SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
FAUQUIER BANKSHARES, INC.
------------------------------------------------
(Name of Registrant as Specified in its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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[X] No fee required.
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calculated and state how it was determined):
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Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
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4. Date Filed:
FAUQUIER BANKSHARES, INC.
10 COURTHOUSE SQUARE
WARRENTON, VIRGINIA 20186
April 16, 2004
Fellow Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders (the
"Annual Meeting") of Fauquier Bankshares, Inc. (the "Company"), the holding
company for The Fauquier Bank, to be held on May 18, 2004, at 11:00 a.m.,
Eastern Time, at The Fauquier Springs Country Club, Springs Road, Warrenton,
Virginia.
The enclosed Notice of Annual Meeting and proxy statement describe the formal
business to be transacted at the Annual Meeting. Directors and officers of the
Company, as well as a representative of Yount, Hyde & Barbour, P.C., the
Company's independent auditors, will be present at the Annual Meeting to respond
to any questions that shareholders may have regarding the business to be
transacted. Detailed information relating to the Company's activities and
operating performance is contained in our 2003 Annual Report, which is also
enclosed.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND, PLEASE SIGN, DATE
AND RETURN THE ENCLOSED PROXY card PROMPTLY IN THE POSTAGE-PAID ENVELOPE
PROVIDED SO THAT YOUR SHARES WILL BE REPRESENTED. IF YOUR SHARES ARE HELD IN THE
NAME OF A BROKER OR OTHER NOMINEE, YOU SHOULD INSTRUCT YOUR BROKER OR NOMINEE
HOW TO VOTE ON YOUR BEHALF, OR, IF YOU PLAN TO ATTEND THE MEETING AND WISH TO
VOTE IN PERSON, BRING WITH YOU A PROXY OR LETTER FROM YOUR BROKER OR NOMINEE TO
CONFIRM YOUR OWNERSHIP OF SHARES.
On behalf of the Board of Directors and all of the employees of the Company and
the Bank, I thank you for your continued interest and support.
Sincerely yours,
/s/ C. Hunton Tiffany
--------------------------------------
C. Hunton Tiffany
Chairman & Chief Executive Officer
Fauquier Bankshares, Inc.
FAUQUIER BANKSHARES, INC.
10 COURTHOUSE SQUARE
WARRENTON, VIRGINIA 20186
(540) 347-2700
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD TUESDAY, MAY 18, 2004
--------------------------------------------------
Warrenton, Virginia
April 16, 2004
To the Shareholders of Fauquier Bankshares, Inc.:
NOTICE is hereby given that the ANNUAL MEETING OF SHAREHOLDERS OF FAUQUIER
BANKSHARES, INC. (the "Company") will be held at THE FAUQUIER SPRINGS COUNTRY
CLUB, SPRINGS ROAD, WARRENTON, VIRGINIA, ON TUESDAY, MAY 18, 2004, AT 11:00
A.M., EASTERN TIME (THE "ANNUAL MEETING"), for the following purposes:
1. To elect five Class II directors to serve until the 2007 Annual
Meeting of Shareholders of the Company and one Class I director to
serve until the 2006 Annual Meeting of Shareholders of the Company,
and until their successors are duly elected and qualify.
2. To ratify the appointment of Yount, Hyde & Barbour, P.C. as the
Company's independent public accountants to audit the books of the
Company and its subsidiary for the current year.
3. To transact such other business as may properly come before the
Annual Meeting or any adjournments thereof, including whether or
not to adjourn the Annual Meeting.
The Board of Directors has fixed the close of business on April 7, 2004, as the
record date for determining shareholders entitled to notice of, and to vote at,
the Annual Meeting.
A copy of the annual report of the Company for the year ended December 31, 2003,
a proxy card and a proxy statement accompany this notice.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WHETHER OR NOT
YOU EXPECT TO BE PRESENT IN PERSON, PLEASE COMPLETE, SIGN, DATE, AND PROMPTLY
MAIL THE ENCLOSED PROXY CARD. A RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE
THAT REQUIRES NO POSTAGE IF MAILED WITHIN THE UNITED STATES. IF YOU ARE PRESENT
AT THE MEETING, YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY AND VOTE YOUR SHARES
PERSONALLY. ANY SHAREHOLDER GIVING A PROXY HAS THE RIGHT TO REVOKE IT AT ANY
TIME BEFORE IT IS EXERCISED BY PROVIDING WRITTEN NOTICE TO THE SECRETARY OF THE
COMPANY.
IF YOUR SHARES ARE HELD IN A BROKERAGE ACCOUNT OR BY A BANK OR OTHER NOMINEE,
YOU ARE CONSIDERED THE BENEFICIAL OWNER OF SHARES "HELD IN STREET NAME," AND
THESE PROXY MATERIALS ARE BEING FORWARDED TO YOU BY YOUR BROKER OR NOMINEE. YOUR
NAME DOES NOT APPEAR ON THE REGISTER OF SHAREHOLDERS AND IN ORDER TO BE ADMITTED
TO THE MEETING, YOU MUST BRING A PROXY OR LETTER SHOWING THAT YOU ARE THE
BENEFICIAL OWNER OF THE SHARES. UNLESS YOU HAVE OBTAINED A PROXY FROM YOUR
BROKER OR NOMINEE, YOU WILL NOT BE ABLE TO VOTE AT THE MEETING AND SHOULD
INSTRUCT YOUR BROKER OR NOMINEE HOW TO VOTE ON YOUR BEHALF.
FAUQUIER BANKSHARES, INC.
By Order of the Board of Directors
/s/ H. Frances Stringfellow
-----------------------------------
H. Frances Stringfellow, Secretary
FAUQUIER BANKSHARES, INC.
10 COURTHOUSE SQUARE
WARRENTON, VIRGINIA 20186
(540) 347-2700
PROXY STATEMENT
SOLICITATION AND VOTING OF PROXIES
This proxy statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Fauquier Bankshares, Inc. (the "Company") for use
at the Annual Meeting of Shareholders to be held at THE FAUQUIER SPRINGS COUNTRY
CLUB, SPRINGS ROAD, WARRENTON, VIRGINIA, ON TUESDAY, MAY 18, 2004 AT 11:00 A.M.,
EASTERN TIME (THE "ANNUAL MEETING"), and at any adjournments thereof.
The cost of proxy solicitation will be borne by the Company. Additional
solicitations may be made by letter, e-mail, telephone or facsimile by the
Company or by its directors or regular employees, without additional
compensation therefor.
The Company began mailing this proxy statement and the form of proxy solicited
hereby to its shareholders on or about April 16, 2004.
Any proxy given pursuant to this solicitation may be revoked by the person
executing it at any time prior to its exercise by submitting to the Secretary of
the Company a written notice of revocation or a properly-executed proxy bearing
a later date, or by attending the Annual Meeting and voting in person. Proxies
will extend to, and will be voted at, any properly adjourned session of the
Annual Meeting.
VOTING SECURITIES
As of April 7, 2004, the record date fixed for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting, there were 3,325,486
outstanding shares of common stock, which is the only class of stock of the
Company. Each share of common stock is entitled to one vote on each matter to be
voted upon at the Annual Meeting. Shares of stock represented by valid proxies
received pursuant to this solicitation, and not revoked before they are
exercised, will be voted as specified therein. If no specification is made,
signed proxy cards will be voted for the election of each of the nominees for
director named in this proxy statement and in favor of the ratification of the
appointment of Yount, Hyde & Barbour, P.C. as the Company's independent
auditors.
The presence, in person or by proxy, of the holders of at least a majority of
the total number of shares of common stock entitled to vote is necessary to
constitute a quorum at the Annual Meeting. In the event that there are not
sufficient votes for a quorum, or to approve or ratify any matter being
presented at the time of the Annual Meeting, the Annual Meeting may be adjourned
in order to permit further solicitation of proxies.
As to the election of directors, the proxy card being provided by the Board of
Directors enables a shareholder to vote "FOR" the election of the nominees
proposed by the Board of Directors or to "WITHHOLD AUTHORITY" to vote for one or
more of the nominees being proposed. Under Virginia law, if a quorum is present,
the nominees receiving a plurality of the votes cast at the Annual Meeting will
be elected directors; therefore, votes withheld will have no effect. Approval of
any other matter requires that the matter receive more votes "FOR" than votes
"AGAINST" the matter. Thus, although abstentions and broker non-votes (shares
held by customers which may not be voted on certain matters because the broker
has not received specific instructions from the customers) are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business at the meeting, they are generally not counted for purposes of
determining whether a matter has been approved, and therefore have no effect.
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PROPOSAL ONE:
ELECTION OF CLASS II DIRECTORS
The Company's articles of incorporation provide that the Board of Directors of
the Company is classified into three classes (I, II and III), with one class
being elected every year for a term of three years. In addition, under Virginia
law, a director appointed to the Board of Directors in between meetings of the
shareholders must stand for re-election at the next annual meeting of
shareholders. The Board of Directors currently consists of fourteen directors.
The terms of office of the Class II directors expire this year. In addition,
John B. Adams, Jr. was appointed by the Board in December, 2003 to serve as a
Class I director until the 2004 Annual Meeting.
Messrs. Ferrell, Haworth, Neale and Montgomery and Ms. Nevill, each of whom
currently serves as a Class II director, are proposed for election as Class II
directors. If elected, these individuals shall hold office until the 2007 Annual
Meeting, and until their successors shall have been elected and shall qualify.
Mr. Adams, who currently serves as a Class I director, is proposed for election
as a Class I director. If elected, Mr. Adams shall hold office until the 2006
Annual Meeting, and until his successor shall have been elected and shall
qualify.
Certain information is set forth below concerning the six nominees for election
at the 2004 Annual Meeting, as well as the other Class I and III Directors who
will continue in office until the 2006 and 2005 Annual Meetings, respectively.
