e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2010
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the transition period from _____________ to _____________
Commission File No.: 000-25805
Fauquier Bankshares, Inc.
(Exact name of registrant as specified in its charter)
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Virginia
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54-1288193 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification No.) |
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10 Courthouse Square, Warrenton, Virginia
(Address of principal executive offices)
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20186
(Zip Code) |
(540) 347-2700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting company o |
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.)
Yes o No þ
The
registrant had 3,627,518 shares of common stock outstanding as of May 5, 2010.
FAUQUIER BANKSHARES, INC.
INDEX
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37 |
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Part I. FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
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March 31, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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(Audited) |
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Assets |
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Cash and due from banks |
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$ |
6,990,352 |
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$ |
5,652,617 |
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Interest-bearing deposits in other banks |
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16,465,087 |
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20,546,596 |
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Federal funds sold |
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9,032 |
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9,154 |
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Securities available for sale |
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36,973,670 |
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36,692,094 |
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Restricted investments |
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3,774,700 |
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3,774,700 |
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Loans, net of allowance for loan losses of $5,469,531
in 2010 and $5,481,963 in 2009 |
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467,429,649 |
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462,783,962 |
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Bank premises and equipment, net |
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14,463,147 |
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14,025,745 |
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Accrued interest receivable |
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1,649,832 |
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1,495,085 |
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Other real estate owned |
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2,029,085 |
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2,479,860 |
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Other assets |
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20,810,756 |
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21,022,655 |
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Total assets |
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$ |
570,595,310 |
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$ |
568,482,468 |
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Liabilities and Shareholders Equity |
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Deposits: |
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Noninterest-bearing |
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$ |
64,845,064 |
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$ |
68,469,699 |
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Interest-bearing: |
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NOW accounts |
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100,797,451 |
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83,395,687 |
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Savings and money market accounts |
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107,909,979 |
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106,458,563 |
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Time certificates of deposit |
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194,243,183 |
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207,662,808 |
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Total interest-bearing |
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402,950,613 |
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397,517,058 |
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Total deposits |
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467,795,677 |
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465,986,757 |
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Federal funds purchased |
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Federal Home Loan Bank advances |
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50,000,000 |
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50,000,000 |
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Company-obligated mandatorily redeemable
capital securities |
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4,124,000 |
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4,124,000 |
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Other liabilities |
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5,333,981 |
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5,732,869 |
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Commitments and contingencies |
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Total liabilities |
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527,253,658 |
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525,843,626 |
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Shareholders Equity |
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Common stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2010: 3,620,544 shares
(includes nonvested shares of 33,772); 2009: 3,594,685 shares
(includes nonvested shares of 47,282) |
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11,226,596 |
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11,103,371 |
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Retained earnings |
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33,743,025 |
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33,458,933 |
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Accumulated other comprehensive income (loss), net |
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(1,627,969 |
) |
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(1,923,462 |
) |
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Total shareholders equity |
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43,341,652 |
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42,638,842 |
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Total liabilities and shareholders equity |
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$ |
570,595,310 |
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$ |
568,482,468 |
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See accompanying Notes to Consolidated Financial Statements.
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended March 31, 2010 and 2009
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2010 |
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2009 |
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Interest Income |
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Interest and fees on loans |
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$ |
6,691,277 |
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$ |
6,381,071 |
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Interest and dividends on securities available for sale: |
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Taxable interest income |
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302,656 |
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356,163 |
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Interest income exempt from federal income taxes |
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59,434 |
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61,461 |
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Dividends |
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6,816 |
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4,463 |
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Interest on federal funds sold |
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3 |
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107 |
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Interest on deposits in other banks |
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8,089 |
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3,669 |
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Total interest income |
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7,068,275 |
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6,806,934 |
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Interest Expense |
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Interest on deposits |
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1,275,025 |
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1,558,089 |
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Interest on federal funds purchased |
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10,446 |
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Interest on Federal Home Loan Bank advances |
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273,620 |
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266,667 |
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Distribution on capital securities of subsidiary trusts |
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19,325 |
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35,835 |
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Total interest expense |
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1,567,970 |
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1,871,037 |
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Net interest income |
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5,500,305 |
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4,935,897 |
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Provision for loan losses |
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375,000 |
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200,000 |
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Net interest income after provision for loan losses |
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5,125,305 |
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4,735,897 |
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Other Income |
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Wealth management income |
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306,568 |
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249,236 |
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Service charges on deposit accounts |
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621,451 |
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606,677 |
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Other service charges, commissions and income |
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426,333 |
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403,380 |
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(Loss) on sale of other real estate owned |
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(16,139 |
) |
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(135,759 |
) |
Gain on sale of investments |
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89,106 |
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Net other than temporary impairment losses on securities
recognized in earnings (includes total other than temporary
impairment losses of $560,548, net of $84,875 loss recognized
in other comprehensive income for the quarter ended March 31,
2010 before tax benefit) |
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(475,673 |
) |
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Total other income |
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951,646 |
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1,123,534 |
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Other Expenses |
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Salaries and benefits |
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2,447,688 |
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2,354,939 |
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Net occupancy expense of premises |
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499,902 |
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307,067 |
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Furniture and equipment |
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317,696 |
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280,450 |
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Marketing expense |
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156,418 |
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120,978 |
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Legal, audit and consulting expense |
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267,231 |
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335,943 |
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Federal Deposit Insurance Corporation expense |
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182,617 |
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145,050 |
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Data processing expense |
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358,105 |
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348,494 |
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Other operating expenses |
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799,328 |
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702,046 |
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Total other expenses |
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5,028,985 |
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4,594,967 |
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Income before income taxes |
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1,047,966 |
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1,264,464 |
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Income tax expense |
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244,073 |
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341,555 |
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Net Income |
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$ |
803,893 |
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$ |
922,909 |
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Earnings per Share, basic |
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$ |
0.22 |
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$ |
0.26 |
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Earnings per Share, assuming dilution |
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$ |
0.22 |
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$ |
0.26 |
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Dividends per Share |
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$ |
0.20 |
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$ |
0.20 |
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See accompanying Notes to Consolidated Financial Statements.
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
For the Three Months Ended March 31, 2010 and 2009
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Accumulated |
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Other |
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Common |
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Retained |
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Comprehensive |
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Comprehensive |
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Stock |
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Earnings |
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Income (Loss) |
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Income |
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Total |
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Balance, December 31, 2008 |
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$ |
11,036,687 |
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$ |
32,668,530 |
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$ |
(2,217,280 |
) |
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$ |
41,487,937 |
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Comprehensive income: |
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Net income |
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|
922,909 |
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$ |
922,909 |
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|
922,909 |
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Other comprehensive income net of tax: |
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Unrealized holding losses on securities available
for sale, net of tax benefit of $535,793 |
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(1,040,068 |
) |
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(1,040,068 |
) |
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(1,040,068 |
) |
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Total comprehensive income |
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|
$ |
(117,159 |
) |
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Cash dividends ($.20 per share) |
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(719,307 |
) |
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|
(719,307 |
) |
Amortization of unearned compensation,
restricted stock awards |
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|
85,289 |
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|
85,289 |
|
Issuance of common stock nonvested
shares (10,585 shares) |
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|
33,131 |
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(33,131 |
) |
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Exercise of stock options |
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|
27,293 |
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|
54,484 |
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|
81,777 |
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|
Balance, March 31, 2009 |
|
$ |
11,097,111 |
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|
$ |
32,978,774 |
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|
$ |
(3,257,348 |
) |
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|
$ |
40,818,537 |
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|
Balance, December 31, 2009 |
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$ |
11,103,371 |
|
|
$ |
33,458,933 |
|
|
$ |
(1,923,462 |
) |
|
|
|
|
|
$ |
42,638,842 |
|
Comprehensive income: |
|
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|
|
|
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|
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|
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Net income |
|
|
|
|
|
|
803,893 |
|
|
|
|
|
|
$ |
803,893 |
|
|
|
803,893 |
|
Other comprehensive income net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available
for sale, net of tax of $20,791 |
|
|
|
|
|
|
|
|
|
|
40,359 |
|
|
|
40,359 |
|
|
|
40,359 |
|
Less: gain on sale of securities available for sale, net
net of tax of $30,296 |
|
|
|
|
|
|
|
|
|
|
(58,810 |
) |
|
|
(58,810 |
) |
|
|
(58,810 |
) |
Less: reclassification adjustments for other than
temporary impairment, net of tax of $161,729 |
|
|
|
|
|
|
|
|
|
|
313,944 |
|
|
|
313,944 |
|
|
|
313,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income net of tax of $152,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,099,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.20 per share) |
|
|
|
|
|
|
(724,109 |
) |
|
|
|
|
|
|
|
|
|
|
(724,109 |
) |
Amortization of unearned compensation,
restricted stock awards |
|
|
|
|
|
|
205,260 |
|
|
|
|
|
|
|
|
|
|
|
205,260 |
|
Issuance of common stock nonvested
shares (28,847 shares) |
|
|
90,291 |
|
|
|
(90,291 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock vested
shares (6,522 shares) |
|
|
20,414 |
|
|
|
69,459 |
|
|
|
|
|
|
|
|
|
|
|
89,873 |
|
Exercise of stock options |
|
|
12,520 |
|
|
|
19,880 |
|
|
|
|
|
|
|
|
|
|
|
32,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010 |
|
$ |
11,226,596 |
|
|
$ |
33,743,025 |
|
|
$ |
(1,627,969 |
) |
|
|
|
|
|
$ |
43,341,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2010 and 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
803,893 |
|
|
$ |
922,909 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
313,944 |
|
|
|
203,179 |
|
Provision for loan losses |
|
|
375,000 |
|
|
|
200,000 |
|
Loss on sale of other real estate |
|
|
16,139 |
|
|
|
135,759 |
|
(Gain) on sale of securities |
|
|
(89,106 |
) |
|
|
|
|
Loss on impairment of securities |
|
|
475,673 |
|
|
|
|
|
Amortization (accretion) of security premiums, net |
|
|
9,058 |
|
|
|
(12,714 |
) |
Amortization of unearned compensation, net of forfeiture |
|
|
205,260 |
|
|
|
85,289 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
(Increase) decrease in other assets |
|
|
(96,708 |
) |
|
|
356,014 |
|
(Decrease) increase in other liabilities |
|
|
(398,888 |
) |
|
|
254,812 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,614,265 |
|
|
|
2,145,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from sale of securities available for sale |
|
|
1,543,439 |
|
|
|
|
|
Proceeds from maturities, calls and principal
payments of securities available for sale |
|
|
2,340,984 |
|
|
|
1,773,795 |
|
Purchase of securities available for sale |
|
|
(4,112,271 |
) |
|
|
(2,978 |
) |
Purchase of premises and equipment |
|
|
(751,346 |
) |
|
|
(592,101 |
) |
Purchase proceeds from sale of other bank stock |
|
|
|
|
|
|
(719,900 |
) |
Net (increase) in loans |
|
|
(5,020,687 |
) |
|
|
(8,870,845 |
) |
Proceeds from sale of other real estate owned |
|
|
434,636 |
|
|
|
869,626 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,565,245 |
) |
|
|
(7,542,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts |
|
|
15,228,545 |
|
|
|
(1,069,027 |
) |
Net (decrease) increase in certificates of deposit |
|
|
(13,419,625 |
) |
|
|
17,056,272 |
|
Federal Home Loan Bank advances |
|
|
|
|
|
|
80,000,000 |
|
Federal Home Loan Bank principal repayments |
|
|
|
|
|
|
(65,000,000 |
) |
Purchase of federal funds |
|
|
|
|
|
|
(18,275,000 |
) |
Cash dividends paid on common stock |
|
|
(724,109 |
) |
|
|
(719,307 |
) |
Issuance of common stock |
|
|
122,273 |
|
|
|
81,777 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,207,084 |
|
|
|
12,074,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(2,743,896 |
) |
|
|
6,677,560 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
26,208,367 |
|
|
|
11,023,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
$ |
23,464,471 |
|
|
$ |
17,700,722 |
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
1,557,869 |
|
|
$ |
1,967,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale, net
of tax effect |
|
$ |
(18,451 |
) |
|
$ |
(1,040,068 |
) |
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. General
The consolidated statements include the accounts of Fauquier Bankshares, Inc. (the Company)
and its wholly-owned subsidiaries: The Fauquier Bank (the Bank) and Fauquier Statutory Trust
II; and the Banks wholly-owned subsidiary, Fauquier Bank Services, Inc. In consolidation,
significant intercompany financial balances and transactions have been eliminated. In the
opinion of management, the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present fairly the
financial positions as of March 31, 2010 and December 31, 2009 and the results of operations for
the three months ended March 31, 2010 and 2009. The notes included herein should be read in
conjunction with the consolidated financial statements and accompanying notes included in the
Companys 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2010 are not necessarily
indicative of the results expected for the full year.
