Other securities 122 122 122
------------ ----------- ------------ ------------ ----------- ------------
Total $ 36,908 $ 12,976 $ 13,403 $ 0 $ 3,980 $ 5,376
------------ ----------- ------------ ------------ ----------- ------------
(1) Amounts for held-to-maturity securities are based on amortized cost.
Amounts for available-for-sale securities are based on fair value.
25
ESTIMATED MATURITY OR NEXT RATE ADJUSTMENT DATE
The following is a schedule of estimated maturities or next rate adjustment date
and related weighted average yields of securities at December 31, 2001:
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 AVAILABLE FOR SALE:
Obligations of U.S. government
corporations and agencies $ 1,447 4.57% $ 21,684 4.62% $ 3,052 5.24%
Obligations of states and political
subdivisions, taxable 0 0.00% 5,229 5.57% 0 0.00%
Other taxable securities 0 0.00% 0 0.00% 0 0.00%
------------ ------------ ------------
Total taxable $ 1,447 $ 26,913 $ 3,052
------------ ------------ ------------
Obligations of states and political
subdivisions, tax-exempt 1,415 6.21% 492 6.20% 0 0.00%
------------ ------------ ------------
TOTAL SECURITIES: $ 2,862 $ 27,405 $ 3,052
============ ============ ============
Due after 10 years
and Equity Securities Total
--------------------------- --------------------------
Amount Yield Amount Yield
------------ ------------- ------------ ------------
SECURITIES AVAILABLE FOR SALE:
Obligations of U.S. government
corporations and agencies $ 661 6.48% 26,844 4.74%
Obligations of states and political
subdivisions, taxable 0 0.00% 5,229 5.58%
Other taxable securities 1,732 5.76% 1,732 5.76%
------------ ------------
Total taxable $2,393 $ 33,805
------------ ------------
Obligations of states and political
subdivisions, tax-exempt 1,196 8.13% 3,103 6.94%
------------ ------------
TOTAL SECURITIES: $ 3,589 $ 36,908
============ ============
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis
using a federal tax rate of 34%.
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,
----------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- ---------------------------- ----------------------------
Amount Rate Amount Rate Amount Rate
------------ ------------ ------------ ------------- ------------- ------------
Noninterest-bearing $ 43,628 $ 37,123 $ 33,906
------------ ------------ -------------
Interest-bearing:
NOW accounts 39,980 0.66% 37,201 1.12% 37,349 1.46%
Money market accounts 36,307 2.89% 34,969 3.39% 36,390 3.56%
Regular savings accounts 32,137 2.16% 32,869 2.68% 33,220 2.93%
Time deposits: 76,469 5.57% 53,001 5.11% 46,683 4.64%
------------ ------------ -------------
Total interest-bearing $ 184,893 3.39% $ 158,040 3.28% $ 153,642 3.24%
------------ ------------ -------------
Total deposits $ 228,521 $ 195,163 $ 187,548
============ ============ =============
26
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, 2001:
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, 2001 $ 2,659 $ 4,625 $ 6,038 $ 8,141 $ 0 $ 21,463
============ ============ ============ ============= ============= ============
BORROWED FUNDS
LONG-TERM BORROWINGS. Amounts and weighted average rates for long-term
borrowings for 2001, 2000 and 1999 are as follows:
BORROWED FUNDS (IN THOUSANDS)
--------------------------------------------------------------------------------
December 31, 2001 December 31, 2000 December 31, 1999
Amount Rate Amount Rate Amount Rate
---------- ----------- ---------- --------- ---------- ----------
FHLB Advances $ 15,000 4.64% $ 13,000 5.27% $ 23,000 5.57%
SHORT-TERM BORROWINGS. This information is not required, as the average amount
of borrowings during the period did not exceed 30% of shareholders' equity.
CAPITAL
Bankshares and TFB are subject to various regulatory capital requirements
administered by banking agencies. Failure to meet minimum capital requirements
can trigger certain mandatory and possibly additional discretionary actions by
regulators that 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, 2001 that Bankshares and TFB meet all capital adequacy requirements
to which they are subject.
27
Bankshares and TFB exceeded their regulatory capital ratios, as set forth in the
following table:
RISK BASED CAPITAL RATIOS (IN THOUSANDS)
December 31,
-------------------------------------
2001 2000
------------ ------------
Tier 1 Capital:
Shareholders' Equity $ 23,930 $ 22,504
Tier 2 Capital:
Allowable Allowance for Loan Losses 2,497 2,355
Total Capital: $ 26,427 $ 24,859
Risk Weighted Assets: $ 199,414 $ 188,213
Risk Based Capital Ratios:
Tier 1 to Risk Weighted Assets 12.00% 11.96%
Total Capital to Risk Weighted Assets 13.25% 13.21%
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 our performance than inflation does.