NOMINEES FOR ELECTION AT 2004 ANNUAL MEETING
--------------------------------------------
CLASS II (TO SERVE UNTIL 2007 ANNUAL MEETING)
Randy K. Ferrell, 53, has been a director of the Company since 2003 and a
director of The Fauquier Bank, the Company's operating subsidiary (the "Bank"),
since 2002. He has been President and Chief Operating Officer of the Company
since May 2003, Chief Executive Officer of the Bank since June 2003, and
President of the Bank since 2002. He served as Senior Vice President of the
Company from 1994 to May 2003. Mr. Ferrell was Chief Operating Officer of the
Bank from 2002 to June 2003, Executive Vice President of the Bank, Commercial
and Retail Banking and Management Information Systems from 2001 to 2002, and
Senior Vice President, Commercial Lending from 1994 to 2001.
Stanley C. Haworth, 79, has been a director of the Company since 1984 and a
director of the Bank, since 1971. Mr. Haworth has been an independent auctioneer
since 1955 and the owner and general manager of Warrenton Nurseries since 1960.
Brian S. Montgomery, 51, has been a director of the Company and a director of
the Bank since 1990. Mr. Montgomery has been owner and President of Warrenton
Foreign Car, Inc. and Montgomery Auto Parts, both located in Warrenton,
Virginia, since 1972.
Harold Paul Neale, 82, has been a director of the Company since 1984 and a
director of the Bank since 1971. Mr. Neale has been a self-employed dairy farmer
in Fauquier County, Virginia since 1965.
Pat H. Nevill, 57, has been a director of the Company and a director of the Bank
since 1993. Ms. Nevill was associated with The Stable Door, Ltd., a retail
clothing, gifts and tack sales business located in Warrenton, Virginia, as
co-owner, director and Secretary-Treasurer, from 1976 until the business was
sold in 2003.
CLASS I (TO SERVE UNTIL 2006 ANNUAL MEETING)
John B. Adams, Jr., 59, has been a director of the Company since 2003 and a
director of the Bank since 2002. He was elected Vice Chairman of the Bank in
January 2004. Mr. Adams was employed as President and Chief Executive Officer of
Bowman Distillery from 1989 through October 2003. Mr. Adams serves as President
and Chief Executive Officer of Bowman Companies, primarily a family real estate
holding company, and is a director of Universal Corporation, headquartered in
Richmond, Virginia.
3
The Board recommends that the shareholders vote "FOR" the above nominees as
directors. The persons named in the proxy will vote for the election of the
above nominees unless authority is withheld. The Board of Directors has no
reason to believe that any of the above nominees will be unable to serve as a
director. However, if any should be unable for any reason to accept the
nomination or election, it is the intention of the persons named in the proxy to
vote those proxies authorizing them to vote for the election of directors for
the election of such other person or persons as the Board of Directors may in
its discretion recommend.
DIRECTORS CONTINUING IN OFFICE AFTER 2004 ANNUAL MEETING
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CLASS III (TERMS EXPIRE IN 2005)
Alexander G. Green, Jr., 87, has been a director of the Company since 1984 and a
director of the Bank since 1950. He is a retired U. S. Postmaster, merchant and
farmer.
Douglas C. Larson, 57, has been a director of the Company and a director of the
Bank since 1996. Mr. Larson has been Vice President of the Piedmont
Environmental Council since December 2000. The Piedmont Environmental Council is
a non-profit organization working to promote and protect the natural resources,
the rural economy, the history and the beauty of the nine county Piedmont
region. From 1990 through November 2000, he served as Executive Director of
Airlie Foundation, a conference and research center in Fauquier County,
Virginia.
D. Harcourt Lees, Jr., 81, has been a director of the Company since 1984 and a
director of the Bank since 1954. He has owned and operated D. H. Lees & Company,
Inc., a real estate brokerage, since 1946.
Randolph T. Minter, 44, has been a director of the Company and a director of the
Bank since 1996. Mr. Minter has been President and owner of Moser Funeral Home,
Inc. since 1990, having worked prior to that time in various positions at the
funeral home since 1980. He also has owned and operated Bright View Cemetery,
Inc. in Fauquier County, Virginia, since 1990.
H. Frances Stringfellow, 65, has been a director of the Company since 1999 and a
director of the Bank since 2000. Ms. Stringfellow has been Corporate Secretary
of the Company since 1991. She was an independent contractor administrative
consultant to the Bank from June 1999 through December 2002, focusing on
internal audit and strategic planning support. Ms. Stringfellow was employed by
the Bank and served in various executive and other positions from 1986 until she
retired as Senior Vice President, Administrative Services, in May 1999.
CLASS I (TERMS EXPIRE IN 2006)
C. H. Lawrence, Jr., 59, has been a director of the Company since 1984 and a
director of the Bank since 1980. Mr. Lawrence is a business development
consultant and has been an independent contractor with the Bank since February
1998. He was owner and general manager of Country Chevrolet, Inc. from 1976 to
1997. Mr. Lawrence served as Chairman of the Bank from March 1996 to March 1997.
John J. Norman, Jr., 41, has been a director of the Company and a director of
the Bank since 1998. Mr. Norman has served as President and Principal Broker of
Norman Realty, Inc., a commercial real estate sales and leasing brokerage in
Manassas, Virginia, since June 2001. He served as Vice President and Associate
Broker for Norman Realty, Inc. from 1991 to June 2001, and as a sales agent of
the company from 1989 to 1991.
4
C. Hunton Tiffany, 64, has been a director and Chief Executive Officer of the
Company since 1984 and a director of the Bank since 1974. He has been Chairman
of the Company since March 1996 and of the Bank since March 1997. He served as
Chief Executive Officer of the Bank from 1982 through May 2003. He also served
as President of the Company from 1984 through June 2003, and as President of the
Bank from 1982 through January 2002. He was Executive Vice President from 1974
to 1982, and has served in various other capacities with the Bank since being
hired in 1965.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
INDEPENDENCE. A majority of the directors are "independent directors" as defined
by the listing standards of NASDAQ and the SEC, and the Board of Directors has
determined that these independent directors have no relationships with the
Company that would interfere with the exercise of their independent judgment in
carrying out the responsibilities of a director. The independent directors are
Messrs. Adams, Green, Haworth, Larson, Lees, Minter, Montgomery, Neale, and
Norman, and Mses. Nevill and Stringfellow.
SHAREHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS. Any shareholder who
wishes to contact the Board of Directors or any of its members may do so by
writing to Fauquier Bankshares, Inc., Board of Directors, c/o Corporate
Secretary, 10 Courthouse Square, Warrenton, VA 20186. The Secretary of the
Company will promptly forward all such communications to the specified
addressees. Communications may also be directed to the Board of Directors
through our website: www.fauquierbank.com under "Contact Us." Emails sent
through our website clearly addressed to the Board of Directors or to a specific
director will be forwarded by our webmaster as indicated.
MEETINGS AND ATTENDANCE. During the year ended December 31, 2003, the Board of
Directors held eight meetings. Each director attended at least 75% of the
aggregate of: (1) the number of Board meetings held during the period in which
he or she has been a director and (2) the number of meetings of all committees
on which he or she served.
The Company has not adopted a formal policy on board members' attendance at our
annual meetings of shareholders, although all board members are encouraged to
attend. All board members attended our 2003 annual meeting of shareholders.
AUDIT COMMITTEE. The Board has an Audit Committee, composed entirely of
directors who satisfy the independence and financial literacy requirements for
audit committee members under the NASDAQ listing standards and applicable SEC
regulations. The Audit Committee is responsible for the appointment,
compensation and oversight of the work performed by the independent auditors.
The Audit Committee held seven official meetings and several informal
discussions in fiscal 2003. The Audit Committee report is set forth below. The
members of the Audit Committee are Messrs. Adams, Haworth, Larson, Neale and
Norman, and Ms. Stringfellow. The Board of Directors has determined that Ms.
Stringfellow and Mr. Norman qualify as audit committee financial experts as
defined by SEC regulations and has designated them as the Company's Audit
Committee Financial Experts.
COMPENSATION AND BENEFITS COMMITTEE. Executive compensation is primarily paid by
the Bank. The Company has a Compensation and Benefits Committee, whose sole
function is to act with respect to the Fauquier Bankshares, Inc. Director
Deferred Compensation Plan, and the Fauquier Bankshares, Inc. Omnibus Stock
Ownership and Long Term Incentive Plan. The committee, composed entirely of
independent directors, held seven official meetings and several informal
discussions in fiscal 2003. The members of the Company's Compensation and
Benefits Committee are Messrs. Haworth, Larson, Minter, and Montgomery, and
Mses. Nevill and Stringfellow.
These same directors serve as the Bank's Compensation and Benefits Committee,
which approves the policies under which compensation is awarded to the Bank's
Chief Executive Officer and to the Bank's other executive officers and oversees
the administration of executive compensation programs. The Bank's Compensation
and Benefits Committee held eight official meetings and several informal
discussions during fiscal 2003.
COMMITTEE ON BOARD GOVERNANCE. The Board has a Committee on Board Governance,
which is responsible for evaluating the Board's structure, personnel and
processes. During 2003, the committee held one official meeting.
5
The members of the Committee on Board Governance are Messrs. Ferrell, Lawrence,
Montgomery, Norman, and Tiffany and Ms. Stringfellow.
NOMINATING COMMITTEE. The Board established a Nominating Committee in December
2003, composed entirely of independent directors, to be responsible for making
recommendations to the full Board regarding nominations of individuals for
election to the Board of Directors. The committee did not meet during 2003. The
committee does not currently operate pursuant to a charter, but the Board
intends to have a written charter in place by the date of the Annual Meeting.
The committee will consider candidates for directors proposed by shareholders.