Recent Accounting Pronouncements
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial
assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009
through the issuance of Accounting Standards Updated (ASU) 2009-16. The new standard provides
guidance to improve the relevance, representational faithfulness, and comparability of the
information that an entity provides in its financial statements about a transfer of financial
assets; the effects of a transfer on its financial position, financial performance, and cash
flows; and a transferors continuing involvement, if any, in transferred financial assets. The
adoption of the new guidance did not have a material impact on the Companys consolidated
financial statements.
In June 2009, the FASB issued new guidance relating to the variable interest entities. The new
guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was
adopted into Codification in December 2009. The objective of the guidance is to improve
financial reporting by enterprises involved with variable interest entities and to provide more
relevant and reliable information to users of financial statements. SFAS No. 167 is effective as
of January 1, 2010. The adoption of the new guidance did not have a material impact on the
Companys consolidated financial statements.
In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15),
Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or
Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance
for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU
2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim
periods within those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of the new guidance did not have a material impact on the Companys
consolidated financial statements.
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics Technical
Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance
including the following topics: accounting for subsequent investments, termination of an
interest rate swap, issuance of financial statements subsequent events, use of residential
method to value acquired assets other than goodwill, adjustments in assets and liabilities for
holding gains and losses, and selections of discount rate used for measuring defined benefit
obligation. The adoption of the new guidance did not have a material impact on the Companys
consolidated financial statements.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.
ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and
includes conforming amendments
7
to guidance on employers disclosures about postretirement benefit plan assets. ASU 2010-06 is
effective for interim and annual periods beginning after December 15, 2009, except for
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity
in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning
after December 15, 2010 and for interim periods within those fiscal years. The adoption of the
new guidance did not have a material impact on the Companys consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update No. 2010-08, Technical
Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and
hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15,
2009. The adoption of the new guidance did not have a material impact on the Companys
consolidated financial statements.
In February 2010, the FASB issued Accounting Standards Update No. 2010-09, Subsequent Events
(Topic 855): Amendments to Certain Recognition and Disclosure Requirements. ASU 2010-09
addresses both the interaction of the requirements of Topic 855 with the SECs reporting
requirements and the intended breadth of the reissuance disclosures provisions related to
subsequent events. An entity that is an SEC filer is not required to disclose the date through
which subsequent events have been evaluated. ASU 2010-09 is effective immediately. The adoption
of the new guidance did not have a material impact on the Companys consolidated financial
statements.
Note 2. Securities
The amortized cost and fair value of securities available for sale, with unrealized gains and
losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
|
Obligations of U.S. Government
corporations and agencies |
|
$ |
28,142,404 |
|
|
$ |
842,125 |
|
|
$ |
(16,494 |
) |
|
$ |
28,968,035 |
|
Obligations of states and political
subdivisions |
|
|
5,569,835 |
|
|
|
276,408 |
|
|
|
(1,449 |
) |
|
|
5,844,794 |
|
Corporate Bonds |
|
|
4,865,613 |
|
|
|
|
|
|
|
(3,038,031 |
) |
|
|
1,827,582 |
|
Mutual Funds |
|
|
318,577 |
|
|
|
|
|
|
|
(818 |
) |
|
|
317,759 |
|
FHLMC Preferred Bank Stock |
|
|
18,500 |
|
|
|
|
|
|
|
(3,000 |
) |
|
|
15,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,914,929 |
|
|
$ |
1,118,533 |
|
|
$ |
(3,059,792 |
) |
|
$ |
36,973,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
Obligations of U.S. Government
corporations and agencies |
|
$ |
27,837,619 |
|
|
$ |
916,798 |
|
|
$ |
(25,592 |
) |
|
$ |
28,728,825 |
|
Obligations of states and political
subdivisions |
|
|
5,569,586 |
|
|
|
163,021 |
|
|
|
(8,758 |
) |
|
|
5,723,849 |
|
Corporate Bonds |
|
|
5,341,286 |
|
|
|
|
|
|
|
(3,428,830 |
) |
|
|
1,912,456 |
|
Mutual Funds |
|
|
315,715 |
|
|
|
|
|
|
|
(3,451 |
) |
|
|
312,264 |
|
FHLMC Preferred Bank Stock |
|
|
18,500 |
|
|
|
|
|
|
|
(3,800 |
) |
|
|
14,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,082,706 |
|
|
$ |
1,079,819 |
|
|
$ |
(3,470,431 |
) |
|
$ |
36,692,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of securities available for sale, by contractual
maturity, are shown below. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations without penalties.
8
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
316,300 |
|
|
$ |
317,600 |
|
Due after one year through five years |
|
|
128,740 |
|
|
|
132,525 |
|
Due after five years through ten years |
|
|
8,773,814 |
|
|
|
9,151,247 |
|
Due after ten years |
|
|
29,358,998 |
|
|
|
27,039,039 |
|
Equity securities |
|
|
337,077 |
|
|
|
333,259 |
|
|
|
|
|
|
|
|
|
|
$ |
38,914,929 |
|
|
$ |
36,973,670 |
|
|
|
|
|
|
|
|
There were impairment losses on securities of $476,000 in the quarter ended March 31, 2010
and no impairment losses in the quarter ended March 31, 2009.
During the quarter ended March 31, 2010, one security, a 30 year mortgage-backed government
agency with a fair value of $1.5 million, was sold at a gain of $89,000. This bond was sold
because of its relatively longer term current duration of approximately five years, and its
inherent extension risk of an additional two years of duration if market interest rates increase
in the future. The tax expense on this gain on sale was $30,000. There were no securities sold
in the quarter ended March 31, 2009.
The following table shows the Company securities with gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at March 31, 2010 and December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
Description of Securities |
|
Fair Value |
|
|
(Losses) |
|
|
Fair Value |
|
|
(Losses) |
|
|
Fair Value |
|
|
(Losses) |
|
Obligations of U.S.
Government corporations
and agencies |
|
$ |
6,019,556 |
|
|
$ |
(16,494 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,019,556 |
|
|
$ |
(16,494 |
) |
Obligations of states and political
subdivisions |
|
|
|
|
|
|
|
|
|
|
282,616 |
|
|
|
(1,449 |
) |
|
|
282,616 |
|
|
|
(1,449 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
1,827,581 |
|
|
|
(3,038,031 |
) |
|
|
1,827,581 |
|
|
|
(3,038,031 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, debt securities |
|
|
6,019,556 |
|
|
|
(16,494 |
) |
|
|
2,110,197 |
|
|
|
(3,039,480 |
) |
|
|
8,129,753 |
|
|
|
(3,055,974 |
) |
Mutual funds |
|
|
|
|
|
|
|
|
|
|
317,759 |
|
|
|
(818 |
) |
|
|
317,759 |
|
|
|
(818 |
) |
FHLMC preferred bank stock |
|
|
|
|
|
|
|
|
|
|
15,500 |
|
|
|
(3,000 |
) |
|
|
15,500 |
|
|
|
(3,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities |
|
$ |
6,019,556 |
|
|
$ |
(16,494 |
) |
|
$ |
2,443,456 |
|
|
$ |
(3,043,298 |
) |
|
$ |
8,463,012 |
|
|
$ |
(3,059,792 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
Description of Securities |
|
Fair Value |
|
|
(Losses) |
|
|
Fair Value |
|
|
(Losses) |
|
|
Fair Value |
|
|
(Losses) |
|
Obligations of U.S.