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
For information regarding recent accounting pronouncements and their effect on
Bankshares see "Recent Accounting Pronouncements" in Note 1 of the Notes to
Consolidated Financial Statements contained herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
WARRENTON, VIRGINIA
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2001
C O N T E N T S
PAGE
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS 31
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 32
Consolidated statements of income 33
Consolidated statements of cash flows 34
Consolidated statements of changes
in shareholders' equity 35
Notes to consolidated financial statements 36 - 60
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, 2001 and 2000, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the years ended December 31, 2001, 2000 and 1999. 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 auditing standards
generally accepted in the United States of America. 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, 2001 and 2000, and
the results of their operations and their cash flows for the years ended
December 31, 2001, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 18, 2002
31
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
DECEMBER 31,
------------------------------------------------
ASSETS 2001 2000
---------------------- ---------------------
Cash and due from banks $ 14,408,495 $ 10,841,319
Interest-bearing deposits in other banks 352,536 49,565
Federal funds sold 15,421,000 14,688,000
Securities (fair value: 2001, $36,907,864;
2000, $16,957,101) 36,907,864 16,955,981
Loans, net of allowance for loan losses of $2,856,743 in 2001
and $2,554,033 in 2000 207,452,738 197,878,880
Bank premises and equipment, net 6,335,708 5,257,188
Accrued interest receivable 1,590,282 1,640,550
Other assets 2,733,384 2,543,345
------------- -------------
Total assets $ 285,202,007 $ 249,854,828
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 50,659,242 $ 39,382,364
Interest-bearing 193,087,800 172,720,895
------------- -------------
Total deposits 243,747,042 212,103,259
Federal Home Loan Bank advances 15,000,000 13,000,000
Dividends payable 318,356 291,072
Other liabilities 1,979,210 2,041,558
Commitments and contingent liabilities -- --
------------- -------------
Total liabilities 261,044,608 227,435,889
============= =============
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13 per share; 8,000,000 shares authorized;
issued and outstanding, 2001, 1,675,559 shares; 2000, 1,712,191 shares 5,244,500 5,359,158
Retained earnings 18,685,761 17,145,324
Accumulated other comprehensive income (loss) 227,138 (85,543)
------------- -------------
Total shareholders' equity 24,157,399 22,418,939
------------- -------------
Total liabilities and shareholders' equity $285,202,007 $ 249,854,828
============= =============
See Notes to Consolidated Financial Statements.
32
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 2001
2001 2000 1999
-------------- ----------------- --------------
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $17,617,424 $ 16,584,470 $ 14,862,821
Interest on investment securities:
Taxable interest income -- 142,788 213,787
Interest income exempt from federal income taxes -- 103,808 114,302
Interest and dividends on securities available for sale:
Taxable interest income 1,174,762 539,331 1,180,573
Interest income exempt from federal income taxes 154,816 17,778 13,757
Dividends 159,089 158,761 149,120
Interest on federal funds sold 675,574 450,492 561,842
Interest on deposits in other banks 2,864 5,251 32,478
----------- ------------ ----------
Total interest and dividend income 19,784,529 18,002,679 17,128,680
----------- ------------ ------------
INTEREST EXPENSE
Interest on deposits 6,263,296 5,188,371 4,977,353
Interest on Federal Home Loan Bank advances 957,414 895,984 1,065,369
----------- ---------- ----------
Total interest expense 7,220,710 6,084,355 6,042,722
----------- ---------- -=--------
Net interest income 12,563,819 11,918,324 11,085,958
Provision for loan losses 350,000 457,498 695,000
----------- ---------- ----------
Net interest income after provision for loan losses 12,213,819 11,460,826 10,390,958
----------- ---------- ----------
NONINTEREST INCOME
Wealth management income 704,681 598,520 605,523
Service charges on deposit accounts 1,711,222 1,483,245 1,189,526
Other service charges, commissions and fees 824,783 750,845 637,181
Non-loan charge-off recovery 542,320 -- --
Loss on securities available for sale -- (110,830) --
Other operating income 53,090 8,969 877
----------- ---------- ----------
Total noninterest income 3,836,096 2,730,749 2,433,107
----------- ---------- ---------
NONINTEREST EXPENSES
Salaries and employees' benefits 4,851,413 4,108,482 3,718,435
Net occupancy expense of premises 591,730 467,111 437,293
Furniture and equipment 861,427 834,915 830,603
Other operating expenses 4,060,530 4,254,838 4,036,795
----------- ---------- ----------
Total noninterest expenses 10,365,100 9,665,346 9,023,126
---------- ---------- ---------
Income before income taxes and extraordinary item 5,684,815 4,526,229 3,800,939
Income tax expense 1,791,465 1,429,601 1,161,999
---------- ---------- ----------
Income before extraordinary item 3,893,350 3,096,628 2,638,940
Extraordinary item, penalty on prepayment of FHLB
advances, less income tax effect of $194,684 (377,916) -- --
----------- ----------- -----------
Net income $ 3,515,434 $ 3,096,628 $ 2,638,940
=========== =========== ===========
EARNINGS PER SHARE, basic, before extraordinary item $ 2.28 $ 1.76 $ 1.46
Extraordinary item (0.22) -- --
----------- ----------- -----------
EARNINGS PER SHARE, basic 2.06 1.76 1.46
=========== =========== ===========
EARNINGS PER SHARE, assuming dilution, before
extraordinary item $ 2.24 $ 1.75 $ 1.45
Extraordinary item (0.22) -- --
----------- ----------- -----------
EARNINGS PER SHARE, assuming dilution $ 2.02 $ 1.75 $ 1.45
=========== =========== ===========
See Notes to Consolidated Financial Statements.