The committee has no formal procedures for submitting candidates and, until
otherwise determined, will accept written submissions that include the name,
address and telephone number of the proposed nominee, along with a brief
statement of the candidate's qualifications to serve as a director. All such
shareholder recommendations should be submitted to the attention of the
Chairman, Nominating Committee, Fauquier Bankshares, Inc., 10 Courthouse Square,
Warrenton, VA 20186, and must be received no later than March 2, 2005 in order
to be considered for the next annual election of directors. Any candidates
submitted by a shareholder are reviewed and considered in the same manner as all
other candidates. The current nominees for Class I and II members of the Board
of Directors were considered and determined by the entire Board at its meetings.
The members of the Nominating Committee are Messrs. Adams, Larson, Lees,
Montgomery and Norman.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, officers,
directors and beneficial owners of more than 10% of the Company's common stock
are required to file reports on Forms 3, 4 and 5 with the Securities and
Exchange Commission to report their beneficial ownership of the Company's common
stock as well as certain changes in such beneficial ownership. Based solely upon
the Company's review of such reports, the Company believes that no officer,
director or more than 10% beneficial owner failed to file required reports on
Forms 3, 4 or 5 on a timely basis during the fiscal year ended December 31,
2003.
COMPENSATION OF MANAGEMENT
DIRECTORS' COMPENSATION
-----------------------
RETAINER. Non-employee directors of the Company and Bank received a retainer of
$2,500 for service during the second half of 2003. Non-employee directors of the
Company will receive a $5,000 retainer for service in 2004.
MEETING FEES. Non-employee directors of the Company receive a fee of $200 for
each Board and committee meeting attended. Non-employee directors of the Bank
receive a fee of $500 for each Bank Board meeting and $200 for each Bank
committee meeting attended. However, no director may receive fees for more than
two meetings held in any one day. Mr. Tiffany and Mr. Ferrell, the Company's
employee directors, receive no additional compensation from the Company for
their services as directors.
DIRECTOR DEFERRED COMPENSATION PLAN. Effective April 1, 1995, the Board approved
and established a Director Deferred Compensation Plan (the "Deferred
Compensation Plan"). This plan provides that any non-employee director of the
Company 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 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 Company'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 Company's common stock are paid, at the election of
the director, either in cash or in whole shares of common stock and cash in lieu
of fractional shares. Directors may elect to receive amounts contributed to
their respective accounts through up to five installment
6
payments. The Company may establish a trust to hold amounts deferred and which
accumulate under the plan. The purpose of the Deferred Compensation Plan is to
give the non-employee directors the option of deferring current taxation on
directors' fee income.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The Board established, effective April
1, 1995, a Non-Employee Director Stock Option Plan (the "Option Plan"). The
five-year term of the Option Plan expired in 1999. Under the Option Plan each
director who was not an employee of the Company or the Bank received an option
grant covering 2,240 shares of Company common stock on April 1 of each year
during the five-year term of the Option Plan. The first grant under the Option
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 was granted. During the term
of the Option Plan, a total of 123,200 shares of common stock could be granted
and 120,960 shares of common stock were granted under the Option Plan. There are
96,820 options under the Option Plan remaining available to be exercised. The
options granted under the Option Plan became exercisable six months from the
date of grant except in the case of death or disability. Options that were not
exercisable at the time a director's services on the Board terminated for
reasons other than death, disability or retirement in accordance with the
Company's policy were forfeited. The purpose of the Option Plan was to promote a
greater identity of interest between non-employee directors and the Company's
shareholders by increasing each participant's proprietary interest in the
Company through the award of options to purchase Company common stock.
OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN. Effective January 1, 2000,
the Omnibus Stock Ownership and Long Term Incentive Plan (the "Omnibus Plan")
established in 1998 for employees, was amended and restated to include
non-employee directors. 180,000 shares of stock were reserved for non-employees
during the ten-year term of the plan. The first grant to non-employee directors
was made on May 23, 2000. Under the Omnibus Plan, non-qualified options to
acquire shares of Company common stock, restricted stock, stock appreciation
rights, and/or units may be granted from time to time to non-employee directors
of the Company and of any of its subsidiaries.
Under the Omnibus Plan, 28,694 options were granted to non-employee directors at
an exercise price of $8.13 in 2000, 28,214 options were granted to non-employee
directors at an exercise price of $8.07 in 2001, and 25,732 options were granted
to non-employee directors at an exercise price of $13.00 in 2002. There were no
grants made in 2003. No options issued to non-employee directors under the
Omnibus Plan had been exercised as of December 31, 2003. All option amounts have
been adjusted to reflect the effect of stock splits.
7
EXECUTIVE COMPENSATION
----------------------
SUMMARY COMPENSATION TABLE. The following table sets forth the compensation
accrued or paid by the Company or the Bank to the Chief Executive Officer of the
Company, C. Hunton Tiffany, and to the other four most highly compensated
executive officers of the Company and the Bank, Randy K. Ferrell, Gary R. Shook,
Eric P. Graap and Rosanne T. Gorkowski (together with Mr. Tiffany, the "Named
Executive Officers"), during the years 2003, 2002, and 2001.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND BONUS(1) COMPENSATION(2) OPTIONS/ COMPENSATION(4)
PRINCIPAL POSITION* YEAR SALARY ($) ($) ($) SARS(3) (#) ($)
------------------- ---- ---------- -------- --------------- ----------- --------------
C. Hunton Tiffany 2003 198,468 78,293 -- -- 6,000
Chairman & Chief 2002 193,816 74,402 -- 4,000 5,100
Executive Officer 2001 190,389 76,871 -- 21,748 5,100
Randy K. Ferrell 2003 165,000 68,777 -- -- 11,270
President & COO 2002 142,000 51,899 -- 8,756 10,473
2001 130,000 45,961 -- 10,058 10,004
Gary R. Shook 2003 123,393 31,098 -- -- 99,677
Senior Vice President 2002 119,666 29,552 -- 4,000 17,781
2001 116,000 30,533 -- 9,020 2,819
Eric P. Graap 2003 116,615 31,098 -- -- 4,377
Senior Vice President & 2002 110,000 29,552 -- 5,514 4,200
Chief Financial Officer 2001 97,000 30,533 -- 9,344 1,334
Rosanne T. Gorkowski, 2003 86,489 22,135 -- -- 3,222
Senior Vice President 2002 83,253 21,035 -- 4,128 3,151
(Bank officer only) 2001 79,250 21,733 -- 6,208 2,850
* Positions shown in table are Company positions. The Named Executive Officers
also hold the following offices with the Bank: Mr. Tiffany, Chairman; Mr.
Ferrell, President & Chief Executive Officer; Mr. Shook, Senior Vice President,
Wealth Management Services, Mr. Graap, Senior Vice President & Chief Financial
Officer; and Ms. Gorkowski, Senior Vice President, Administration & Human
Resources.
(1) Reflects incentive compensation paid under the Management Incentive Plan.
(2) The dollar value of perquisites and other personal benefits for each of the
Named Executive Officers did not exceed the lesser of either $50,000 or 10%
of the total annual salary and bonus reported in each of the three years
reported for any of the Named Executive Officers.
(3) Reflects the number of incentive stock options and non-qualified stock
options granted under the Omnibus Plan. Numbers have been adjusted to
reflect stock splits.
(4) "All other compensation" for Mr. Tiffany, Mr. Graap and Ms. Gorkowski for
2003 consists of the 401(k) Savings Plan match paid by the Bank; for Mr.
Ferrell for 2003 consists of $5,373 in split dollar life insurance premiums
paid by the Bank on Mr. Ferrell's behalf and a 401(k) Savings Plan match of
$6,000 paid by the Bank; and for Mr. Shook for 2003
consists of a 401(k) Savings Plan match of $1,379 paid by the Bank and
$98,398 that Mr. Shook recognized as income as a result of his exercise and
sale of incentive stock options prior to the expiration of the one-year
holding period required for incentive stock option treatment under the
Internal Revenue Code.
OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN. Effective January 1, 2000,
the Omnibus Stock Ownership and Long Term Incentive Plan (the "Omnibus Plan")
established in 1998 for employees, was amended and restated to include
non-employee directors. During the term of the Omnibus Plan, a total of 400,000
shares of stock may be granted to eligible employees. Under the Omnibus Plan,
incentive stock options and non-qualified options to acquire shares of the
stock, restricted stock, stock appreciation rights, and/or units may be granted
from time to time to eligible employees of the Company and of any of its
subsidiaries.
In 2003, there were no grants made under the Omnibus Plan.
OPTION EXERCISE TABLE. The following table provides certain information with
respect to the stock options exercised by the Named Executive Officers during
2003 and the number of shares of common stock represented by outstanding stock
options held by the Named Executive Officers at December 31, 2003.
AGGREGATED OPTION EXERCISES IN 2003 AND 2003 FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised
Unexercised Options In-the- Money Options At
Shares at Fiscal Year-End (#) Fiscal Year-End ($)(1)
Acquired on Valued ----------------------- ------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ----------- ----------- ------------- ------------- ---------------
C. Hunton Tiffany -- -- 46,688 25,748 668,568 364,739
Randy K. Ferrell 5,366 52,962 16,412 18,814 223,006 239,506
Gary R. Shook 15,348 125,055 3,902 13,020 57,847 175,283
Eric P. Graap -- -- -- 14,858 -- 195,632
Rosanne T. Gorkowski -- -- -- 10,336 -- 134,739
----------
(1) In-the-money options are those for which the December 31, 2003 fair market
value of the underlying shares of Company common stock (as determined by
the closing price on The NASDAQ SmallCap Market) exceeds the exercise price
of the option.
PENSION PLAN. The Bank has a non-contributory defined benefit plan which covers
substantially all employees of the Bank who are 21 years of age or older, who
have at least one year of service, and work a minimum of 1,000 hours per year.