Government corporations
and agencies |
|
$ |
3,030,782 |
|
|
$ |
(25,592 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,030,782 |
|
|
$ |
(25,592 |
) |
Obligations of states and political
subdivisions |
|
|
312,667 |
|
|
|
(174 |
) |
|
|
275,475 |
|
|
|
(8,584 |
) |
|
|
588,142 |
|
|
|
(8,758 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
1,912,456 |
|
|
|
(3,428,830 |
) |
|
|
1,912,456 |
|
|
|
(3,428,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, debt securities |
|
|
3,343,449 |
|
|
|
(25,766 |
) |
|
|
2,187,931 |
|
|
|
(3,437,414 |
) |
|
|
5,531,380 |
|
|
|
(3,463,180 |
) |
Mutual funds |
|
|
|
|
|
|
|
|
|
|
312,263 |
|
|
|
(3,451 |
) |
|
|
312,263 |
|
|
|
(3,451 |
) |
FHLMC preferred bank stock |
|
|
14,700 |
|
|
|
(3,800 |
) |
|
|
|
|
|
|
|
|
|
|
14,700 |
|
|
|
(3,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities |
|
$ |
3,358,149 |
|
|
$ |
(29,566 |
) |
|
$ |
2,500,194 |
|
|
$ |
(3,440,865 |
) |
|
$ |
5,858,343 |
|
|
$ |
(3,470,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The nature of securities which are temporarily impaired for a continuous 12 month period or
more at March 31, 2010 can be segregated into four groups:
The first group consists of four corporate bonds with a cost basis totaling $4.8 million and a
temporary loss of approximately $3.0 million. The method for valuing these four corporate bonds
came from Moodys Analytics. Moodys Analytics employs a two step discounted cash-flow valuation
process. The first step is to use Monte Carlo simulations to evaluate the credit quality of the
collateral pool and the structural supports. Step two is to apply a discount rate to the cash
flows to calculate a value. These four corporate bonds are the Class B or subordinated
mezzanine tranche of pooled trust preferred securities. The trust preferred securities are
collateralized by the interest and principal payments made on trust preferred capital offerings
by a geographically diversified pool of approximately 60 different financial institutions. They
have an estimated maturity of 25 years. These bonds could have been called at par on the five
year anniversary date of issuance, which has already passed for all four bonds. The bonds
reprice every three months at a fixed rate index above the three-month London Interbank Offered
Rate (LIBOR). These bonds have sufficient collateralization and cash flow projections to
satisfy their valuation based on the cash flow portion of the (other than temporary
impairment) OTTI test under authoritative accounting guidance as of March 31, 2010. All four
bonds totaling $1.8 million at fair value, are greater than 90 days past due, and are classified
as nonperforming corporate bond investments in the nonperforming asset table in Note 4.
Additional information regarding each of the pooled trust preferred securities as of March 31, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying |
|
|
Percent of |
|
|
Percent of |
|
|
incremental |
|
|
|
|
|
|
|
|
|
|
Cumulative Other |
|
|
|
|
|
|
|
|
|
Current |
|
|
Underlying |
|
|
Underlying |
|
|
defaults |
|
|
Current |
|
|
Cumulative |
|
|
Compreshensive |
|
Cost, net of |
|
|
|
|
|
|
Collateral |
|
|
Collateral in |
|
|
Collateral in |
|
|
required to |
|
|
Moody's |
|
|
Amount of |
|
|
Loss, net of tax |
|
OTTI loss |
|
|
Fair Value |
|
|
Performing |
|
|
Deferral |
|
|
Default |
|
|
break yield (1) |
|
|
Rating |
|
|
OTTI Loss |
|
|
benefit |
|
$ |
359,294 |
|
|
$ |
102,362 |
|
|
|
56.6% |
|
|
|
28.6% |
|
|
|
14.8% |
|
|
broken |
|
Ca |
|
$ |
640,706 |
|
|
$ |
169,575 |
|
|
1,822,050 |
|
|
|
746,034 |
|
|
|
76.3% |
|
|
|
11.7% |
|
|
|
12.0% |
|
|
broken |
|
Ca |
|
|
177,950 |
|
|
|
710,171 |
|
|
1,899,350 |
|
|
|
779,749 |
|
|
|
77.9% |
|
|
|
18.3% |
|
|
|
3.8% |
|
|
broken |
|
Ca |
|
|
100,650 |
|
|
|
738,937 |
|
|
784,919 |
|
|
|
199,436 |
|
|
|
73.9% |
|
|
|
14.7% |
|
|
|
11.4% |
|
|
broken |
|
Ca |
|
|
215,081 |
|
|
|
386,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,865,613 |
|
|
$ |
1,827,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,134,387 |
|
|
$ |
2,005,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A break in yield for a given tranche investment means that defaults and/or deferrals
have reached such a level that the specific tranche would not receive all of the
contractual principal and interest cash flow by its maturity, resulting in not a temporary
shortfall, but an actual loss. This column represents the percentage of additional defaults
among the currently performing collateral that would result in other than temporary
impairment and loss. |
The Company monitors these pooled trust preferred securities in its portfolio as to
additional collateral issuer defaults and deferrals, which as a general rule indicate that
additional impairment may have occurred. Due to the continued stress on banks in general, and
the issuer banks in particular, as a result of overall economic conditions, the Company
anticipates having to recognize additional impairment in future
periods; however the extent,
timing, and probability of any additional impairment cannot be reasonably estimated at this
time.
The second group consists of one municipal bond with a temporary loss of approximately $1,000.
This bond is current and has an A2 rating from Moodys. The Company plans to hold it until
maturity in 2021.
The third and fourth group consists of a Community Reinvestment Act qualified investment bond
fund with a temporary loss of approximately $1,000, and FHLMC preferred bank stock with a
temporary loss of $3,000. Both represent a relatively small balance of the portfolio and the
Company plans to hold them indefinitely.
10
The following roll forward reflects the amount related to credit losses recognized in earnings
(in accordance with FASB ASC 320-10-35-34D):
|
|
|
|
|
|
|
Available for sale |
|
Beginning balance as of December 31, 2009 |
|
$ |
658,734 |
|
Add: Amount related to the credit loss for which an other-than- temporary impairment was
not previously recognized |
|
|
100,650 |
|
|
|
|
|
|
Add: Increases to the amount related to the credit loss for which an other-than temporary
impairment was previously recognized |
|
|
375,003 |
|
|
|
|
|
|
Less: Realized losses for securities sold |
|
|
|
|
|
|
|
|
|
Less: Securities for which the amount previously recognized in other comprehensive income
was recognized in earnings because the Company intends to sell the security or more likely
than not will be required to sell the security before recovery of its amortized cost basis |
|
|
|
|
|
|
|
|
|
Less: Increases in cash flows expected to be collected that are recognized over the remaining
life of the security (See FASB ASC 320-10-35-35) |
|
|
|
|
|
|
|
|
Ending balance as of March 31, 2010 |
|
$ |
1,134,387 |
|
|
|
|
|
The carrying value of securities pledged to secure deposits and for other purposes amounted
to $20.1 million and $23.7 million at March 31, 2010 and December 31, 2009, respectively.
The amortized cost and fair value of restricted securities follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
Restricted investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock |
|
$ |
3,625,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,625,700 |
|
Federal Reserve Bank Stock |
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
99,000 |
|
Community Bankers Bank Stock |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,774,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,774,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
Restricted investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock |
|
$ |
3,625,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,625,700 |
|
Federal Reserve Bank Stock |
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
99,000 |
|
Community Bankers Bank Stock |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,774,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,774,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys restricted investments include an equity investment in the Federal Home Loan
Bank of Atlanta (FHLB). FHLB stock is generally viewed as a long term investment and as a
restricted investment which is carried at cost because there is no market for the stock other
than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its
value is based on ultimate recoverability of the par value rather than recognizing temporary
declines in value. Despite the FHLBs temporary suspension of cash dividends in 2009, the
Company does not consider this investment to be other than temporarily impaired at March 31,
2010, and no impairment has been recognized.
11
Note 3. Loans
A summary of the balances of loans follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Thousands) |
|
Real estate loans: |
|
|
|
|
|
|
|
|
Construction |
|
$ |
30,027 |
|
|
$ |
33,003 |
|
Secured by farmland |
|
|
1,093 |
|
|
|
948 |
|
Secured by 1 - to - 4 family residential |
|
|
193,650 |
|
|
|
193,709 |
|
Other real estate loans |
|
|
192,780 |
|
|
|
186,463 |
|
Commercial and industrial loans (not secured by real estate) |
|
|
27,941 |
|
|
|
29,286 |
|
Consumer installment loans |
|
|
13,354 |
|
|
|
10,390 |
|
All other loans |
|
|
14,105 |
|
|
|
14,559 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
472,950 |
|
|
$ |
468,358 |
|
Unearned income |
|
|
(51 |
) |
|
|
(92 |
) |
Allowance for loan losses |
|
|
(5,470 |
) |
|
|
(5,482 |
) |
|
|
|
|
|
|
|
Net loans |
|
$ |
467,429 |
|
|
$ |
462,784 |
|
|
|
|
|
|
|
|
Of the $192.7 million in other real estate loans at March 31, 2010, $100.2 million or 52.1%
were owner occupied. Of the $186.5 million in other real estate loans at December 31, 2009,
$100.3 million or 53.8% were owner occupied.