33
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 2001
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,515,434 $ 3,096,628 $ 2,638,940
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 747,886 747,145 764,862
Provision for loan losses 350,000 457,498 695,000
Provision for other real estate -- -- 6,000
Deferred tax (benefit) (77,080) (156,891) (154,757)
Loss on securities available for sale -- 110,830 --
(Gain) loss on other real estate -- (7,739) 23
(Gain) on sale of premises and equipment (65) (1,230) (877)
Amortization of security premiums and
(accretion) of discounts, net 93,021 (63,001) 58,477
Changes in assets and liabilities:
(Increase) decrease in other assets (223,769) (1,078,253) 304,919
Increase (decrease) in other liabilities (62,348) 576,732 71,339
------------- ------------- -------------
Net cash provided by operating activities 4,343,079 3,681,719 4,383,926
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale -- 826,979 --
Proceeds from maturities, calls and principal
payments of investment securities -- 1,401,804 1,588,605
Proceeds from maturities, calls and principal
payments of securities available for sale 11,960,187 2,422,512 17,271,037
Purchase of securities available for sale (31,531,332) (2,447,894) (15,466,607)
Proceeds from sale of premises and equipment 65 1,230 877
Proceeds from sale of other real estate owned -- 355,561 175,175
Purchase of premises and equipment (1,826,406) (410,085) (479,373)
Purchase of other investment -- (749,000) --
Improvements to other real estate owned -- (2,774) --
Net (increase) in loans (9,923,858) (17,178,114) (20,050,275)
------------- ------------- -------------
Net cash (used in) investing activities (31,321,344) (15,779,781) (16,960,561)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and saving accounts 36,585,184 (2,582,805) 4,134,077
Net increase (decrease) in certificates of deposit (4,941,401) 27,413,390 3,921,455
Federal Home Loan Bank advances 10,000,000 -- 5,000,000
Federal Home Loan Bank principal repayments (8,000,000) (10,000,000) --
Cash dividends paid (1,194,739) (1,092,198) (978,308)
Issuance of common stock 28,309 22,932 42,286
Acquisition of common stock (895,941) (1,069,839) (1,288,079)
------------- ------------- -------------
Net cash provided by financing activities 31,581,412 12,691,480 10,831,431
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 4,603,147 593,418 (1,745,204)
CASH AND CASH EQUIVALENTS
Beginning 25,578,884 24,985,466 26,730,670
------------- ------------- -------------
Ending $ 30,182,031 $ 25,578,884 $ 24,985,466
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 7,371,938 $ 5,704,615 $ 6,115,327
============= ============= =============
Income taxes $ 1,872,500 $ 1,467,000 $ 1,281,000
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Other real estate acquired in settlement of loans $ -- $ 345,048 $ 124,254
============= ============= =============
Unrealized gain (loss) on securities available for sale, net $ 473,759 $ 427,822 $ (546,152)
============= ============= =============
Transfer of securities from held to maturity to available for sale $ 3,980,765 $ -- $ --
============= ============= =============
See Notes to Consolidated Financial Statements.
34
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For Each of the Three Years in the Period Ended December 31, 2001
ACCUMULATED
OTHER
COMPRE- COMPRE-
COMMON CAPITAL RETAINED HENSIVE HENSIVE
STOCK SURPLUS EARNINGS INCOME (LOSS) INCOME TOTAL
------------ ------------- -------------- ------------- ------------- --------------
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 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 -- -- -- -- $ 3,378,991 --
============
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
Comprehensive income:
Net income -- -- 3,515,434 -- $ 3,515,434 3,515,434
Other comprehensive income net of tax:
Unrealized holding gains on securities
available for sale, net of deferred income
taxes of $161,078 -- -- -- 312,681 312,681 312,681
------------
Total comprehensive income $ 3,828,115 --
============
Cash dividends ($.72 per share) -- -- (1,222,023) -- (1,222,023)
Acquisition of 38,958 shares of
common stock (121,938) -- (774,003) -- (895,941)
Issuance of common stock 4,150 -- 15,409 -- 19,559
Exercise of stock options 3,130 -- 5,620 -- 8,750
----------- ---------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 2001 $ 5,244,500 $ -- $ 18,685,761 $ 227,138 $ 24,157,399
=========== ========== ============ =========== ============
See Notes to Consolidated Financial Statements.
35
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended December 31, 2001
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
accounting principles generally accepted in the United States of
America 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 subsidiary, The
Fauquier Bank, of which Fauquier Bank Services, Inc. is its sole
subsidiary. 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.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assets acquired through, or in lieu of, loan foreclosure are held
for sale and are initially recorded at the lower of the 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
accounting principles generally accepted in the United States of
America, 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
$262,886, $258,997 and $215,119 were incurred in 2001, 2000 and
1999, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period balances
to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued two
statements - Statement 141, Business Combinations, and Statement
142, Goodwill and Other Intangible Assets, which will potentially
impact the accounting for goodwill and other intangible assets.