The plan's normal retirement benefit formula is as follows:
(a) 1.35% of the participant's final 5-year average compensation per
year of service up to 35 years, plus
(b) 0.60% of the participant's final 5-year average compensation, in
excess of his/her covered compensation level, per year of service
up to 35 years.
For purposes of the pension plan, "covered compensation level" equals the
average of the last 35 years of the social security wage base at normal
retirement. The Bank's pension plan expense for the fiscal year ended December
31, 2003 was $411,994. Cash benefits under the plan generally commence on
retirement, death or other termination of employment and are payable in various
forms, generally at the participant's election. The plan is based on a straight
life annuity assuming full benefit at age 65, no offsets, and covered
compensation of $43,968 for a person age 65 in 2003. Compensation that may be
taken into account for purposes of the pension plan is currently limited to
$200,000 by Internal Revenue Code regulations and includes all regular pay,
overtime and regular bonuses.
9
PENSION PLAN TABLE
YEARS OF SERVICE
Remuneration 10 15 20 25 30 35
------------ -- -- -- -- -- --
$50,000 7,112 10,668 14,224 17,780 21,336 24,892
$65,000 10,037 15,055 20,074 25,092 30,111 35,129
$80,000 12,962 19,443 25,924 33,405 38,886 45,367
$100,000 16,862 25,293 33,724 42,155 50,586 59,017
$125,000 21,737 32,605 43,474 54,342 65,211 76,079
$150,000 26,612 39,918 53,224 66,530 79,836 93,142
$175,000 31,487 47,230 62,974 78,717 94,461 110,204
$200,000 and above 36,362 54,543 72,724 90,905 109,086 127,267
The monthly retirement benefit based on current compensation and assuming
retirement at age 65, as well as final average earnings and approximate years of
service as of October 1, 2003 for the Named Executive Officers is as follows:
Monthly Benefit Final Average Years of
Name at 65 Earnings Service
----- --------------- ------------- ---------
C. Hunton Tiffany $10,566 $200,000 39.00
Randy K. Ferrell 6,107 156,338 9.00
Gary R. Shook 6,436 137,109 9.00
Eric P. Graap 3,412 131,238 3.00
Rosanne T. Gorkowski 1,595 94,935 4.00
401(K) SAVINGS PLAN. The Bank has a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code of 1986, as amended, covering
employees who have completed six months of service and who are at least 18 years
of age (the "401(k) Savings Plan"). Under the plan participants may contribute
an amount up to 15% of their covered compensation for the year, subject to
certain limitations. The Bank 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 Bank's Board of Directors. The
Bank made a contribution to the plan for the year ended December 31, 2003 of
$109,130.
MANAGEMENT INCENTIVE PLAN. The Bank awards cash incentive compensation under a
management incentive plan (the "Management Incentive Plan") to the Chief
Executive Officer and other executive officers. Incentive compensation awards
under the Management Incentive Plan are based on Bank's performance, as measured
by the corporate objectives. An incentive compensation plan for Bank employees
was approved by the Bank's Board of Directors during 2002 to be shared by all
employees of the Bank, other than the executive officers (the "Employee
Incentive Plan"). An incentive pool of $353,644 for 2003 was divided among all
employees of the Bank, other than the executive officers.
There are no commission agreements between the Company or the Bank and their
respective directors or officers.
SPLIT DOLLAR LIFE INSURANCE AGREEMENTS. On January 1, 1996, the Bank entered
into a split dollar life insurance agreement with Mr. Ferrell pursuant to which
the Bank purchased two existing policies of insurance on Mr. Ferrell's life.
Pursuant to the agreement, the Bank pays a portion of the annual premium on the
insurance policies. The policies provide for a combined death benefit of
$440,000 to be paid to the beneficiaries named therein, and the Bank is entitled
to the total policy proceeds in excess of the death benefits. The Bank paid
$5,270 for premiums in 2003 in connection with these agreements.
10
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In 2000, the Board of Directors
authorized the investment of a specially designed life insurance policy to be
carried as an asset of the Bank and to be used to fund a supplemental retirement
plan for Mr. Tiffany (the "SERP"). The initial investment of $749,000 was
implemented on August 10, 2000, and was split equally between Jefferson Pilot
Life Insurance and Southland Life Insurance Companies. At December 31, 2003, the
approximate cash surrender value was $883,007.
CHANGE OF CONTROL AGREEMENTS. The Bank has entered into change of control
agreements with each of the Named Executive Officers. The change of control
agreements are intended to attract and retain experienced, well-qualified
executive officers who will advance the best interests of the Bank. The
continued success of the Bank and the Company depends to a significant degree on
the skills and competence of these executive officers.
The agreements become operative upon a change of control in the Bank. For
purposes of the agreements, a change of control of the Bank occurs if, (i) any
person, including a "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934 (but excluding any group of which an executive officer is a
member), becomes the beneficial owner of securities of the Bank or of the
Company having 20% or more of the combined voting power of the then outstanding
Bank or Company securities that may be cast for the election of the Bank or
Company directors, other than as a result of an issuance of securities initiated
by the Bank or Company, as long as the majority of the Bank's Board of Directors
approving the purchases is a majority at the time the purchases are made; or
(ii) as the direct or indirect result of, or in connection with, a tender or
exchange offer, a merger or other business combination, a sale of assets,
contested election, or any combination of these events, the persons who were
directors of the Bank or Company before such events cease to constitute a
majority of the Bank or Company's Board of Directors, or any successor's board,
within two years of the last of such transactions.
If, after a change of control occurs, an executive officer's employment is
terminated within three (3) years, depending upon the agreement, the executive
officer is entitled to receive the payments specified in the agreements, unless
such termination was for cause or the executive officer terminates employment
without good reason. "Cause" means the executive officer's gross negligence or
willful misconduct, which is detrimental to the best interests of the Bank's
business operations. "Good reason" means (i) a material change in the executive
officer's functions, duties, responsibilities, authority, benefits or
perquisites, or relocation of the executive officer's principal place of
employment, (ii) removal from or failure to re-elect the executive officer to a
current position, (iii) a reduction of the executive officer's base salary or a
failure to increase such salary in accordance with cost-of-living increases, or
(iv) the failure of any successor to assume and agree to perform the agreements.
If an executive officer is terminated other than for cause or terminates
employment for good reason: (i) the Bank is required to pay the executive
officer as compensation for services rendered to the Bank a cash amount, subject
to any applicable payroll or other taxes required to be withheld, equal to 2.99
times the highest annual compensation paid to the executive officer by the Bank
for any six months ending with the executive officer's termination; (ii) in
addition to the benefits to which the executive officer is entitled under the
retirement plans or programs, in effect, the Bank is required to pay the
executive officer a cash amount equal to the actuarial equivalent of the
retirement pension to which the executive officer would have been entitled under
the terms of such retirement plan or programs, without regard to "vesting"
thereunder, had the executive officer accumulated three (3) additional years of
continuous service after termination at the executive officer's base rate in
effect at the time of termination, reduced by the single sum actuarial
equivalent of any amounts to which the executive officer is entitled pursuant to
the provisions of the retirement plans or programs; (iii) the Bank is required
to maintain in full force and effect, for the continued benefit of the executive
officer for a three-year period after termination, all employee benefit plans
and programs or arrangements in which the executive officer was entitled to
participate immediately prior to termination, or substantially similar programs
if the executive officer's continued participation is not possible under the
general terms and provisions of such existing plans and programs; and (iv) all
stock options granted to the executive officer under any of the Bank's stock
option plans shall become immediately exercisable with respect to all or any
portion of the shares covered thereby, regardless of whether such options are
otherwise exercisable. The Bank is required to reimburse the executive officer
for any federal income tax liability incurred by the executive officer in
connection with the exercise of such options that would not have been incurred
by the executive officer in the absence of such options becoming immediately
available upon a change of control.
11
If any payment made or benefit provided to an executive officer pursuant to the
agreements would constitute an "excessive parachute payment" within the meaning
of Section 280G of the Internal Revenue Code of 1986, as amended and any
regulations thereunder, thereby resulting in a loss of an income tax deduction
by the Bank or the imposition of an excise tax on the executive officer under
Section 4999 of the Internal Revenue Code of 1986, as amended, then the payments
scheduled under the agreements will be reduced to one dollar less than the
maximum amount which may be paid without causing any such payment or benefit to
be nondeductible.
REPORT OF THE COMPENSATION AND BENEFITS COMMITTEES
ON EXECUTIVE COMPENSATION
The following report of the Company's Compensation and Benefits Committee (the
"Company Committee") and the Bank's Compensation and Benefits Committee (the
"Bank Committee") provides information with respect to the compensation paid to
the Company's and the Bank's executive officers for the year ended December 31,
2003.
Executive compensation is primarily paid by the Bank. Therefore, the executive
compensation program of the Company and the Bank is primarily administered by
the Bank Committee. The compensation program for executive officers consists of
some or all of the following elements: base salary; performance-based cash
awards under the Management Incentive Plan; grants under the Omnibus Plan;
annual matching contributions under the 401(k) Savings Plan; split dollar life
insurance, automobile allowances, and SERP compensation.
The executive compensation program is designed to enable the Company and the
Bank to attract, retain and reward executive officers. The Company Committee and
the Bank Committee intend to keep compensation levels competitive with a
representative sample of the Bank's peer institutions. In 2003, the Company and
Bank Committees contracted with an outside professional consultant for
assistance in performing due diligence in regards to executive compensation and
benefits. The goal was to insure that the Company and Bank maintain an executive
compensation program that is equitable, competitive and reasonable. The peer
group used includes other community banks of similar size, complexity,
performance and relevant characteristics which are located in an appropriate
geographic region. The committees' strategy is to maintain a structure within
the executive compensation program that strengthens the link between executive
compensation, the Bank's performance, individual performance of the executive
officers and shareholder interests.
The following sections of this report describe the compensation program for
executive officers in effect in 2003.