Note 4. Allowance for Loan Losses
Analysis of the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Twelve Months |
|
|
|
Ended March |
|
|
Ended March |
|
|
Ended December |
|
|
|
31, 2010 |
|
|
31, 2009 |
|
|
31, 2009 |
|
Balance at beginning of year |
|
$ |
5,481,963 |
|
|
$ |
4,779,662 |
|
|
$ |
4,779,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
375,000 |
|
|
|
200,000 |
|
|
|
1,710,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged-off |
|
|
15,370 |
|
|
|
13,462 |
|
|
|
81,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan losses charged-off |
|
|
(402,802 |
) |
|
|
(120,553 |
) |
|
|
(1,088,805 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
5,469,531 |
|
|
$ |
4,872,571 |
|
|
$ |
5,481,963 |
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2009 |
|
Non-accrual loans |
|
$ |
3,420 |
|
|
$ |
3,410 |
|
|
$ |
1,573 |
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
2,029 |
|
|
|
2,480 |
|
|
$ |
2,029 |
|
Other repossessed assets owned |
|
|
61 |
|
|
|
54 |
|
|
|
36 |
|
Non-performing corporate bond investments, at fair value |
|
|
1,828 |
|
|
|
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
7,338 |
|
|
$ |
7,070 |
|
|
$ |
3,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans, period end |
|
|
1.16 |
% |
|
|
1.17 |
% |
|
|
1.08 |
% |
Non-accrual loans to total loans, period end |
|
|
0.72 |
% |
|
|
0.73 |
% |
|
|
0.35 |
% |
Allowance for loan losses to non-accrual loans, period end |
|
|
159.83 |
% |
|
|
160.76 |
% |
|
|
309.79 |
% |
Non-performing assets to total assets, period end |
|
|
1.29 |
% |
|
|
1.24 |
% |
|
|
0.69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
March 31, 2009 |
|
Impaired loans for which an allowance has been provided |
|
$ |
3,059,542 |
|
|
$ |
3,213,516 |
|
|
$ |
1,629,725 |
|
Impaired loans for which no allowance has been provided |
|
|
607,256 |
|
|
|
175,429 |
|
|
|
228,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,666,798 |
|
|
$ |
3,388,945 |
|
|
$ |
1,858,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance provided for impaired loans, included in the
allowance for loan losses |
|
$ |
1,054,000 |
|
|
$ |
1,163,072 |
|
|
$ |
776,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Twelve Months |
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
Ended |
|
|
Ended March 31, |
|
|
|
2010 |
|
|
December 31, 2009 |
|
|
2009 |
|
Average balance in impaired loans |
|
$ |
3,725,047 |
|
|
$ |
3,631,937 |
|
|
$ |
1,871,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans |
|
$ |
11,740 |
|
|
$ |
148,490 |
|
|
$ |
14,757 |
|
|
|
|
|
|
|
|
|
|
|
Total loans past due 90 days or more and still accruing interest were $197,000 at March 31,
2010 and $354,000 and $4,000 on December 31, 2009, and March 31, 2009, respectively.
Authoritative accounting guidance requires that the impairment of loans that have been
separately identified for evaluation is to be measured based on the present value of expected
future cash flows or, alternatively, the observable market price of the loans or the fair value
of the collateral. However, for those loans that are collateral dependent (that is, if repayment
of those loans is expected to be provided solely by the underlying collateral) and for which
management has determined foreclosure is probable, the measure of impairment is to be based on
the net realizable value of the collateral. Authoritative accounting guidance also requires
certain disclosures about investments in impaired loans and the allowance for loan losses and
interest income recognized on loans.
A loan is considered impaired when it is probable that the Bank will be unable to collect all
principal and interest amounts according to the contractual terms of the loan agreement. Factors
involved in determining impairment include, but are not limited to, expected future cash flows,
financial condition of the borrower, and the current economic conditions. A performing loan may
be considered impaired if the factors above indicate a need for impairment. A loan on
non-accrual status may not be impaired if it is in the process of collection or if the shortfall
in payment is insignificant. A delay of less than 30 days or a shortfall of less than 5% of the
required principal and interest payments generally is considered insignificant and would not
indicate an impairment situation, if in managements judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired
loans under authoritative accounting guidance. As is the case for all loans, charge-offs for
impaired loans occur when the loan or portion of the loan is determined to be uncollectible.
Note 5. Company-Obligated Mandatorily Redeemable Capital Securities
On September 21, 2006, the Companys wholly-owned Connecticut statutory business trust privately
issued $4 million face amount of the trusts Floating Rate Capital Securities in a pooled
capital securities offering (Trust II). Simultaneously, the trust used the proceeds of that
sale to purchase $4.0 million principal amount of the Companys Floating Rate Junior
Subordinated Deferrable Interest Debentures due 2036. The interest rate on the capital security
resets every three months at 1.70% above the then current three month LIBOR. Interest is paid
quarterly.
Total capital securities at March 31, 2010 and 2009 were $4,124,000 for both respective dates.
The Trust II issuance of capital securities and the respective subordinated debentures are
callable at any time after five years from the issue date. The subordinated debentures are an
unsecured obligation of the Company and are junior in right of payment to all present and future
senior indebtedness of the Company. The capital securities are guaranteed by the Company on a
subordinated basis.
13
Note 6. Earnings Per Share
The following table shows the weighted average number of shares used in computing earnings per
share and the effect on weighted average number of shares of dilutive potential common stock.
Dilutive potential common stock had no effect on income available to common shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Per Share |
|
|
|
|
|
|
Per Share |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Basic earnings per share |
|
|
3,602,776 |
|
|
$ |
0.22 |
|
|
|
3,535,817 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities, stock-based awards |
|
|
15,356 |
|
|
|
|
|
|
|
18,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,618,132 |
|
|
$ |
0.22 |
|
|
|
3,554,767 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All shares in circulation were dilutive and included in the calculation above at March 31,
2010. Shares not included in the calculation above because their effects were not dilutive
totaled 23,732 at March 31, 2009.
Note 7. Stock-Based Compensation
Stock Incentive Plan (2009)
On May 19, 2009, the shareholders of the Company approved the Companys Stock Incentive Plan
(the Plan), which superseded and replaced the Omnibus Stock Ownership and Long-Term Incentive
Plan.
Under the Plan, stock options, stock appreciation rights, non-vested and/or restricted shares,
and long-term performance unit awards may be granted to directors and employees for purchase of
the Companys stock. The effective date of the plan was March 19, 2009, the date the Companys
Board approved the Plan, and has a termination date of December 31, 2019. The Companys Board
may terminate, suspend or modify the Plan within certain restrictions. The Plan authorizes for
issuance 350,000 shares of the Companys common stock. The Plan requires that options be
granted at an exercise price equal to at least 100% of the fair market value of the common stock
on the date of the grant. Such options are generally not exercisable until three years from the
date of issuance and generally require continuous employment during the period prior to
exercise. The options will expire in no more than ten years after the date of grant. The stock
options, stock appreciation rights, restricted shares, and long-term performance unit awards for
employees are generally subject to vesting requirements and are subject to forfeiture if vesting
and other contractual provision requirements are not met. The restricted shares for
non-executive directors are not subject to vesting requirements, but are generally subject to
three year restrictions of sale.
Nonemployee Director Stock Option Plan
The Company previously has issued stock options to non-employee directors under its Non-employee
Director Stock Option Plan, which expired in 1999. Under that plan, each non-employee director
of the Company or its subsidiary 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 plan. The first grant
under the plan was made on May 1, 1995. The exercise price of awards was fixed at the fair
market value of the shares on the date the option was granted. During the term of the plan, a
total of 120,960 options for shares of common stock were granted. Effective January 1, 2000,
the Omnibus Stock Ownership and Long-Term Incentive Plan for employees was amended and restated
to include non-employee directors.
The Company did not grant stock options during the three months ended March 31, 2010 or March
31, 2009.
The Company granted awards of shares to executive officers and non-employee directors under the
above-described incentive plans: 9,784 shares and 15,050 shares of unvested restricted stock to
executive officers and
14
5,553 shares and 8,450 shares of restricted stock to non-executive directors on March 5, 2010
and February 18, 2009, respectively.
The restricted shares are accounted for using the fair market value of the Companys common
stock on the date the restricted shares were awarded. The restricted shares issued to executive
officers are subject to a vesting period, whereby, the restrictions on the shares lapse on the
third year anniversary of the date the restricted shares were awarded. Compensation expense for
non-vested shares amounted to $55,000 and $85,000, net of forfeiture, for the three months ended
March 31, 2010 and 2009, respectively. During the quarter ended March 31, 2010, the restricted
shares previously issued to non-employee directors were no longer subject to a vesting period,
and the previously deferred compensation expense on these shares, totaling an additional
compensation expense of $150,000, was fully recognized during the first quarter of 2010.
The Company granted awards of non-vested performance-based stock rights to executive officers of
9,784 share rights and 15,050 share rights of to executive officers on March 5, 2010 and
February 18, 2009, respectively.
The performance-based stock rights are accounted for using the fair market value of the
Companys common stock on the date the restricted shares were awarded, and adjusted as the
market value of the stock changes. The performance-based stock rights shares issued to
executive officers and directors are subject to a vesting period, whereby, the restrictions on
the shares lapse on the third year anniversary of the date the restricted shares were awarded.
They are also subject to the Company reaching a predetermined return on average equity ratio for
the final year of the vesting period. Compensation expense for performance-based stock rights
amounted to $28,000 and $12,000 during the quarters ended March 31, 2010 and 2009, respectively.
A summary of the status of the options granted under the above described plans is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
Number of |
|
|
Exercise |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Value (1) |
|
Outstanding at January 1, 2010 |
|
|
62,480 |
|
|
$ |
9.96 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(4,000 |
) |
|
|
8.10 |
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
58,480 |
|
|
$ |
10.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of quarter |
|
|
58,480 |
|
|
|
|
|
|
$ |
279,168 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value
per option of
options granted during the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value of stock options in the table above reflects the
pre-tax intrinsic value (the amount by which the March 31, 2010 market value of
the underlying stock option exceeded the exercise price of the option) that would
have been received by the option holders had all option holders exercised their
options on March 31, 2010. This amount changes based on the changes in the market
value of the Companys stock. |
The total intrinsic value of options exercised during the three months ended March 31, 2010
and 2009 was $23,900 and $22,478, respectively.
A summary of the status of the Companys non-vested restricted shares granted under the above
described plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
|
|
Shares |
|
|
Price |
|
Nonvested at January 1, 2010 |
|
|
47,282 |
|
|
|
|
|
Granted |
|
|
15,337 |
|
|
$ |
13.78 |
|
Vested |
|
|
(28,847 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2010 |
|
|
33,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, there was $265,115 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the plans. That cost is expected
to be recognized over an approximate period of 35 months.