Statement 141 eliminates the pooling method of accounting for
business combinations and requires that intangible assets that meet
certain criteria be reported separately from goodwill. The
Statement also requires negative goodwill arising from a business
combination to be recorded as an extraordinary gain. Statement 142
eliminates the amortization of goodwill and other intangibles that
are determined to have an indefinite life. The Statement requires,
at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to
re-evaluate goodwill and other intangible assets that arose from
business combinations entered into before July 1, 2001. If the
recorded other intangibles assets do not meet the criteria for
recognition, they should be classified as goodwill. Similarly, if
there are other intangible assets that meet the criteria for
recognition but were not separately recorded from goodwill, they
should be reclassified from goodwill. An organization also must
reassess the useful lives of intangible assets and adjust the
remaining amortization periods accordingly. Any negative goodwill
must be written-off. The standards generally are required to be
implemented by the Bank in its 2002 financial statements. The
adoption of these standards will not have a material impact on the
financial statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2001, the Financial Accounting Standards Board issued
Statement 143, Accounting for Asset Retirement Obligations. This
Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and associated retirement costs. It requires that the fair
value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred and the associated
asset retirement costs be capitalized as part of the carrying
amount of the long-lived asset. This Statement is effective for
financial statements issued for fiscal years beginning after June
15, 2002. The Statement is not expected to have a material effect
on the Corporation's financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. It
also establishes a single accounting model for long-lived assets to
be disposed of by sale, which includes long-lived assets that are
part of a discontinued operation. This Statement is effective for
financial statements issued for fiscal years and interim periods
beginning after December 15, 2001. The Statement is not expected to
have a material effect on the Corporation's financial statements.
NOTE 2. SECURITIES
The amortized cost of securities available for sale, with unrealized
gains and losses follows:
DECEMBER 31, 2001
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-------------- ------------- ------------ -------------
Obligations of U.S.
Government corporations
and agencies $ 26,680,369 $ 202,404 $ (38,948) $ 26,843,825
Obligations of states and
political subdivisions 3,043,644 59,399 -- 3,103,043
Corporate bonds 5,080,203 148,793 -- 5,228,996
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 -- (27,500) 460,000
------------- ------------- ------------- -------------
$ 36,563,716 $ 410,596 $ (66,448) $ 36,907,864
============= ============= ============= =============
DECEMBER 31, 2000
-----------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-------------- ------------- ------------- -------------
Obligations of U.S.
Government corporations
and agencies $ 9,706,802 $ 9,609 $ (157,327) $ 9,559,084
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 50,000 -- -- 50,000
FHLMC preferred
stock 487,500 -- -- 487,500
------------- ------------- ------------- -------------
$ 13,105,946 $ 27,717 $ (157,327) $ 12,976,336
============= ============= ============= =============
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
2001
-----------------------------
Amortized Fair
Cost Value
------------- -------------
Due in one year or less $ 1,400,057 $ 1,414,723
Due after one year through five years 8,485,027 8,663,550
Due after five years through ten years 6,301,405 6,368,707
Due after ten years 18,617,727 18,728,884
Equity securities 1,759,500 1,732,000
------------- -------------
$ 36,563,716 $ 36,907,864
============= =============
For the year ended December 31, 2000, proceeds from sales of securities
available for sale amounted to $826,979. Gross realized losses amounted to
$110,830. The tax (benefit) applicable to this net realized loss amounted to
$(37,682). There were no sales of securities available for sale for the years
ended December 31, 2001 and 1999.
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
=========== =========== =========== ===========
In accordance with FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the Corporation transferred the above held
to maturity securities to the available for sale category on January 1, 2001.
The carrying value of securities pledged to secure deposits and for other
purposes amounted to $6,281,107 and $7,609,612 at December 31, 2001 and 2000,
respectively.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. LOANS
A summary of the balances of loans follows:
DECEMBER 31,
----------------------------
2001 2000
--------- ---------
(Dollars in Thousands)
Mortgage loans on real estate:
Construction $ 16,851 $ 12,948
Secured by farmland 2,220 381
Secured by 1 to 4 family residential 72,692 74,167
Other real estate loans 62,845 53,959
Commercial and industrial loans (except
those secured by real estate) 15,154 17,148
Consumer installment loans 34,640 36,083
All other loans 5,962 5,873
--------- ---------
Total loans 210,364 200,559
Less: Unearned income 54 126
Allowance for loan losses 2,857 2,554
--------- ---------
Net loans $ 207,453 $ 197,879
========= =========
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Analysis of the allowance for loan losses follows:
2001 2000 1999
----------- ----------- ------------
Balance at beginning of year $ 2,554,033 $ 2,284,348 $ 1,853,150
Provision charged to operating expense 350,000 457,498 695,000
Recoveries added to the allowance 230,310 254,698 63,368
Loan losses charged to the allowance (277,600) (442,511) (327,170)
----------- ----------- -----------
Balance at end of year $ 2,856,743 $ 2,554,033 $ 2,284,348
=========== =========== ============
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Information about impaired loans is as follows:
2001 2000
----------- -----------
Impaired loans for which an allowance
has been provided $ 776,755 $ --
Impaired loans for which no allowance
has been provided -- --
----------- -----------
Total impaired loans $ 776,755 $ --
=========== ===========
Allowance provided for impaired loans,
included in the allowance for loan losses $ 200,000 $ --
=========== ===========
2001 2000 1999 1997
----------- ----------- ----------- -----------
Average balance in impaired loans $ 843,586 $ 12,804 $ 330,980 $ 644,283
=========== =========== =========== ===========
Interest income recognized $ -- $ -- $ 10,519 $ 46,497
=========== =========== =========== ===========
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 $136,134, $121,057 and $49,534 at December 31, 2001, 2000
and 1999, respectively. If interest on these loans had been accrued,
such income would have approximated $4,066, $3,509 and $1,421 for 2001,
2000 and 1999, respectively.