BASE SALARY. The base salary paid to the Bank's President & Chief Executive
Officer is determined by the Bank Committee. The Bank Committee establishes
performance thresholds or other measures that directly relate his base salary to
operating performance and a review of the range of salaries earned by Chief
Executive Officers within a representative peer group, although there is no
predetermined point within such range at which the Bank Committee targets the
salary. Mr. Tiffany, Chief Executive Officer of the Bank until May 2003, earned
a salary at the midpoint of the range of salaries paid to the Chief Executive
Officers of the Bank's peer group. Mr. Ferrell, promoted to Chief Executive
Officer in May 2003, received a starting base salary approximately 10% below
that of the peer group. The Bank Committee believes these 2003 base salaries are
appropriate in relation to the Bank's performance and are consistent with the
salaries earned by executive officers of the Bank's peer group.
For 2003, the President & Chief Executive Officer determined the base salaries
paid to the other executive officers, which were reviewed and approved by the
Bank Committee. The executive salaries were managed in relation to the salaries
paid to executive officers in peer institutions, giving effect to operating
performance, their relative contributions, and the experience of each executive
officer. In determining base salary, a computer-based model developed by the
outside consultant was utilized for computing salary increases based on
performance reviews. The Bank Committee believes that the base salaries paid to
the executive officers gave fair consideration to their individual contributions
in 2003 and are competitive with the Bank's peer group.
12
In accordance with NASDAQ listing requirements, beginning in 2004 the Bank
Committee will make all of the base salary determinations with respect to the
executive officers.
MANAGEMENT INCENTIVE COMPENSATION. The Management Incentive Plan is recommended
by the Bank Committee and approved by the Bank's Board of Directors. The Bank
Committee determined the President & Chief Executive Officer's incentive
compensation in 2003. The President & Chief Executive Officer determined the
incentive compensation awards for executive officers of the Bank in 2003, based
on each executive officer's achievement of his or her individual performance
objectives. These objectives were tied to measurements directly related to
corporate strategic objectives. These actions reflect a commitment to
maintaining a strong incentive compensation plan that is directly related to
maximizing long-term shareholder value.
For performance during 2003, the Bank awarded cash incentive compensation under
the Management Incentive Plan totaling $253,536 for the Chief Executive Officer
and other executive officers. The incentive compensation awards granted to the
executive officers were based solely upon the Bank's performance as measured by
the corporate objectives. Each of the executive officers met the performance
objectives established for him or her for 2003.
In accordance with NASDAQ listing requirements, beginning in 2004 the Bank
Committee will make all of the incentive compensation determinations with
respect to the executive officers.
The Company Committee makes all stock option or other grants under the Omnibus
Plan, upon consideration of the recommendations of the Bank Committee. There
were no grants made in 2003.
401(K) SAVINGS PLAN MATCHING CONTRIBUTIONS. The 401(k) Savings Plan is a
voluntary defined contribution benefit plan designed to provide additional
incentive and retirement security for eligible employees of the Bank. All Bank
employees over the age of 18 are eligible to participate in the 401(k) Savings
Plan. The executive officers of the Bank participate in the 401(k) Savings Plan
on the same basis as all other eligible employees of the Bank. Under the 401(k)
Savings Plan, each eligible employee of the Bank may elect to contribute on a
pre-tax basis to the 401(k) Savings Plan between 2% to 15% of his or her
compensation, subject to certain limitations that may lower the maximum
contributions of more highly compensated participants. The Bank's Board of
Directors determines each year whether to match employee contributions based on
the previous year's profitability. In 2003, the Bank matched fifty cents ($0.50)
on each dollar contributed by an employee up to six percent (6%) of that
employee's contribution.
SPLIT DOLLAR LIFE INSURANCE AGREEMENT. The Bank currently has a split dollar
life insurance agreement with Mr. Ferrell, entered into on January 1, 1996. The
policy provides for a combined death benefit of $440,000 to be paid to named
beneficiaries, and the Bank is entitled to policy proceeds in excess of death
benefits. The Bank paid $5,270 for premiums in January 2003 in connection with
this agreement.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In 2001, the Bank's Board of Directors
authorized the investment of a specially designed life insurance policy to be
carried as an asset of the Bank and to be used to fund a supplemental retirement
plan for Mr. Tiffany. The initial investment of $749,000 was implemented on
August 10, 2000, and was split equally between Jefferson Pilot Life Insurance
and Southland Life Insurance Companies. At December 31, 2003, the approximate
cash surrender value was $883,007. The Board's objective was to supplement Mr.
Tiffany's expected retirement earnings under current plans to provide him with
approximately 70% of his annual income at the time of retirement. The expected
tax attributes, increases in cash value, and receipt of death benefits were
believed to make the life insurance investment an effective means of paying for,
or off-setting the cost of, the SERP.
STOCK OPTIONS. From 1998 to 2002, the Company awarded stock options to executive
officers as a long-term incentive to align the executive officer's interest with
those of other shareholders and to encourage significant stock ownership. Under
the Omnibus Plan, the Company Committee granted to selected key employees
options to purchase common stock at a price equal to the fair market value of
the common stock on the date of grant. Employees selected under the Omnibus Plan
are those key employees who, in the judgment of the Company
13
Committee, are in a position to materially affect the overall success of the
Bank and its subsidiaries by reason of the nature and extent of their duties.
These grants were approved and ratified by the Company Committee and the Company
Board of Directors. In awarding the grant to the executive officers, the Bank
Committee considered numerous factors, including the Bank's operating
performance, each executive officer's prior contributions and potential to
contribute in the future and practices within the Bank's peer group with respect
to granting options, although, none of these factors was individually
determinative.
The stock options granted under the Omnibus Plan to employees generally become
exercisable on the third anniversary of the date of grant. The option
recipients, including Mr. Tiffany, will receive value from these grants only to
the extent that the price of the Company's common stock exceeds the grant price.
In 2003, the Company Committee, with Board approval, opted to begin utilizing
other types of awards available under the Omnibus Plan, such as restricted
stock. A plan was developed based primarily on the Company's operating
performance, and awards will be considered following release by the Company's
independent auditors of 2003 year-end results.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The Bank Committee
and the Company Committee are composed of outside, independent directors, none
of whom was, during the fiscal year 2003, an employee of the Company, the Bank
or their subsidiaries. Ms. Stringfellow was employed by the Bank and served in
various executive and other positions from 1986 until she retired as Senior Vice
President, Administrative Services, in May 1999.
This report is submitted by the Compensation and Benefits Committees of the
Company and the Bank.
COMPENSATION AND BENEFITS COMMITTEE (BOTH THE COMPANY COMMITTEE AND THE BANK
COMMITTEE):
Brian S. Montgomery, Chairman Stanley C. Haworth
Douglas C. Larson Randolph T. Minter
Pat H. Nevill H. Frances Stringfellow
STOCK PERFORMANCE
The following graph shows a comparison of total shareholder return on the
Company's common stock based on its market price, assuming the reinvestment of
dividends, with the cumulative total returns for the companies on the NASDAQ
Stock Market (U.S.), and SNL Bank Stocks indices for the period beginning on
June 16, 1999, the date that the Company's common stock became registered
pursuant to the Securities Exchange Act of 1934, as amended, and ending on
December 31, 2003. We believe the Company's performance is more accurately
compared to companies in the banking industry, rather than the NASDAQ Total U.S.
Index, which includes companies in diverse industries with market
capitalizations many times the size of the Company's market capitalization.
14
The Stock Performance Graph also compares the Company's stock performance to the
SNL $250M-$500M Bank Index in addition to the SNL Bank Index. The SNL
$250M-$500M Bank Index, which includes the Bank, contains all banks and related
holding companies from throughout the United States with total assets of between
$250 million and $500 million, thus providing a larger and more appropriate
measurement base to compare with the Company's stock performance. We believe
that a comparison of the Company's stock performance to banks with similar
assets is more accurate than a comparison of banks of all asset sizes.
[GRAPHIC OMITTED]
PERIOD ENDING
---------------------------------------------------------
INDEX 06/16/99 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
----------------------------------------------------------------------------------------
Fauquier Bankshares, Inc. 100.00 95.63 82.75 140.15 181.76 281.41
NASDAQ - Total US 100.00 161.94 97.49 77.34 53.46 80.53
SNL $250M-$500M Bank Index 100.00 95.60 92.05 130.77 168.63 243.64
RELATED PARTY TRANSACTIONS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with executive officers,
directors, their immediate families and affiliated companies in which they are
principal stockholders. Such loans were made on substantially the same terms,
including interest rate and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve more than the
normal risk of collectability or present other unfavorable features. At December
31, 2003, these loans amounted to $5,227,922. During 2003, total principal
additions were $5,254,338 and total principal payments were $2,243,987.
INDEPENDENT CONTRACTOR AGREEMENTS. C. H. Lawrence, Jr., a non-employee director
of the Company and the Bank, continues to provide business development and
customer relations services to the Bank under an Independent
15
Contractor Agreement dated February 23, 1998, which contract is renewable
annually. In 2003, compensation for his business development services amounted
to $58,800.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or entity is known to the Company to be the beneficial owner of more
than five percent (5%) of the Company's common stock.
The following table sets forth, as of April 7, 2004, the number and percentage
of shares of Company common stock held by each director and nominee of the
Company, the Named Executive Officers, and all directors and executive officers
of the Company and the Bank as a group. The business address of each beneficial
owner is c/o Fauquier Bankshares, Inc., 10 Courthouse Square, Warrenton,
Virginia 20186.