Note 8. Employee Benefit Plan
The following table provides a reconciliation of the changes in the defined benefit pension
plans obligations for the three months ended March 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
|
|
|
$ |
62,707 |
|
Interest cost |
|
|
79,523 |
|
|
|
73,827 |
|
Expected return on plan assets |
|
|
(64,176 |
) |
|
|
(65,029 |
) |
Amortization of transition (asset) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
Recognized net actuarial (gain) loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
15,347 |
|
|
$ |
71,505 |
|
|
|
|
|
|
|
|
The Company previously disclosed in its financial statements for the year ended December
31, 2009, that there were no contributions made to its pension plan in 2009. As of March 31,
2010, the pension plan required no additional contributions.
On December 20, 2007, the Companys Board of Directors approved the termination of the defined
benefit pension plan effective on December 31, 2009, and effective January 1, 2010, the Company
replaced the defined benefit pension plan with an enhanced 401(k) plan. On January 18, 2009,
the assets within the defined benefit pension plan were redeployed from ownership in various
equity and debt mutual fund investments, and into a short-term money market fund in order to
preserve asset value until the terminated plan is distributed.
Defined benefit pension plan expenses are projected to be approximately $61,000 in 2010 and
nothing due to curtailment going forward. Expenses for the 401(k) plan are projected to increase
to approximately $625,000 in 2010. Growth in 401(k) expense after 2010 is projected to increase
approximately at the same rate of increase as salaries.
Note 9. Fair Value Measurement
The Company adopted Accounting Standards Codification (ASC) 820 Fair Value Measurement and
Disclosures (previously Statement of Financial Accounting Standards (SFAS) No. 157, Fair
Value Measurements), on January 1, 2008 to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. ASC 820 clarifies that fair value of
certain assets and liabilities is an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types
of inputs are as follows:
|
Level 1 |
|
Valuation is based on quoted prices in active markets for
identical assets and liabilities. |
|
|
Level 2 |
|
Valuation is based on observable inputs including quoted
prices in active markets for similar assets and
liabilities, quoted prices for identical or similar
assets and liabilities in less active markets, and
model-based valuation techniques for which significant
assumptions can be derived primarily from or corroborated
by observable data in the market. |
16
|
Level 3 |
|
Valuation is based on model-based techniques that use one
or more significant inputs or assumptions that are
unobservable in the market. |
The following describes the valuation techniques used by the Company to measure certain
financial assets and liabilities recorded at fair value on a recurring basis in the financial
statements:
Securities available for sale: Securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted market prices, when available
(Level 1). If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market data. Third party
vendors compile prices from various sources and may determine the fair value of identical or
similar securities by using pricing models that consider observable market data (Level 2).
The following table presents the balances of financial assets and liabilities measured at fair
value on a recurring basis as of March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Using |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
Balance |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets at March 31, 2010
Available-for-sale securities |
|
$ |
36,974 |
|
|
$ |
35,146 |
|
|
$ |
|
|
|
$ |
1,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at December 31, 2009
Available-for-sale securities |
|
$ |
36,692 |
|
|
$ |
34,780 |
|
|
$ |
|
|
|
$ |
1,912 |
|
Change in Level 3 Fair Value
The changes in Level 3 assets measured at estimated fair value on a recurring basis during the
quarter ended March 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains (Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized/Unrealized |
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Included in Other |
|
|
Transfers in |
|
|
|
|
|
|
January 1, |
|
|
Included in |
|
|
Comprehensive |
|
|
and/or out of |
|
|
Balance March 31, |
|
|
|
2010 |
|
|
earnings |
|
|
Income |
|
|
Level 3 |
|
|
2010 |
|
Available for sale securities |
|
$ |
1,912 |
|
|
$ |
(476 |
) |
|
$ |
(84 |
) |
|
$ |
476 |
|
|
$ |
1,828 |
Certain financial assets are measured at fair value on a nonrecurring basis in accordance
with GAAP. Adjustments to the fair value of these assets usually result from the application of
lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain
financial assets recorded at fair value on a nonrecurring basis in the financial statements:
Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These
loans currently consist of one-to-four family residential loans originated for sale in the
secondary market. Fair value is based on the price secondary markets are currently offering for
similar loans using observable market data which is not
materially different than cost due to the short duration between origination and sale (Level 2).
As such, the
17
Company records any fair value adjustments on a nonrecurring basis. No nonrecurring
fair value adjustments were recorded on loans held for sale during the quarter ended March 31,
2010. Gains and losses on the sale of loans, if applicable, are recorded within income from mortgage banking on
the Consolidated Statements of Income.
Impaired Loans: Loans are designated as impaired when, in the judgment of management based on
current information and events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. The measurement of loss associated with
impaired loans can be based on either the observable market price of the loan or the fair value
of the collateral. Fair value is measured based on the value of the collateral securing the
loans. Collateral may be in the form of real estate or business assets including equipment,
inventory, and accounts receivable. The value of real estate collateral is determined utilizing
an income or market valuation approach based on an appraisal conducted by an independent,
licensed appraiser outside of the Company using observable market data (Level 2). However, if
the collateral is a house or building in the process of construction or if an appraisal of the
real estate property is over two years old, then the fair value is considered Level 3. The value
of business equipment is based upon an outside appraisal if deemed significant, or the net book
value on the applicable business financial statements if not considered significant using
observable market data. Likewise, values for inventory and accounts receivables collateral are
based on financial statement balances or aging reports (Level 3). Impaired loans allocated to
the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value
adjustments are recorded in the period incurred as provision for loan losses on the Consolidated
Statements of Income.
Certain assets such as real estate owned are measured at fair value less the cost to sell.
Management believes that the fair value component in its valuation follows the provisions of ASC
820.
The following table summarizes the Companys financial assets that were measured at fair value
on a nonrecurring basis during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at March 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
Balance as of |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
(In Thousands) |
|
March 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net |
|
$ |
2,006 |
|
|
|
|
|
|
$ |
799 |
|
|
$ |
1,207 |
|
Other real estate owned |
|
|
2,029 |
|
|
|
|
|
|
|
2,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value at December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
Balance as of |
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
(In Thousands) |
|
December 31, |
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans, net |
|
$ |
2,050 |
|
|
|
|
|
|
$ |
794 |
|
|
$ |
1,256 |
|
Other real estate owned |
|
|
451 |
|
|
|
|
|
|
|
451 |
|
|
|
|
|
The fair value of a financial instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments. In cases
where quoted market prices are not available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the
18
discount rate and estimates of future cash flows. Accordingly,
the fair value estimates may not be realized in an immediate settlement of the instruments. ASC
820 (previously SFAS No. 107 Disclosures about Fair Value of Financial Instruments) excludes
certain financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
|
|
Cash and cash equivalents |
|
|
|
The carrying amounts of cash and short-term instruments approximate fair value. |
|
|
|
For securities and marketable equity securities held for investment purposes, fair
values are based on quoted market prices or dealer quotes. For other securities
held as investments, fair value equals quoted market price, if available. If a
quoted market price is not available, fair values are based on quoted market prices
for similar securities. See Note 2 Securities of the Notes to Consolidated
Financial Statements for further discussion on determining fair value for pooled
trust preferred securities. |
|
|
|
For variable-rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values. Fair values for certain
mortgage loans (e.g., one-to-four family residential), credit card loans, and other
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. Fair values for other loans (i.e., commercial real estate and
investment property mortgage loans, commercial and industrial loans) are estimated
using discounted cash flow analyses, using interest rates currently being offered
for loans with similar terms to borrowers of similar credit quality. Fair values
for nonperforming loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable. |
|
|
|
The carrying amounts of accrued interest approximate fair value. |
|
|
|
The fair values disclosed for demand deposits (i.e., interest and non-interest
bearing checking, statement savings and money market accounts) are, by definition,
equal to the amount payable at the reporting date (that is, their carrying
amounts). Fair values of fixed rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered to a schedule of aggregated expected monthly maturities on time deposits. |
|
|
|
The carrying amounts of the Companys federal funds purchased are
approximate fair value. |
|
|
Federal Home Loan Bank Advances |
|
|
|
The fair values of the Companys FHLB advances are estimated using discounted cash
flow analyses based on the Companys current incremental borrowing rates for
similar types of borrowing arrangements. |
|
|
Off-Balance-Sheet Financial Instruments |
|
|
|
The fair value of commitments to extend credit is estimated using the fees
currently charged to
enter similar agreements, taking into account the remaining terms of the agreements
and the present credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also
considers the difference between current levels of
interest rates and the committed rates. |
19
|
|
|
The fair value of standby letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date. |
|
|
|
|
At March 31, 2010 and 2009, the fair value of loan commitments and standby letters
of credit were deemed immaterial. |
|
|
|
|
The estimated fair values of the Companys financial instruments are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(In Thousands) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
short-term investments |
|
$ |
23,455 |
|
|
$ |
23,455 |
|
|
$ |
26,199 |
|
|
$ |
26,199 |
|
Federal funds sold |
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
|
|
9 |
|
Securities |
|
|
40,748 |
|
|
|
40,748 |
|
|
|
36,692 |
|
|
|
36,692 |
|
Loans, net |
|
|
467,430 |
|
|
|
475,807 |
|
|
|
462,784 |
|
|
|
477,100 |
|
Accrued interest receivable |
|
|
1,650 |
|
|
|
1,650 |
|
|
|
1,495 |
|
|
|
1,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
467,796 |
|
|
$ |
457,656 |
|
|
$ |
465,987 |
|
|
$ |
467,600 |
|
FHLB advances |
|
|
50,000 |
|
|
|
50,786 |
|
|
|
50,000 |
|
|
|
50,477 |
|
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
obligated mandatorily redeemable capital securities |
|
|
4,124 |
|
|
|
2,919 |
|
|
|
4,124 |
|
|
|
2,673 |
|
Accrued interest payable |
|
|
623 |
|
|
|
623 |
|
|
|
613 |
|
|
|
613 |
|
The Company assumes interest rate risk (the risk that general interest rate levels will
change) as a result of its normal operations. As a result, the fair values of the Companys
financial instruments will change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment. Management
monitors rates and maturities of assets and liabilities and attempts to minimize interest rate
risk by adjusting terms of new loans and deposits and by investing in securities with terms that
mitigate the Companys overall interest rate risk.