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 $4,652,519 at December 31, 2001 and $4,788,426 at December
31, 2000. During 2001, total principal additions were $717,750 and
total principal payments were $853,657.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. BANK PREMISES AND EQUIPMENT, NET
A summary of the cost and accumulated depreciation of premises and
equipment follows:
2001 2000
------------- -------------
Land $ 864,667 $ 864,667
Buildings and improvements 6,186,054 5,967,455
Furniture and equipment 7,063,646 6,008,597
Leasehold improvements 273,817 --
Construction in progress 259,976 --
------------- -------------
14,648,160 12,840,719
Less accumulated depreciation and amortization 8,312,452 7,583,531
------------- -------------
$ 6,335,708 $ 5,257,188
============= =============
Depreciation and amortization charged to operations totaled $747,886,
$747,145 and $764,862 in 2001, 2000 and 1999, respectively.
NOTE 7. DEPOSITS
The aggregate amount of time deposits, in denominations of $100,000 or
more at December 31, 2001 and 2000 was $21,462,537 and $24,420,250,
respectively.
At December 31, 2001, the scheduled maturities of time deposits are as
follows:
2002 $ 48,536,018
2003 11,798,730
2004 1,912,861
2005 5,937,973
2006 810,650
------------
$ 68,996,232
============
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 2001, computed as of October 1st
of each respective year:
2001 2000 1999 1997
------------ ------------ ------------ ------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning $ 3,736,910 $ 3,339,553 $ 3,086,296 $ 2,193,845
Service cost 215,762 178,513 193,629 140,968
Interest cost 278,253 248,451 229,513 162,425
Actuarial (gain) loss (115,194) 40,973 19,907 335,902
Benefits paid (78,792) (70,580) (189,792) (65,117)
------------ ------------ ------------ ------------
Benefit obligation, ending $ 4,036,939 $ 3,736,910 $ 3,339,553 $ 2,768,023
------------ ------------ ------------ ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning $ 4,470,263 $ 3,679,064 $ 3,154,626 $ 2,523,098
Actual return on plan assets (914,910) 831,151 714,230 653,203
Employer contributions 297,908 30,628 -- --
Benefits paid (78,792) (70,580) (189,792) (65,117)
------------ ------------ ------------ ------------
Fair value of plan assets, ending $ 3,774,469 $ 4,470,263 $ 3,679,064 $ 3,111,184
------------ ------------ ------------ ------------
FUNDED STATUS $ (262,470) $ 733,353 $ 339,511 $ 343,161
Unrecognized net actuarial (gain) loss 65,173 (1,170,638) (726,229) (631,080)
Unrecognized net obligation at transition (189,782) (208,761) (227,740) (265,698)
Unrecognized prior service cost 77,669 85,435 93,201 108,733
------------ ------------ ------------ ------------
Accrued benefit cost included in other liabilities $ (309,410) $ (560,611) $ (521,257) $ (444,884)
============ ============ ============ ============
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides the components of net periodic benefit
cost for the plan for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
---------- ---------- ----------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 215,762 $ 178,513 $ 193,629
Interest cost 278,253 248,451 229,513
Expected return on plan assets (399,914) (328,706) (267,066)
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 (36,181) (17,063) --
---------- ---------- ----------
Net periodic benefit cost $ 46,707 $ 69,982 $ 144,863
========== ========== ==========
The assumptions used in the measurement of the Corporation's benefit
obligation are shown in the following table:
2001 2000 1999
---- ---- ----
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, 2001, 2000 and 1999 of $74,880, $72,922
and $63,057, respectively.
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES
The Fauquier Bank has entered into two long-term banking facility
leases. The first lease was entered into on January 31, 1999. The lease
provides for an original five-year term with a renewal option for
additional periods of five years on the Bank's Sudley Road, Manassas
branch. Annual rent currently is $41,160.
The second lease for a branch office in Old Town Manassas was entered into
on April 10, 2001. The lease provides for an original ten-year term with
the right to renew for two additional ten-year periods beginning on June 1,
2001. Annual rent is $37,400 for the first five years and $40,700 annually
commencing with the sixth year.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Total rent expense was $73,076, $48,784, and $31,068 for 2001, 2000 and
1999, respectively, and was included in occupancy expense.