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER(S) BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
John B. Adams, Jr. 5,134 *
Randy K. Ferrell 63,282(1) 1.89%
Rosanne T. Gorkowski 8,755(2) *
Eric P. Graap 13,364(3) *
Alexander G. Green, Jr. 154,299(4) 4.62%
Stanley C. Haworth 97,699(5) 2.93%
John J. Norman, Jr. 15,499(6) *
Douglas C. Larson 18,619(7) *
C. H. Lawrence, Jr. 49,585(8) 1.49%
D. Harcourt Lees, Jr. 39,899(9) 1.19%
Randolph T. Minter 17,029(10) *
B. S. Montgomery 36,163(11) 1.08%
H. P. Neale 60,107(12) 1.80%
Pat H. Nevill 34,979(13) 1.05%
Gary R. Shook 13,030(14) *
H. Frances Stringfellow 23,691(15) *
C. Hunton Tiffany 166,881(16) 4.91%
All Bank & Company directors
and executive officers as
a group (18 persons): 818,822(17) 22.72%
---------------
*Percentage ownership is less than one percent of the outstanding shares of
common stock.
For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of
1934 under which, in general, a person is deemed to be the beneficial owner of a
security if he or she has or shares the power to vote or direct the voting of
the security or the power to dispose of or direct the disposition of the
security, or if he or she has the right to acquire beneficial ownership of the
security within sixty days. All shares of common stock indicated in the above
table are subject to the sole investment and voting power of the identified
director or officer, except as otherwise set forth in the footnotes below.
(1) Includes 26,470 shares that could be acquired within 60 days
through the exercise of stock options.
(2) Includes 2,547 shares held jointly with John P. Gorkowski, her
husband, over which she shares voting power and investment
power. Also includes 2,491 shares that could be acquired within
60 days through the exercise of stock options.
(3) Includes 400 shares owned by Barbara Graap, his wife, as to
which shares he disclaims beneficial ownership. Also includes
9,344 shares that could be acquired within 60 days through the
exercise of stock options.
(4) Includes 5,440 shares held jointly with Alexander G. Green, III,
his son; 5,440 shares held jointly with Courtenay G. Mullen, his
daughter; and 5,440 shares held jointly with Mary Blake Green,
his daughter.
16
Mr. Green shares voting and investment power with each of his
children. Also includes 14,960 shares that could be acquired
within 60 days through the exercise of stock options.
(5) Includes 40,000 shares held in trust for Mildred W. Haworth, his
wife, over which he shares voting and investment power; and
includes 10,480 shares that could be acquired within 60 days
through the exercise of stock options.
(6) Includes 13,200 shares that could be acquired within 60 days
through the exercise of stock options.
(7) Includes 2,000 shares held jointly with Edith J. Larson, his
mother, and 1,240 shares held jointly with Eliza C. Larson, his
wife, over which he shares voting and investment power; and
13,960 shares that could be acquired within 60 days through the
exercise of stock options.
(8) Includes 12,720 shares that could be acquired within 60 days
through the exercise of stock options.
(9) Includes 17,200 shares that could be acquired within 60 days
through the exercise of stock options.
(10) Includes 15,200 shares that could be acquired within 60 days
through the exercise of stock options.
(11) Includes 10,376 shares held jointly with Patty M. Montgomery,
his wife, over which he shares voting and investment power; and
17,200 shares that could be acquired within 60 days through the
exercise of stock options.
(12) Includes 20,576 shares owned by Fontaine G. Neale, his wife, as
to which shares he disclaims beneficial ownership; and 14,460
shares that could be acquired within 60 days through the
exercise of stock options.
(13) Includes 1,600 shares owned jointly with H. T. A. Nevill, her
husband, over which she shares voting and investment power;
12,000 shares owned by H. T. A. Nevill, as to which shares she
disclaims beneficial ownership; 3,000 shares over which Mr.
Nevill has voting power, as to which shares she disclaims
beneficial ownership; and 17,200 shares that could be acquired
within 60 days through the exercise of stock options.
(14) Includes 420 shares held by Ann Rodman Shook, his wife, as
custodian for their children, as to which shares he disclaims
beneficial ownership; and 9,020 shares that could be acquired
within 60 days through the exercise of stock options.
(15) Includes 5,176 shares owned jointly with Dallas F. Stringfellow,
her husband, over which she shares voting and investment power;
1,400 shares owned by Dallas F. Stringfellow, as to which shares
she disclaims beneficial ownership; and 11,200 shares that could
be acquired within 60 days through the exercise of stock
options.
(16) Includes 29,162 shares owned by Susanne J. McC. Tiffany, his
wife, as to which shares he disclaims beneficial ownership; and
72,436 shares that could be acquired within 60 days through the
exercise of stock options.
(17) Includes 807 shares held by Mark A. Debes, Senior Vice
President, Retail Division of the Bank, and 277,541 shares that
could be acquired within 60 days through the exercise of stock
options.
The Company is not aware of any arrangement that may operate at a subsequent
date to effect a change in control of the Company.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board is responsible for providing independent,
objective oversight of the Company's accounting functions and internal controls.
The committee's responsibilities include providing for effective external audits
of all corporate subsidiaries by a suitable independent accountant, providing
for an effective and efficient internal audit program to serve all subsidiaries
in an examining and advisory capacity, assisting the Board of Directors in
fulfilling its fiduciary responsibilities for financial reporting and internal
accounting and operations controls, and to act as an agent for the Board of
Directors to help insure the independence of internal and external auditors, the
integrity of management, and the adequacy of disclosures to shareholders.
The Company's management is responsible for preparing the Company's financial
statements. The Company's independent auditors are responsible for auditing the
financial statements. The committee's responsibility is to monitor and oversee
these processes.
17
In this context, the Audit Committee has reviewed and discussed the audited 2003
financial statements with management, and has discussed with the independent
auditors the matters required to be discussed by Statement on Auditing Standards
No. 61, Communication with Audit Committees, as amended, including their
judgments about the quality, not just the acceptability, of the Company's
accounting principles and underlying estimates in the Company's consolidated
financial statements; all critical accounting policies and practices to be used;
all alternative treatments within generally accepted accounting principles for
policies and practices related to material terms that have been discussed with
management of the Company; and other material written communication between the
independent accountants and the management of the Company, such as any
management letter or schedule of unadjusted differences.
The Audit Committee has received and has discussed the written disclosures and
the letter from the independent auditors required by Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees, has
considered the compatibility of non-audit services with the auditors'
independence, and has discussed with the auditors the auditor's independence.
Based on its review and discussions with the auditors and management, the Audit
Committee recommended, and the Board of Directors approved, that the audited
financial statements be included in the Company's 2003 Annual Report and in the
Company's Form 10-K for 2002 filed with the Securities and Exchange Commission.
The Audit Committee operates pursuant to a written charter that has been adopted
by the committee and the Board of Directors and is reviewed annually. A copy is
provided with this the proxy material as Appendix A.
The six members of the Audit Committee are independent as defined by NASD
Marketplace Rule 4200(a)(15) of the NASDAQ listing standards.
AUDIT COMMITTEE:
John B. Adams, Jr. H. P. Neale
Stanley C. Haworth John J. Norman, Jr.
Douglas C. Larson H. Frances Stringfellow, Chairman
RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors selected Yount, Hyde & Barbour, P.C., independent public
accountants to certify the Company's annual financial statements for the year
ended December 31, 2003. Yount, Hyde & Barbour, P.C. has acted as the
independent accountant for the Company since January 1, 1986. Yount, Hyde &
Barbour, P.C. has also acted as the independent accountant for the Bank, the
Company's wholly owned subsidiary, since January 1, 1986. A representative of
Yount, Hyde & Barbour, P.C. is expected to be present at the meeting with the
opportunity of making a statement if he so desires, and to respond to
appropriate questions of the shareholders.
In addition to the audit of the 2003 financial statements of the Company and the
Bank, Yount, Hyde & Barbour, P.C. performed audit-related services for the Bank,
including the preparation of the Bank's income tax returns, tax planning, and
other accounting services. The retention of Yount, Hyde & Barbour, P.C. to
perform the audit-related services was pre-approved by the Audit Committee of
the Company and the Bank with the knowledge that they also assisted in the
preparation of the Bank's income tax returns, did tax planning, and performed
other accounting services, as is compatible with maintaining the accountants'
independence.
18
PRINCIPAL ACCOUNTING FEES
Fees paid to Yount, Hyde & Barbour for the years 2002 and 2003 are shown below:
2003 2002
------------------------------------------------
FEES PERCENTAGE FEES PERCENTAGE
------------------------------------------------
Audit fees $ 47,728 52.8% $ 45,468 37.5%
Audit-related fees 36,634 40.5% 40,295 33.3%
Tax fees 6,088 6.7% 5,000 4.1%
All other fees -- 0% 30,372 25.1%
------------------------------------------------
$ 90,450 100% $121,135 100%
------------------------------------------------
A description of these fees is as follows:
Audit-related fees: Director's examination of the Wealth Management
Services division, Information Technology systems audit, FHLB
collateral verification audit, ACH agreed-upon procedures, Public Funds
agreed-upon procedures and consultation concerning financial accounting
and reporting standards and other related issues.
Tax fees: Preparation of federal and state tax returns and consultation
related to estimated quarterly taxes and compliance related issues.
All other fees: Agreed-upon procedures for the internal audit function.
PRE-APPROVAL POLICIES
Pursuant to the terms of the Company's Audit Committee Charter, the Audit
Committee is responsible for the appointment, compensation and oversight of the
work performed by the Company's independent public accountants. The Audit
Committee, or a designated member of the Audit Committee, must pre-approve all
audit (including audit-related) and non-audit services performed by the
independent accountants in order to assure that the provisions of such services
does not impair the accountants' independence. The Audit Committee has delegated
interim pre-approval authority to Ms. Stringfellow, Chairman of the Audit
Committee. Any interim pre-approval of permitted non-audit services is required
to be reported to the Audit Committee at its next scheduled meeting. The Audit
Committee does not delegate its responsibilities to pre-approve services
performed by the independent auditor to management.