Note 10. Subsequent Event
In accordance with ASC 855-10/SFAS 165, the Company evaluates subsequent events that have
occurred after the balance sheet date, but before the financial statements are issued. There are
two types of subsequent events: (1) recognized, or those that provide additional evidence about
conditions that existed at the date of the balance sheet, including the estimates inherent in
the process of preparing financial statements, and (2) non-recognized, or those that provide
evidence about conditions that did not exist at the date of the balance sheet but arose after
that date.
The Company evaluated subsequent events through the date of filing this document. Based on the
evaluation, the Company did not identify any recognized or non-recognized subsequent events that
would have required adjustment to, or disclosure in, the financial statements.
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, this report contains
forward-looking statements. Forward-looking statements are based on certain assumptions and
describe future plans, strategies, and expectations of the Company and the Bank, and are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate, project
may, will or similar expressions. Although we believe our plans, intentions and expectations
reflected in these forward-looking statements are reasonable, we can give no assurance that these
plans, intentions, or expectations will be achieved. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain, and actual results could differ
materially from those contemplated. Factors that could have a material adverse effect on our
operations and future prospects include, but are not limited to, changes in: interest rates,
general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the
Federal Reserve System, the quality or composition of the Banks loan or investment portfolios,
demand for loan products, deposit flows, competition, demand for financial services in our market
area, our plans to expand our branch network and increase our market share, and accounting
principles, policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements in this report and you should not place undue reliance on
such statements, which reflect our position as of the date of this report.
For additional discussion of risk factors that may cause our actual future results to differ
materially from the results indicated within forward-looking statements, please see Risk Factors
in Item 1A of the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
GENERAL
Fauquier Bankshares, Inc. (the Company) was incorporated under the laws of the Commonwealth
of Virginia on January 13, 1984. The Company is a registered bank holding company and owns all of
the voting shares of The Fauquier Bank (the Bank). The Company engages in its business through
the Bank, a Virginia state-chartered bank that commenced operations in 1902. The Company has no
significant operations other than owning the stock of the Bank. The Company had issued and
outstanding 3,620,544 shares of common stock, par value $3.13 per share, held by approximately 420
holders of record on March 31, 2010. The Bank has ten full service branch offices located in the
Virginia communities of Old Town-Warrenton, Warrenton, Catlett, The Plains, Sudley Road-Manassas,
Old Town-Manassas, New Baltimore, Bealeton, Bristow and Haymarket. The executive offices of the
Company and the main office of the Bank are located at 10 Courthouse Square, Warrenton, Virginia
20186.
The Banks general market area principally includes Fauquier County, western Prince William County,
and neighboring communities and is located approximately fifty (50) miles southwest of Washington,
D.C.
The Bank provides a range of consumer and commercial banking services to individuals, businesses
and industries. The deposits of the Bank are insured up to applicable limits by the Deposit
Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). The basic services offered by
the Bank include: non-interest-bearing demand deposit accounts, money market deposit accounts, NOW
accounts, time deposits, safe deposit services, credit cards, cash management, direct deposits,
notary services, night depository, prepaid debit cards, cashiers checks, domestic collections,
savings bonds, automated teller services, drive-in tellers, internet banking, telephone banking,
and banking by mail. In addition, the Bank makes secured and unsecured commercial and real estate
loans, issues stand-by letters of credit and grants available credit for installment, unsecured and
secured personal loans, residential mortgages and home equity loans, as well as automobile and
other types of consumer financing. The Bank provides automated teller machine (ATM) cards, as a
part of the Cirrus, Accel-Exchange and Plus ATM networks, thereby permitting customers to utilize
the convenience of larger ATM networks. The Bank also is a member of the Certificate of Deposit
Account Registry Service (CDARS). CDARs can provide a customer multi-million dollar FDIC
insurance on CD investments through the transfer and/or exchange with other FDIC insured
institutions. CDARS is a registered service mark of Promontory Interfinancial Network, LLC.
21
The Bank operates a Wealth Management Services (WMS or Wealth Management) division that began
with the granting of trust powers to the Bank in 1919. The WMS division provides personalized
services that include investment management, trust, estate settlement, retirement, insurance, and
brokerage services.
The Bank, through its subsidiary Fauquier Bank Services, Inc., has equity ownership interests in
Bankers Insurance, LLC, a Virginia independent insurance company; Infinex Investments, Inc., a full
service broker/dealer; and Bankers Title Shenandoah, LLC, a title insurance company. Bankers
Insurance consists of a consortium of Virginia community bank owners; Infinex is owned by banks and
banking associations in various states; and Bankers Title Shenandoah is owned by a consortium of
Virginia community banks.
The revenues of the Bank are primarily derived from interest on, and fees received in connection
with, real estate and other loans, and from interest and dividends from investment and
mortgage-backed securities, and short-term investments. The principal sources of funds for the
Banks lending activities are its deposits, repayment of loans, the sale and maturity of investment
securities, and borrowings from the Federal Home Loan Bank (FHLB) of Atlanta. Additional revenues
are derived from fees for deposit-related and WMS-related services. The Banks principal expenses
are the interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, the Banks operations are materially and
significantly influenced by general economic conditions and by related monetary and fiscal policies
of financial institution regulatory agencies, including the Board of Governors of the Federal
Reserve System (Federal Reserve). As a Virginia-chartered bank and a member of the Federal
Reserve, the Bank is supervised and examined by the Federal Reserve and the Virginia State
Corporation Commission. Interest rates on competing investments and general market rates of
interest influence deposit flows and costs of funds. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting local demand and
availability of funds. The Bank faces strong competition in the attraction of deposits (its primary
source of lendable funds) and in the origination of loans. Please see Risk Factors in Item 1A of
the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
As of March 31, 2010, the Company had total consolidated assets of $570.6 million, total loans net
of allowance for loan losses of $467.4 million, total consolidated deposits of $467.8 million, and
total consolidated shareholders equity of $43.3 million.
CRITICAL ACCOUNTING POLICIES
GENERAL. The Companys financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial information contained
within our statements is, to a significant extent, based on measures of the financial effects of
transactions and events that have already occurred. A variety of factors could affect the ultimate
value that is obtained either when earning income, recognizing an expense, recovering an asset or
relieving a liability. We use historical loss factors as one factor in determining the inherent
loss that may be present in our loan portfolio. Actual losses could differ significantly from the
historical factors that we use in our estimates. In addition, GAAP itself may change from one
previously acceptable accounting method to another method. Although the economics of the Companys
transactions would be the same, the timing of events that would impact the Companys transactions
could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on three basic principles of accounting:
(i) Accounting Standards Codification (ASC) 450 Contingencies (previously Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies) which requires that
losses be accrued when they are probable of occurring and estimable, (ii) ASC 310 Receivables
(previously SFAS No. 114, Accounting by Creditors for Impairment of a Loan) which requires that
losses be accrued based on the differences between the value of collateral, present value of future
cash flows or values that are observable in the secondary market and the loan balance and (iii)
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 102, Selected Loan Loss
Allowance Methodology and Documentation Issues, which requires adequate documentation to support
the allowance for loan losses estimate.
22
The Companys allowance for loan losses has two basic components: the specific allowance and the
general allowance. Each of these components is determined based upon estimates that can and do
change when the actual events occur. The specific allowance is used to individually allocate an
allowance for larger balance, non-homogeneous loans. The specific allowance uses various techniques
to arrive at an estimate of loss. First, analysis of the borrowers overall financial condition,
resources and payment record, the prospects for support from financial guarantors, and the fair
market value of collateral are used to estimate the probability and severity of inherent losses.
Then the migration of historical default rates and loss severities, internal risk ratings, industry
and market conditions and trends, and other environmental factors are considered. The use of these
values is inherently subjective and our actual losses could be greater or less than the estimates.
The general allowance is used for estimating the loss on pools of smaller-balance, homogeneous
loans; including 1-4 family mortgage loans, installment loans, other consumer loans, and
outstanding loan commitments. Also, the general allowance is used for the remaining pool of larger
balance, non-homogeneous loans which were not allocated a specific allowance upon their review. The
general allowance begins with estimates of probable losses inherent in the homogeneous portfolio
based upon various statistical analyses. These include analysis of historical and peer group
delinquency and credit loss experience, together with analyses that reflect current trends and
conditions. The Company also considers trends and changes in the volume and term of loans, changes
in the credit process and/or lending policies and procedures, and an evaluation of overall credit
quality. The general allowance uses a historical loss view as an indicator of future losses. As a
result, even though this history is regularly updated with the most recent loss information, it
could differ from the loss incurred in the future. The general allowance also captures losses that
are attributable to various economic events, industry or geographic sectors whose impact on the
portfolio have occurred but have yet to be recognized in the specific allowances.
Specifically, the Company uses both external and internal qualitative factors when determining the
non-loan-specific allowances. The external factors utilized include: unemployment in the Companys
defined market area of Fauquier County, Prince William County, and the City of Manassas (market
area), as well as state and national unemployment trends; new residential construction permits for
the market area; bankruptcy statistics for the Virginia Eastern District and trends for the United
States; and foreclosure statistics for the market area and the state. Quarterly, these external
qualitative factors as well as relevant anecdotal information are evaluated from data compiled from
local periodicals such as The Washington Post, The Fauquier Times Democrat, and The Bull Run
Observer, which cover the Companys market area. Additionally, data is gathered from the Federal
Reserve Beige Book for the Richmond Federal Reserve District, Global Insights monthly economic
review, the George Mason School of Public Policy Center for Regional Analysis, and daily economic
updates from various other sources. Internal Bank data utilized includes: loans past due aging
statistics, nonperforming loan trends, trends in collateral values, loan concentrations, loan
review status downgrade trends, and lender turnover and experience trends. Both external and
internal data is analyzed on a rolling six quarter basis to determine risk profiles for each
qualitative factor. Ratings are assigned through a defined matrix to calculate the allowance
consistent with authoritative accounting literature. A narrative summary of the reserve allowance
is produced quarterly and reported directly to the Companys Board of Directors. The Companys
application of these qualitative factors to the allowance for loan losses has been consistent over
the reporting period.