The following is a schedule by year of future minimum lease
requirements required under the long-term noncancellable lease
agreements:
2002 $ 82,970
2003 84,557
2004 41,339
2005 37,400
2006 39,325
Thereafter 179,758
------------
Total $ 465,349
============
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, 2001 and
2000, the aggregate amounts of daily average required balances were
approximately $8,300,000 and $4,044,000, 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.
NOTE 10. INCOME TAXES
The components of the net deferred tax assets included in other assets
are as follows:
2001 2000 1999
---------- ---------- ----------
Deferred tax assets:
Allowance for loan losses $ 837,466 $ 734,545 $ 625,995
Accrued pension obligation 105,826 190,114 166,320
Interest on nonaccrual loans 31,076 1,193 1,797
Allowance on other real estate owned -- -- 652
Securities available for sale -- 44,067 189,528
Other 11,329 -- --
---------- ---------- ----------
985,697 969,919 $ 984,292
---------- ---------- ----------
Deferred tax liabilities:
Securities available for Sale 117,011 -- --
Other 35,518 1,711 1,416
Accumulated depreciation 217,778 268,820 294,918
370,307 270,531 296,334
---------- ---------- ----------
Net deferred tax assets $ 615,390 $ 699,388 $ 687,958
========== ========== ==========
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Allocation of federal income taxes between current and deferred
portions is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ------------ -----------
Current tax expense $ 1,673,861 $ 1,586,492 $ 1,316,756
Deferred tax (benefit) (77,080) (156,891) (154,757)
----------- ----------- -----------
$ 1,596,781 $ 1,429,601 $ 1,161,999
=========== =========== ===========
The reasons for the difference between the statutory federal income tax
rate and the effective tax rates are summarized as follows:
2001 2000 1999
----------- ----------- -----------
Computed "expected" tax expense $ 1,932,837 $ 1,538,918 $ 1,292,319
Decrease in income taxes
resulting from:
Tax-exempt interest income (135,625) (106,799) (116,442)
Extraordinary item (194,684) -- --
Other (5,747) (2,518) (13,878)
----------- ----------- -----------
$ 1,596,781 $ 1,429,601 $ 1,161,999
=========== =========== ===========
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.
2001 2000 1999
--------------------------- --------------------------- ----------------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Basic earnings per share 1,703,433 $ 2.06 1,755,182 $ 1.76 1,802,165 $ 1.46
============ ============ ============
Effect of dilutive securities,
stock options 33,415 11,591 15,967
------------ ------------ ------------
Diluted earnings per share 1,736,848 $ 2.02 1,766,773 $ 1.75 1,818,132 $ 1.45
============ ============ ============ ============ ============ ============
Options on 49,280 and 80,060 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
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. STOCK OPTION PLANS
OMNIBUS STOCK OWNERSHIP AND LONG-TERM INCENTIVE 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. The plan provides for an annual 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
the Plan are not exercisable for six months from the date of grant
except in the case of death or disability. Options that are not
exercisable at the time a director's services on the Board terminates
for reason other than death, disability or retirement in accordance
with the Corporation's policy will be forfeited.
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.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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,
---------------------------------------------
2001 2000 1999
------------- ------------- -------------
Net income As reported $ 3,515,434 $ 3,096,628 $ 2,638,940
Pro forma $ 3,247,129 $ 2,872,942 $ 2,511,546
Earnings per share As reported $ 2.06 $ 1.76 $ 1.46
Pro forma $ 1.91 $ 1.64 $ 1.39
Earnings per share - As reported $ 2.02 $ 1.75 $ 1.45
assuming dilution Pro forma $ 1.87 $ 1.63 $ 1.38
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,
---------------------------------------------
2001 2000 1999
------------- -------------- -------------
Dividend yield 0.69% 0.65% 0.60%
Expected life 10 years 10 years 10 years
Expected volatility 18.32% 18.38% 17.88%
Risk-free interest rate 5.11% 6.70% 6.50%
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of the status of the Omnibus Stock Ownership and Long-Term
Incentive is presented below:
2001 2000 1999
------------------------------ --------------------------------- ---------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ---------------- ---------------- ---------------- ---------------- ----------------
Outstanding at January 1 129,816 $ 18.46 $ 19.93 $ 21.00
89,968 61,648
Granted 42,296 16.13 39,848 16.25 32,800 19.00
Exercised (1,000) 8.75 -- -- (4,480) 9.44
------------ --------------- ---------------
Outstanding at December 31 171,112 $ 16.44 129,816 $ 18.46 89,968 $ 19.93
============ =============== ================
Exercisable at end of year 83,454 70,347 56,000
Weighted-average fair value
per option of options granted
during the year $ 6.21 $ 7.34 $ 6.83
The status of the options outstanding as of December 31, 2001 for the
Omnibus Stock Ownership and Long-Term Incentive 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
-------------------- ------------------ ------------------ ------------------ -------------------
3.33 years 7,960 $ 8.75 7,960 $ 8.75
4.25 years 11,200 10.13 11,200 10.13
5.25 years 12,320 12.50 12,320 12.50
6.25 years 11,200 20.00 11,200 20.00
6.66 years 13,488 21.00 11,827 21.00
7.25 years 12,320 19.50 12,320 19.50
7.66 years 20,480 19.00 -- --
8.6 years 39,848 16.25 14,347 16.25
9.88 years 42,296 16.13 14,107 16.13
------- ------
171,112 $ 16.44 95,281 $ 15.12
======= ======
The Corporation also maintains a Director Deferred Compensation Plan
(the "Deferred Compensation Plan"). This plan provides that any
non-employee director of the Corporation or the Bank may elect to defer
receipt of all or any portion of his or her compensation as a director.