PROPOSAL TWO:
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee has selected the firm of Yount, Hyde & Barbour, P.C. as
independent public accountants to audit the books of the Company and the Bank
for the current year, to report on the consolidated statement of financial
position and related statement of earnings of the Company and the Bank, and to
perform such other appropriate accounting services as may be required by the
Board. The Audit Committee and the Board of Directors recommends that the
shareholders vote "FOR" ratifying and approving the selection of Yount, Hyde &
Barbour, P.C. for the purposes set forth above. The Company has been advised by
Yount, Hyde & Barbour, P.C. that the firm did not have any direct financial
interest or any material indirect financial interest in the Company and the Bank
in 2003. Should the shareholders vote "AGAINST" ratification, the Audit
Committee will consider a change in auditors for the next year.
19
ANNUAL REPORT ON FORM 10-K
FINANCIAL STATEMENTS OF THE COMPANY ARE CONTAINED IN THE ANNUAL REPORT FOR THE
YEAR ENDED DECEMBER 31, 2003, WHICH ACCOMPANIES THIS PROXY STATEMENT. UPON
REQUEST, THE COMPANY WILL PROVIDE, AT NO COST TO THE SHAREHOLDER, A COPY OF THE
COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, INCLUDING THE
FINANCIAL STATEMENTS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
PROPOSALS FOR 2005 ANNUAL MEETING OF SHAREHOLDERS
The deadline for submitting shareholder proposals to be considered for inclusion
in the proxy statement and form of proxy relating to the 2005 Annual Meeting of
Shareholders is December 17, 2004. Any such proposal received at the Company's
principal executive offices after such date will be considered untimely and may
be excluded from the proxy statement and form of proxy.
The deadline for submitting shareholder proposals to be presented at the 2005
Annual Meeting of Shareholders, but which will not be included in the proxy
statement and form of proxy relating to such meeting, is March 2, 2005. Any such
proposal received by the Company's principal executive offices after such date
will be considered untimely and the persons named in the proxy for such meeting
may exercise their discretionary voting power with respect to such proposal.
OTHER MATTERS
The Board of Directors is not aware of any other matters to come before the
Annual Meeting. Execution of a proxy, however, confers on the designated proxy
holders discretionary authority to vote the shares in accordance with their best
judgment on such other business, if any, that may properly come before the
Annual Meeting or any adjournment thereof, including whether or not to adjourn
the Annual Meeting.
RETURN OF PROXIES
WHETHER OR NOT YOU EXPECT TO ATTEND THIS ANNUAL MEETING, PLEASE COMPLETE, DATE,
SIGN AND RETURN YOUR PROXY CARD AS PROMPTLY AS POSSIBLE TO ASSURE REPRESENTATION
OF YOUR SHARES AND HELP ASSURE A QUORUM FOR THE ANNUAL MEETING. YOU MAY REVOKE
YOUR PROXY AT ANY TIME PRIOR TO ITS EXERCISE.
FAUQUIER BANKSHARES, INC.
By Order of the Board of Directors
/s/ C. Hunton Tiffany
-----------------------------------
C. Hunton Tiffany
Chairman & Chief Executive Officer
Warrenton, Virginia
April 16, 2004
20
APPENDIX A
FAUQUIER BANKSHARES, INC.
BOARD OF DIRECTORS
AUDIT COMMITTEE CHARTER
STATEMENT OF POLICY
-------------------
A soundly conceived, effective Audit Committee is essential to the
management, operation, and financial reporting process of Fauquier Bankshares,
Inc. and its subsidiaries (the "Company"). The Audit Committee shall provide
assistance to the Board of Directors in fulfilling its responsibilities to the
shareholders, potential shareholders, and investment community in overseeing and
monitoring (1) the quality and integrity of the Company's financial statements
and the Company's accounting and financial reporting processes, (2) the
independent auditor's qualifications, independence and performance, (3) the
performance of the Company's internal audit function, and (4) the compliance by
the Company with legal and regulatory requirements. In so doing, it is the
responsibility of the Audit Committee to maintain free and open communication
between the directors, the independent auditor, the internal auditors, and the
financial management of the Company.
The Audit Committee shall have the sole authority to select, evaluate
and, where appropriate, replace the independent auditor. The Audit Committee
shall be directly responsible for the compensation and oversight of the work of
the independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting) for the
purpose of preparing or issuing an audit report or related work. The independent
auditor shall report directly to the Audit Committee.
ORGANIZATION
MEMBERS
-------
The Audit Committee shall be composed of at least three (3) directors
who are independent of the management of the Company and are free of any
relationship that, in the opinion of the Board of Directors, would interfere
with their exercise of independent judgment as a committee member. Each member
of the Audit Committee shall meet the independence and financial literacy
requirements of the listing requirements of The NASDAQ Stock Market, Inc.,
Section 10A(m)(3) of the Securities Exchange Act of 1934 (the "Exchange Act")
and the rules and regulations of the Securities and Exchange Commission (the
"Commission"), as determined by the Board. At least one member of the Audit
Committee shall have past employment experience in finance or accounting,
requisite professional certification in accounting or any other comparable
experience or background which results in the member's financial sophistication.
In addition, at least one member of the Audit Committee shall be an "audit
committee financial expert" as defined by the Commission or the Company shall
explain why it has no such expert in the Company's annual report. Audit
Committee members shall not simultaneously serve on the audit committee of more
than two other public companies. The members of the Audit Committee and its
Chair shall be annually appointed by the Board of Directors. Audit Committee
members may be replaced by the Board.
Committee membership standards will be maintained in accordance with
applicable banking laws and regulations.
MEETINGS
--------
The Audit Committee shall meet as often as it determines, but not less
frequently than once per fiscal quarter. For the transaction of business at any
meeting of the Audit Committee, a majority of the members shall constitute a
quorum. The act of a majority of the committee members participating at any
meeting of the Audit Committee at which a quorum is present shall be the act of
the Audit Committee.
At the committee's discretion, the management of the Company, internal
auditor, independent auditor and/or Corporate Secretary may be requested to
attend any meeting or portion thereof of the Audit Committee. Any such
attendance by a person who is not a member of the Audit Committee shall be in
non-voting capacity.
The Audit Committee shall provide an open avenue of communication
between the internal and independent auditor and the Audit Committee, and
periodically shall meet separately in private sessions with management, the
internal auditor, and the independent auditor. The Audit Committee shall report
on its activities to the Board of Directors on a regular basis.
MINUTES
-------
Minutes shall be prepared for all meetings of the Audit Committee to
document the committee's discharge of its responsibilities. The minutes shall
provide an accurate record of the proceedings, and shall be read and approved at
the next meeting of the Audit Committee.
The Minutes of the Audit Committee actions shall be presented to the
Board of Directors at its next regular or special meeting.
ANNUAL EVALUATION AND CHARTER
-----------------------------
The Audit Committee shall evaluate the performance of the Audit
Committee annually, and review and reassess the adequacy of Audit Committee
Charter annually and recommend any proposed changes to the Board of Directors
for approval.
OUTSIDE ADVISORS
----------------
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting or other
advisors. The Company shall provide for appropriate funding, as determined by
the Audit Committee, for payment of: (i) compensation to the independent auditor
for the purpose of rendering or issuing an audit report or performing other
audit, review or attest services for the Company (ii) and compensation to any
advisors employed by the Audit Committee, and (iii) ordinary administrative
expenses of the Audit Committee for carrying out its duties. to retain special
legal, accounting or other consultants to advise the committee.
AUTHORITY AND RESPONSIBILITIES
The Audit Committee has authority to conduct or authorize
investigations into any matters within its scope of responsibilities.
In fulfilling its stated role under the Audit Committee's Statement of
Policy, the responsibilities of the Audit Committee are as follows:
22
OVERSIGHT OF THE COMPANY'S RELATIONSHIP WITH THE INDEPENDENT AUDITOR
The Audit Committee shall:
1. Be directly responsible, in its capacity as a committee of the Board of
Directors, for the appointment, compensation and oversight of the work of
the independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting) for
the purpose of preparing or issuing an audit report or performing other
audit, review of attest services for the Company. In this regard, the Audit
Committee shall exercise sole authority to appoint, evaluate, and, as
necessary, replace the independent auditor (subject, if applicable, to
shareholder ratification). The independent auditor shall report directly to
the Audit Committee.
2. Preapprove all audit and permitted non-audit services, and the
compensation, fees and terms for such services provided by the independent
auditor, subject to the de minimis exception for permitted non-audit
services described in Section 10A(i)(1)(B) of the Exchange Act which are
approved by the Audit Committee prior to the completion of the audit. (By
approving the audit engagement, an audit service within the scope of the
engagement shall be deemed to have been preapproved). In addition, the
Audit Committee shall establish policies and procedures for the engagement
of the independent auditor to provide permitted non-audit services, which
may include approval in advance by a subcommittee or member or members of
the Audit Committee of all permitted non-audit services to be performed by
the independent auditor.
3. Review and evaluate the lead partner of the independent auditor team.
4. At least annually, obtain a report by the independent auditor describing:
(a) the auditing firm's internal quality-control procedures, (b) any
material issues raised by the most recent internal quality-control review,
or peer review, of the firm, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years,
respecting one or more independent audits carried out by the firm, and (c)
any steps taken to deal with any such issues.
5. At least annually, obtain and review a report by the independent auditor
describing any relationships between the auditor and the Company and any
other relationships that may adversely affect the independence of the
auditor. Actively engage in a dialogue with the independent auditor with
respect to any disclosed relationships or services that may impact the
objectivity and independence of the auditor. Evaluate the qualifications,
performance and adequacy of the quality controls of the auditor and
consider the independence of the auditor, including whether the auditor's
provision of permitted non-audit services is compatible with maintaining
the auditor's independence. The committee shall present its conclusions
with respect to the independent auditor to the Board of Directors.