A participating director may elect to have amounts deferred under the
Deferred Compensation Plan held in a deferred cash account, which is
credited on a quarterly basis with interest equal to the highest rate
offered by the Bank at the end of the preceding quarter. Alternatively,
a participant may elect to have a deferred stock account in which
deferred amounts are treated as if invested in the Corporation's common
stock at the fair market value on the date of deferral. The value of a
stock account will increase and decrease based upon the fair market
value of an equivalent number of shares of common stock. In addition,
the deferred amounts deemed invested in common stock will be credited
with dividends on an equivalent number of shares. Amounts considered
invested in the Corporation's common stock are paid, at the election of
the director, either in cash or in whole shares of the common stock and
cash in lieu of fractional shares. Directors may elect to receive
amounts contributed to their respective accounts in one or up to five
installments.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. FEDERAL HOME LOAN BANK ADVANCES
The Corporation's fixed-rate debt of $15,000,000 at December 31, 2001
matures through 2008. At December 31, 2001 and 2000, the interest rates
ranged from 4.51 percent to 4.89 percent and from 4.89 percent to 5.51
percent, respectively. At December 31, 2001 and 2000, the weighted
average interest rates were 4.64 percent and 5.27 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,
2001, the book value of these loans totaled approximately $67,332,000.
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,
---------------------------------
2001 2000
------------ ------------
Due in 2006 $ 10,000,000 $ --
Due in 2008 5,000,000 13,000,000
------------ ------------
$ 15,000,000 $ 13,000,000
============ ============
An advance dated October 1, 1998 has an imbedded call option that gives
the Federal Home Loan Bank the option to call only on the five-year
anniversary date. The remaining advance, dated May 10, 2002 has an
imbedded call option that gives the Federal Home Loan Bank the option
to call only on the two-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, 2001, the aggregate amount of unrestricted funds, which could be
transferred from the banking subsidiary to the parent corporation,
without prior regulatory approval, totaled $2,378,573.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 as it does for
on-balance-sheet instruments.
At December 31, 2001 and 2000, the following financial instruments were
outstanding whose contract amounts represent credit risk:
2001 2000
------------ ------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 47,553,841 $ 54,509,321
Standby letters of credit $ 6,102,463 $ 6,341,922
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:
CASH, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, statement 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.
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, 2001 and
2000, the carrying amounts of loan commitments and standby letters
of credit approximated fair values.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The estimated fair values of the Corporation's financial instruments are as
follows:
2001 2000
---------------------------------------- ----------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------- ------------------- ------------------- -------------------
(Thousands) (Thousands)
Financial assets:
Cash and short-term
investments $ 14,761 14,761 $ 10,891 $ 10,891
Federal funds sold 15,421 15,421 14,688 14,688
Securities 36,908 36,908 16,956 16,957
Loans, net 207,453 213,688 197,879 196,918
Accrued interest receivable 1,590 1,590 1,641 1,641
Financial liabilities:
Deposits $ 243,747 243,822 $ 212,103 $ 196,068
FHLB advances 15,000 15,060 13,000 12,892
Accrued interest payable 558 558 710 710
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.
NOTE 17. OTHER OPERATING EXPENSES
The principal components of "Other operating expenses" in the
Consolidated Statements of Income are:
2001 2000 1999
----------------- ------------------ -----------------
Advertising and business development $ 398,694 $ 381,204 $ 337,503
Bank card 426,738 408,342 401,617
Data processing 719,820 644,911 581,729
Postage and supplies 385,291 253,206 265,319
Professional and consulting fees 700,086 855,637 598,423
Other (no items exceed 1% of total revenue) 1,429,901 1,711,538 1,852,204
---------------- ----------------- ----------------
$ 4,060,530 $ 4,254,838 $ 4,036,795
================ ================= ================
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $299,895 at December 31,
2001.
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, 2001 and 2000, that
the Corporation and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 2001, 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.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, 2001: (Amount in Thousands)
Total Capital (to Risk
Weighted Assets):
Consolidated $ 26,427 13.2% $ 15,953 8.0% N/A N/A
The Fauquier Bank $ 26,138 13.1% $ 15,923 8.0% $ 19,903 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 23,930 12.0% $ 7,977 4.0% N/A N/A
The Fauquier Bank $ 23,646 11.9% $ 7,961 4.0% $ 11,942 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 23,930 8.3% $ 11,533 4.0% N/A N/A
The Fauquier Bank $ 23,646 8.2% $ 11,538 4.0% $ 14,422 5.0%
As of December 31, 2000:
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%
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 20. EXTRAORDINARY ITEM
The extraordinary item represents the prepayment penalty associated
with the repayment of $8 million of Federal Home Loan Bank advances on
December 5, 2001. The penalty amounted to $572,600, less the applicable
income tax effect of $194,684.
NOTE 21. PARENT CORPORATION ONLY FINANCIAL STATEMENTS
FAUQUIER BANKSHARES, INC.
(Parent Corporation Only)
BALANCE SHEETS
December 31, 2001 and 2000
DECEMBER 31,
---------------------------
ASSETS 2001 2000
------------ ------------
Cash on deposit with subsidiary bank $ 76,164 $ 46,624
Investment in subsidiaries, at cost,
plus equity in undistributed net income 23,872,648 22,498,032
Dividend receivable 318,356 291,072
Other assets 377,769 --
------------ ------------
$ 24,644,937 $ 22,835,728
============ ============
Liabilities and Shareholders' Equity
LIABILITIES
Dividend payable $ 318,356 $ 291,072
Other liabilities 169,182 125,717
------------ ------------
487,538 416,789
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 5,244,500 5,359,158
Retained earnings, which are substantially
distributed earnings of subsidiaries 18,685,761
17,145,324
Accumulated other comprehensive income (loss) 227,138 (85,543)
------------ ------------
24,157,399 22,418,939
Total liabilities and shareholders' equity $ 24,644,937 $ 22,835,728
============ ============
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FAUQUIER BANKSHARES, INC.
(Parent Corporation Only)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 2001
2001 2000 1999
----------- ----------- -----------
REVENUE,
dividends from subsidiaries $ 2,530,732 $ 2,237,339 $ 2,315,247
----------- ----------- -----------
EXPENSES
Legal and professional fees 28,624 35,613 105,153
Directors' fees 52,432 6,632 11,959
Miscellaneous 35,963 15,003 28,149
----------- ----------- -----------
Total expenses 117,019 57,248 145,261
----------- ----------- -----------
Income before income tax benefit
and equity in undistributed net
income of subsidiaries 2,413,713 2,180,091 2,169,986
Income tax (benefit) (39,786) (19,464) (49,389)
----------- ----------- -----------
Income before equity in
undistributed net income
of subsidiaries 2,453,499 2,199,555 2,219,375
Equity in undistributed net income
of subsidiaries 1,061,935 897,073 419,565
----------- ----------- -----------
Net income $ 3,515,434 $ 3,096,628 $ 2,638,940
=========== =========== ===========
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
for Each of the Three Years in the Period Ended December 31,
2001
2001 2000 1999
----------------- ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,515,434 $ 3,096,628 $ 2,638,940
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (1,061,935)
(897,074) (419,565)
(Increase) in undistributed dividends
receivable from subsidiaries -- (25,302) (26,860)
(Increase) decrease in other assets (405,053) -- 23,959
Increase (decrease) in other liabilities 43,465 (25,910) 15,459
---------------- ----------------- -----------------
Net cash provided by operating activities 2,091,911 2,148,342 2,231,933
---------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid (1,194,739) (1,092,198) (978,308)
Issuance of common stock 28,309 22,932 42,286
Acquisition of common stock (895,941) (1,069,839) (1,288,079)
--------------- ----------------- -----------------
Net cash (used in) financing activities (2,062,371) (2,139,105) (2,224,101)
---------------- ----------------- -----------------
Increase in cash and cash equivalents 29,540 9,237 7,832
Cash and Cash Equivalents
Beginning 46,624 37,387 29,555
---------------- --------------- ---------------
Ending $ 76,164 46,624 37,387
================ =============== ===============
60
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 24, 2002
/s/ Eric P. Graap
-----------------------------
Eric P. Graap
Senior Vice President and Chief Financial Officer
Dated: April 24, 2002
Pursuant to the requirements 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
------------------------------- Chief Executive Officer, April 24, 2002
C. Hunton Tiffany Director
/s/ Alexander G. Green, Jr.
------------------------------- Director April 24, 2002
Alexander G. Green, Jr.
/s/ Stanley C. Haworth
------------------------------- Director April 24, 2002
Stanley C. Haworth
/s/ John J. Norman, Jr.
------------------------------- Director April 24, 2002
John J. Norman, Jr.
/s/ Douglas C. Larson
------------------------------- Director April 24, 2002
Douglas C. Larson
/s/ C.H. Lawrence, Jr.
------------------------------- Director April 24, 2002
C.H. Lawrence, Jr.
/s/ D. Harcourt Lees, Jr.
------------------------------- Director April 24, 2002
D. Harcourt Lees, Jr.
/s/ Randolph T. Minter
------------------------------- Director April 24, 2002
Randolph T. Minter
/s/ B.S. Montgomery
------------------------------- Director April 24, 2002
B.S. Montgomery
/s/ H.P. Neale
------------------------------- Director April 24, 2002
H.P. Neale
/s/ Pat H. Nevill
------------------------------- Director April 24, 2002
Pat H. Nevill
/s/ Henry M. Ross
------------------------------- Director April 24, 2002
Henry M. Ross
/s/ H. Frances Stringfellow
------------------------------- Director April 24, 2002
H. Frances Stringfellow
64