6. Ensure the rotation of the audit partners as required by law. Consider
whether, in order to assure continuing auditor independence, it is
appropriate to adopt a policy of rotating the independent auditing firm on
a regular basis.
7. Set clear hiring policies for employees and former employees of the
independent auditor.
3
8. Meet with the independent auditor prior to the audit to discuss the
planning, staffing and scope of the audit. The audit scope shall include a
requirement that the independent auditor inform the Committee of any
significant changes in the audit plan.
OVERSIGHT OF FINANCIAL REPORTING AND DISCLOSURE MATTERS
9. Review and discuss with management the Company's financial reporting
process, financial statements and major disclosures, and the adequacy and
effectiveness of the Company's system of internal controls and disclosure
controls and procedures.
10. Review and discuss with the independent auditor the Company's system of
internal controls, including information technology security and control
and including any major issues as to the adequacy of the Company's internal
controls (together with management's responses and any special steps
adopted in light of material control deficiencies).
11. Review and discuss with the independent auditor the adequacy of the
Company's financial reporting process and receive from the independent
auditor reports required by the SEC.
12. Review and discuss with management and the independent auditor the annual
audited financial statements, including disclosures made under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and management's critical accounting policies and practices,
and recommend to the Board whether the audited financial statements should
be included in the Company's Form 10-K.
13. Review and discuss with management and the independent auditor the
Company's quarterly financial statements, including the results of the
independent auditor's reviews of the quarterly financial statements and
disclosures made in management's discussion and analysis and management's
critical accounting policies and practices, prior to the filing of its Form
10-Q.
14. Review and discuss with management and the independent auditor their
analyses of significant financial reporting issues and judgments made in
connection with the preparation of the Company's financial statements, the
appropriateness of accounting principles followed by the Company,
significant changes in the Company's selection or application of accounting
principles, and major issues regarding the Company's accounting principles
and financial statement presentations.
15. Discuss with management and the independent auditor the effect of
regulatory and accounting initiatives as well as off-balance sheet
structures on the Company's financial statements.
16. Request and receive from the independent auditor, and review with the
independent auditor, a report relating to (a) all critical accounting
policies and practices to be used; (b) all alternative treatments of
financial information within generally accepted accounting principles that
have been discussed with management, ramifications of the use of such
alternative disclosures and treatments, and the treatment preferred by the
independent auditor; and (c) any material written communications between
the independent auditor and management, such as any management letter or
schedule of unadjusted differences.
4
17. Meet periodically with management, the independent auditor, and the
internal auditor to discuss the Company's major financial risk exposures
and the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
18. Discuss with management and the independent auditor the Company's earnings
press releases, including the use of "pro forma" or "adjusted" non-GAAP
information, as well as financial information and earnings guidance
provided to analysts and rating agencies. Such discussion may be done
generally (consisting of discussing the types of information to be
disclosed and the types of presentations to be made).
19. Review disclosures made to the Audit Committee by the Company's CEO and CFO
during their certification process for the Form10-K and Form 10-Q about any
significant deficiencies or material weaknesses in the design or operation
of internal controls and any fraud involving management or other employees
who have a significant role in the Company's internal control over
financial reporting.
20. Discuss with the independent auditor the matters required to be discussed
by Statement on Auditing Standards No. 61 relating to the conduct of the
audit, including any audit problems or difficulties, including any
restrictions on the scope of the independent auditor's activities or on
access to requested information, and any significant disagreements between
management and the independent auditor, and management's response thereto.
21. Prepare a report for inclusion in the Company's proxy statement, disclosing
that the Audit Committee reviewed and discussed the audited financial
statements with management and discussed with the independent auditor the
matters required by Statement on Auditing Standards No. 61 and, based upon
these discussions, recommend to the Board of Directors whether the audited
financial statements should be included in the annual report on Form 10-K.
OVERSIGHT OF THE COMPANY'S INTERNAL AUDIT FUNCTION
22. Review the annual internal audit program in terms of the scope of the audit
conducted or schedules of the audit to be conducted, and review the
internal audit budget and staffing levels.
23. Discuss with the independent auditor and management the internal auditor's
responsibilities, budget and staffing and any recommended changes in the
planned scope of the internal audit.
24. Review the significant reports to management prepared by the internal
auditor and management's responses.
25. On a regular basis, meet separately with the internal auditor team leader
to discuss any matters that the Committee or the internal auditor believes
should be discussed outside of management's presence.
26. Appoint and, as necessary, replace the internal auditor, if such function
is outsourced, or if such function is staffed internally by the Company,
appoint and as necessary, replace the senior internal auditing staff
member.
5
27. Review the effectiveness of the internal audit function, including whether
or not the function should be outsourced or staffed internally.
28. Inquire regarding the adequacy and effectiveness of the Company's system of
internal controls and any recommendations for improvements.
COMPLIANCE OVERSIGHT RESPONSIBILITIES
29. Establish procedures for the receipt, retention and treatment of complaints
received by the Company regarding accounting, internal accounting controls
or auditing matters, and procedures for the confidential, anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters.
30. Obtain reports from management, the internal auditor team leader and the
independent auditor that the Company and its subsidiaries are in conformity
with applicable legal requirements and the Company's Code of Conduct and
Ethics.
31. Review reports and disclosures of insider and affiliated party transactions
and pre-approve all such transactions required to be approved pursuant to
the listing standards of The NASDAQ Stock Market, Inc.
32. Discuss with management and the independent auditor any correspondence with
regulators or governmental agencies and any published reports which raise
material issues regarding the Company's financial statements or accounting
policies.
33. Discuss with the Company's legal counsel matters that may have a material
impact on the financial statements or the Company's compliance policies.
34. Review the effectiveness of the system for monitoring compliance with laws
and regulations and the results of management's investigation and follow-up
(including disciplinary action) of any instances of noncompliance.
LIMITATION OF THE AUDIT COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is recognized that the members of the Audit Committee are not
full-time employees of the Company and are not, and do not represent themselves
to be, accountants or auditors by profession. As such, it is not the duty of the
Audit Committee or its members to plan or conduct audits or to determine that
the Company's financial statements and disclosures are complete and accurate and
are in accordance with generally accepted accounting principles and applicable
rules and regulations. These are the responsibilities of management and the
independent auditor.
Each member of the Audit Committee shall be entitled to rely on (1) the
integrity of the persons and organizations within and outside the Company from
which it receives information, (2) the accuracy of financial and other
information provided to the Audit Committee by such persons or organizations
absent actual knowledge to the contrary (which shall promptly be reported to the
Board of Directors) and (3) representations made by management as to any
non-audit services provided by the independent auditor to the Company.
Adopted by the Board of Directors, Fauquier Bankshares, Inc. March 18, 2004.
H. F. Stringfellow, Corporate Secretary
6
27
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
FAUQUIER BANKSHARES, INC.
ANNUAL MEETING OF SHAREHOLDERS
MAY 18, 2004, 11:00 EASTERN TIME
The undersigned hereby appoints C. H. Lawrence, Jr., R. T. Minter and
J. J. Norman, Jr. and each of them (with full power to act without the others)
to act as proxy for the undersigned, and to vote all shares of Common Stock of
Fauquier Bankshares, Inc. (the "Company") which the undersigned is entitled to
vote only at the Annual Meeting of Shareholders, to be held on May 18, 2004, at
11:00 a.m. Eastern Time, at The Fauquier Springs Country Club, Springs Road,
Warrentown, Virginia, and at any adjournments thereof, as set forth on the
reverse side.
(CONTINUED AND TO BE MARKED ON THE OTHER SIDE)
ANNUAL MEETING OF SHAREHOLDERS OF
FAUQUIER BANKSHARES, INC.
MAY 18, 2004
PLEASE DATE, SIGN AND MAIL
YOUR PROXY CARD IN THE
ENVELOPE PROVIDED AS SOON
AS POSSIBLE.
Please detach along perforated line and mail in the envelope provided.
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS PRESENTED.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK
YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [x]
--------------------------------------------------------------------------------
1. The election as directors of all nominees listed (except as marked to
the contrary below):
CLASS II AND CLASS I NOMINEES:
[ ] FOR ALL NOMINEES o R.K. Ferrell Class II
o S.C. Haworth Class II
[ ] WITHHOLD AUTHORITY o B.S. Montgomery Class II
FOR ALL NOMINEES o H.P. Neale Class II
o P.H. Nevill Class II
[ ] FOR ALL EXCEPT o J.B. Adams, Jr. Class I
(See instructions below)
INSTRUCTION: To withhold authority to vote for any individual nominee(s),
mark "FOR ALL EXCEPT" and fill in the circle next to each nominee you wish to
withhold, as shown here:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that [ ]
changes to the registered name(s) on the account may not be submitted via
this method.
--------------------------------------------------------------------------------
2. The ratification of the selection of Yount, Hyde & Barbour, P.C., as
independent public accountants for the corporation for 2004.
FOR AGAINST ABSTAIN
/ / / / / /
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO
INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS
LISTED. IF ANY OTHER BUSINESS IS PRESENTED AT THE ANNUAL MEETING, INCLUDING
WHETHER OR NOT TO ADJOURN THE MEETING, THIS PROXY WILL BE VOTED BY THE PROXY
HOLDERS IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE PROXY HOLDERS KNOW OF
NO OTHER BUSINESS TO BE PRESENTED AT THE ANNUAL MEETING.
The undersigned acknowledges receipt from the Company prior to the execution of
this proxy of a Notice of Annual Meeting of Shareholders and Proxy Statement
dated April 16, 2004 and of the 2003 Annual Report to Shareholders.
PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
Signature of Shareholder Date:
----------------------------
Signature of Shareholder Date:
----------------------------
NOTE: Please sign exactly as your name or names appear on this Proxy. When
shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give full
title as such. If the signer is a corporation, please sign full corporate
name by duly authorized officer, giving full title as such. If signer is
a partnership, please sign in partnership name by authorized person.