The Company employs an independent outsourced loan review function, which annually substantiates
and/or adjusts internally generated risk ratings and loan impairment calculations. This independent
review is reported directly to the Companys Board of Directors audit committee, and the results
of this review are factored into the calculation of the allowance for loan losses.
EXECUTIVE OVERVIEW
This discussion is intended to focus on certain financial information regarding the Company
and the Bank and may not contain all the information that is important to the reader. The purpose
of this discussion is to provide the reader with a more thorough understanding of our financial
statements. As such, this discussion should be read carefully in conjunction with the consolidated
financial statements and accompanying notes contained elsewhere in this report.
The Bank is the primary independent community bank in its immediate market area as measured by
deposit market share. It seeks to be the primary financial service provider for its market area by
providing the right mix of consistently high quality customer service, efficient technological
support, value-added products, and a strong
23
commitment to the community. The Company and the Banks primary operating businesses are in
commercial and retail lending, deposit accounts and core deposits, and assets under WMS management.
Net income of $804,000 for the first quarter of 2010 was a 12.9% decrease from the net income for
the first quarter of 2009 of $923,000. Loans, net of reserve, totaling $467.4 million at March 31,
2010, increased 1.0% when compared with December 31, 2009, and increased 5.4% when compared with
March 31, 2009. Deposits, totaling $467.8 million at March 31, 2010, increased 0.4% compared with
year-end 2009, and increased 12.4% when compared with March 31, 2009. Assets under WMS management,
totaling $309.3 million in market value at March 31, 2010, increased 30.4% from $237.2 million in
market value at March 31, 2009, primarily due to the increase in valuations of common stock under
management. For example, from March 31, 2009 to March 31, 2010, stocks measured in the Standard &
Poors 500 index increased by approximately 47%.
Net interest income is the largest component of net income, and equals the difference between
income generated on interest-earning assets and interest expense incurred on interest-bearing
liabilities. Future trends regarding net interest income are dependent on the absolute level of
market interest rates, the shape of the yield curve, the amount of lost income from non-performing
assets, the amount of prepaying loans, the mix and amount of various deposit types, competition for
loans and deposits, and many other factors, as well as the overall volume of interest-earning
assets. These factors are individually difficult to predict, and when taken together, the
uncertainty of future trends compounds. Based on managements current projections, net interest
income may increase in 2010 and beyond as average interest-earning assets increase, but this may be
offset in part or in whole by a possible contraction in the Banks net interest margin resulting
from competitive market conditions and/or a flat or inverted yield curve. A steeper yield curve is
projected to result in an increase in net interest income, while a flatter or inverted yield curve
is projected to result in a decrease in net interest income.
The Banks non-performing assets totaled $7.3 million or 1.29% of total assets at March 31, 2010,
as compared with $7.1 million or 1.24% of total assets at December 31, 2009, and $3.6 million or
0.69% of total assets at March 31, 2009. Nonaccrual loans totaled $3.4 million or 0.72% of total
loans at March 31, 2010 compared with $3.4 million or 0.73% of total loans at December 31, 2009,
and $1.6 million or 0.35% of total loans at March 31, 2009. The provision for loan losses was
$375,000 for the first quarter of 2010 compared with $200,000 for the first quarter of 2009. Loan
charge-offs, net of recoveries, totaled $387,000 or 0.08% of total average loans for the first
three months of 2010, compared with $107,000 or 0.02% of total average loans for the first three
months of 2009. The $175,000 increase in the provision for loan losses from first quarter 2009 to
first quarter 2010 was largely in response to the increase in net loan charge-offs. Total allowance
for loan losses was $5.5 million or 1.16% of total loans at March 31, 2010 compared with $5.5
million or 1.17% of loans at December 31, 2009 and $4.9 million or 1.08% of loans at March 31,
2009.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND MARCH 31, 2009
NET INCOME
Net income of $804,000 for the first quarter of 2010 was a 12.9% decrease from the net income
for the first quarter of 2009 of $923,000. Earnings per share on a fully diluted basis were $0.22
for the first three months of 2010 compared to $0.26 for the first three months of 2009.
Profitability as measured by return on average assets decreased from 0.72% in the first quarter of
2009 to 0.58% for the same period in 2010. Profitability as measured by return on average equity
decreased from 8.89% to 7.48% over the same respective quarters in 2009 and 2010. The decline in
net income and the corresponding profitability measures was primarily due to the $476,000 loss on
the impairment of the Banks investment in pooled trust preferred corporate bonds, as well as an
increase in non-interest other expenses of $434,000, primarily due to expenses relating to the
operations of two new branches that were not in operation in March 2009. This was partially offset
by a $564,000 increase in net interest income in the first quarter of 2010 compared with the first
quarter of 2009.
NET INTEREST INCOME AND EXPENSE
Net interest income increased $564,000 or 11.4% to $5.50 million for the quarter ended March
31, 2010 from $4.94 million for the quarter ended March 31, 2009. The increase in net interest
income was due to the impact of total average earning assets increasing 7.1% from $485.6 million
during the first quarter of 2009 to $525.7 million during
24
the first quarter of 2010. This was partially offset by the Companys net interest margin
increasing from 4.12% in the first quarter of 2009 to 4.27% in the first quarter of 2010.
Total interest income increased $261,000 or 3.8% to $7.07 million for the first quarter of 2010
from $6.81 million for the first quarter of 2009. This increase was primarily due to the increase
in total average earning assets of $40.2 million from first quarter 2009 to first quarter 2010.
This was partially offset by the 21 basis point decrease in the yield on average assets over the
same time period.
The average yield on loans was 5.81% for the first quarter of 2010 as well as the first quarter of
2009. Average loan balances increased $24.0 million or 5.4% from $443.2 million during the first
quarter of 2009 to $467.2 million during the first quarter of 2010. The increase in loans
outstanding and constant yield resulted in a $310,000 or 4.9% increase in interest and fee income
from loans for the first quarter of 2010 compared with the same period in 2009.
Average investment security balances increased $3.8 million from $37.6 million in the first quarter
of 2009 to $41.4 million in the first quarter of 2010. The tax-equivalent average yield on
investments decreased from 4.82% for the first quarter of 2009 to 3.86% for the first quarter of
2010. Together, there was a decrease in interest and dividend income on security investments of
$53,000 or 12.6%, from $422,000 for the first quarter of 2009 to $369,000 for the first quarter of
2010. This decrease was partially due to the suspension of interest payments on the Banks
investment in pooled trust-preferred corporate bonds during the first quarter of 2010. Interest
income on deposits in other banks increased $4,000 from first quarter 2009 to first quarter 2010.
Total interest expense decreased $303,000 or 19.3% from $1.87 million for the first quarter of 2009
to $1.57 million for the first quarter of 2010 primarily due to the overall decline in shorter-term
market interest rates. Interest paid on deposits decreased $283,000 or 18.2% from $1.56 million for
the first quarter of 2009 to $1.28 million for the first quarter of 2010. Average money market
account balances decreased $12.5 million from first quarter 2009 to first quarter 2010, while their
average rate decreased from 0.97% to 0.75% over the same period, resulting in a decrease of $63,000
of interest expense for the first quarter of 2010. Average time deposit balances increased $40.1
million from the first quarter of 2009 to the first quarter of 2010 while the average rate on time
deposits decreased from 3.26% to 1.98%, resulting in a decrease of $307,000 in interest expense for
the first quarter of 2010. Average NOW deposit balances increased $15.4 million from the first
quarter of 2009 to the first quarter of 2010, while the average rate on NOW accounts increased from
0.43% to 0.59%, resulting in an increase of $52,000 in NOW interest expense for the first quarter
of 2010.
Interest expense on FHLB of Atlanta advances increased $7,000 from the first quarter of 2009 to the
first quarter of 2010 due to the increase in the average rate paid on FHLB advances from 1.79% to
2.19%. Over the last nine months, the Bank has strategically been extending the weighted average
maturity of its FHLB advances in order to reduce its exposure to rising interest rates. This has
led to the 0.40% increase in rates paid on the FHLB advances for the first quarter of 2010 compared
with the same quarter one year earlier. The average rate on total interest-bearing liabilities
decreased from 1.86% for the first quarter of 2009 to 1.40% for the first quarter of 2010.
25
The following table sets forth information relating to the Companys average balance sheet and
reflects the average yield on assets and average cost of liabilities for the periods indicated and
the average yields and rates paid for the periods indicated. These yields and costs are derived by
dividing income or expense by the average daily balances of assets and liabilities, respectively,
for the periods presented.
AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,2010 |
|
|
Three Months Ended March 31, 2009 |
|
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
|
Balances |
|
|
Expense |
|
|
Rate |
|
|
Balances |
|
|
Expense |
|
|
Rate |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
449,292 |
|
|
$ |
6,529 |
|
|
|
5.82 |
% |
|
$ |
433,102 |
|
|
$ |
6,285 |
|
|
|
5.81 |
% |
Tax-exempt (1) |
|
|
14,127 |
|
|
|
245 |
|
|
|
6.95 |
% |
|
|
8,534 |
|
|
|
145 |
|
|
|
6.80 |
% |
Nonaccrual (2) |
|
|
3,732 |
|
|
|
|
|
|
|
|
|
|
|
1,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
467,151 |
|
|
|
6,774 |
|
|
|
5.81 |
% |
|
|
443,167 |
|
|
|
6,430 |
|
|
|
5.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
35,616 |
|
|
|
309 |
|
|
|
3.48 |
% |
|
|
31,946 |
|
|
|
361 |
|
|
|
4.52 |
% |
Tax-exempt (1) |
|
|
5,766 |
|
|
|
91 |
|
|
|
6.25 |
% |
|
|
5,672 |
|
|
|
93 |
|
|
|
6.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
41,382 |
|
|
|
400 |
|
|
|
3.86 |
% |
|
|
37,618 |
|
|
|
454 |
|
|
|
4.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in banks |
|
|
17,181 |
|
|
|
8 |
|
|
|
0.19 |
% |
|
|
4,595 |
|
|
|
4 |
|
|
|
0.32 |
% |
Federal funds sold |
|
|
9 |
|
|
|
|
|
|
|
0.15 |
% |
|
|
170 |
|
|
|
0.1 |
|
|
|
0.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
525,723 |
|
|
|
7,182 |
|
|
|
5.47 |
% |
|
|
485,550 |
|
|
|
6,888 |
|
|
|
5.68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reserve for loan losses |
|
|
(5,492 |
) |
|
|
|
|
|
|
|
|
|
|
(4,883 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
5,729 |
|
|
|
|
|
|
|
|
|
|
|
7,529 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment, net |
|
|
14,481 |
|
|
|
|
|
|
|
|
|
|
|
8,857 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
24,978 |
|
|
|
|
|
|
|
|
|
|
|
22,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
565,419 |
|
|
|
|
|
|
|
|
|
|
$ |
519,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES &
SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
63,722 |
|
|
|
|
|
|
|
|
|
|
$ |
64,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
90,863 |
|
|
|
133 |
|
|
|
0.59 |
% |
|
|
75,465 |
|
|
|
81 |
|
|
|
0.43 |
% |
Money market accounts |
|
|
59,331 |
|
|
|
110 |
|
|
|
0.75 |
% |
|
|
71,878 |
|
|
|
173 |
|
|
|
0.97 |
% |
Savings accounts |
|
|
48,651 |
|
|
|
59 |
|
|
|
0.49 |
% |
|
|
32,234 |
|
|
|
25 |
|
|
|
0.31 |
% |
Time deposits |
|
|
199,572 |
|
|
|
973 |
|
|
|
1.98 |
% |
|
|
159,486 |
|
|
|
1,280 |
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
398,417 |
|
|
|
1,275 |
|
|
|
1.30 |
% |
|
|
339,063 |
|
|
|
1,559 |
|
|
|
1.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,914 |
|
|
|
10 |
|
|
|
0.86 |
% |
Federal Home Loan Bank advances |
|
|
50,000 |
|
|
|
274 |
|
|
|
2.19 |
% |
|
|
59,556 |
|
|
|
267 |
|
|
|
1.79 |
% |
Capital securities of subsidiary trust |
|
|
4,124 |
|
|
|
19 |
|
|
|
1.87 |
% |
|
|
4,124 |
|
|
|
36 |
|
|
|
3.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
452,541 |
|
|
|
1,568 |
|
|
|
1.40 |
% |
|
|
407,656 |
|
|
|
1,872 |
|
|
|
1.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
5,583 |
|
|
|
|
|
|
|
|
|
|
|
5,346 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
43,573 |
|
|
|
|
|
|
|
|
|
|
|
42,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity |
|
$ |
565,419 |
|
|
|
|
|
|
|
|
|
|
$ |
519,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
$ |
5,614 |
|
|
|
4.07 |
% |
|
|
|
|
|
$ |
5,017 |
|
|
|
3.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense as a percent of average earning assets |
|
|
|
|
|
|
|
|
|
|
1.20 |
% |
|
|
|
|
|
|
|
|
|
|
1.56 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
4.27 |
% |
|
|
|
|
|
|
|
|
|
|
4.12 |
% |
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. |
|
(2) |
|
Nonaccrual loans are included in the average balance of total loans and total earning assets. |
26
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest income and
interest expense of the Company for the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on changes attributable to changes in
volume (change in volume multiplied by old rate); and changes in rates (change in rate multiplied
by old volume). Changes in rate-volume, which cannot be separately identified, are allocated
proportionately between changes in rate and changes in volume.
RATE / VOLUME VARIANCE
(In Thousands)
Three Months Ended March 31, 2010 Compared to
Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to |
|
|
Due to |
|
|
|
Change |
|
|
Volume |
|
|
Rate |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Loans; taxable |
|
$ |
244 |
|
|
$ |
235 |
|
|
|
9 |
|
Loans; tax-exempt (1) |
|
|
100 |
|
|
|
95 |
|
|
|
5 |
|
Securities; taxable |
|
|
(52 |
) |
|
|
41 |
|
|
|
(93 |
) |
Securities; tax-exempt (1) |
|
|
(2 |
) |
|
|
2 |
|
|
|
(4 |
) |
Deposits in banks |
|
|
4 |
|
|
|
11 |
|
|
|
(7 |
) |
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
294 |
|
|
|
384 |
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
52 |
|
|
|
17 |
|
|
|
35 |
|
Money market accounts |
|
|
(63 |
) |
|
|
(30 |
) |
|
|
(33 |
) |
Savings accounts |
|
|
34 |
|
|
|
13 |
|
|
|
21 |
|
Time deposits |
|
|
(307 |
) |
|
|
322 |
|
|
|
(629 |
) |
Federal funds purchased and securities
sold under agreements to repurchase |
|
|
(10 |
) |
|
|
(10 |
) |
|
|
|
|
Federal Home Loan Bank advances |
|
|
7 |
|
|
|
(43 |
) |
|
|
50 |
|
Capital securities of subsidiary trust |
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
(304 |
) |
|
|
269 |
|
|
|
(573 |
) |
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
598 |
|
|
$ |
115 |
|
|
$ |
483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. |
PROVISION FOR LOAN LOSSES, ALLOWANCE FOR LOAN LOSSES, AND ASSET QUALITY
The provision for loan losses was $375,000 for the first quarter of 2010, compared with
$200,000 for the first quarter of 2009. The amount of the provision for loan loss was based upon
managements continual evaluation of the adequacy of the allowance for loan losses, which
encompasses the overall risk characteristics of the loan portfolio, trends in the Banks delinquent
and non-performing loans, estimated values of collateral, and the impact of economic conditions on
borrowers. Greater weight is given to the loss history by loan category, prolonged changes in
portfolio delinquency trends by loan category, and changes in economic trends. There can be no
assurances, however, that future losses will not exceed estimated amounts, or that increased
amounts of provisions for loan losses will not be required in future periods.
The $175,000 increase in the provision for loan losses during the first quarter of 2010, compared
to the same quarter one year earlier, was largely in response to the increase in total loans and
non-accrual loans at March 31, 2010 compared with one year earlier.
OTHER INCOME
Total other income decreased by $172,000 from $1.12 million for the first quarter of 2009 to
$952,000 in the first quarter of 2010. Non-interest income is derived primarily from recurring
non-interest fee income, which consists primarily of fiduciary and other Wealth Management fees,
service charges on deposit accounts, and other fee income. The decline in other income was
primarily due to the $476,000 loss on the impairment of the Banks
27
investment in pooled trust preferred corporate bonds, partially offset by a $89,000 gain on the sale of investments, a $57,000
increase in Wealth Management income, and a $120,000 decrease on the loss realized on the sale of
other real estate owned properties.
Wealth Management income increased $57,000 or 23.0% from the first quarter of 2009 to the first
quarter of 2010, as assets under management increased from year to year, primarily due to the
increase in overall stock market valuations as well as the growth in new customer relationships.
Service charges on deposit accounts increased $15,000 or 2.4% to $621,000 for the first three
months of 2010 compared to one year earlier. Due to changes in regulations regarding customer usage
of overdraft protection services, service charges on deposit accounts are projected to decline
during the second half of 2010. Whether this is a temporary change to customer preferences for
overdraft protection, or a more permanent structural change is difficult to determine at this point
in time.
Other service charges, commissions and fees increased $23,000 or 5.7% from $403,000 in first
quarter 2009 to $426,000 in first quarter 2010. Also included in other service charges,
commissions, and income is Bank Owned Life Insurance (BOLI) income, which was $101,000 during the
first quarter of 2010 compared with $100,000 one year earlier. Total BOLI was $10.9 million at
March 31, 2010, compared with $10.8 million one year earlier.
OTHER EXPENSE
Total other expense increased $434,000 or 9.4% during the first quarter of 2010 compared with
the first quarter of 2009. Salaries and employees benefits increased $93,000 or 3.9%, entirely due
to a $111,000 increase in the 401(k) plan contribution. This increase is the result of the
termination of the Banks defined-benefit pension plan and enhancement of its defined-contribution
401(k) plan. Active full-time equivalent personnel totaled 161 at March 31, 2010 compared with 147
at March 31, 2009. The increase was primarily due to the staffing of the Bristow and Haymarket
offices since the first quarter of 2009.
On December 20, 2007, the Companys Board of Directors approved the termination of the defined
benefit pension plan effective on December 31, 2009, and effective January 1, 2010 the Board
approved to replace the defined benefit pension plan with an enhanced 401(k) plan. Defined benefit
pension plan expenses are projected to be approximately $61,000 in 2010, and nothing due to curtailment going forward. Expenses for the
401(k) plan are projected to increase to approximately $625,000 in 2010. Growth in 401(k) expenses
after 2010 is projected to increase approximately at the same rate of increase as salaries.
The Bank expects personnel costs, consisting primarily of salary and benefits, to continue to be
its largest other expense. As such, the most important factor with regard to potential changes in
other expenses is the expansion of staff. The cost of any additional staff expansion, however,
would be expected to be offset by the increased revenue generated by the additional services that
the new staff would enable the Bank to perform. For the remainder of 2010, the Company plans to add
one new full-time position, and will fill four currently vacant positions.
Net occupancy expense increased $193,000 or 62.8%, and furniture and equipment expense increased
$37,000 or 13.3%, from first quarter 2009 to first quarter 2010. The increase in occupancy expense
and furniture and equipment expense primarily reflect increases in rent, building depreciation, and
furniture and equipment depreciation associated with the opening of the Bristow and Haymarket
branch offices, and the new location of the Warrenton-View Tree office, none of which were in
operation during the first quarter of 2009.
Marketing expense increased $35,000 or 29.3% from $121,000 for the first quarter of 2009 to
$156,000 for the first quarter of 2010. This increase primarily reflects the marketing expense of
the grand openings of the Haymarket office and relocation of the Warrenton-View Tree office.
Marketing expenses for all of 2010 are projected to be approximately the same as 2009.
Legal, accounting and consulting expense decreased $69,000 or 20.5% in the first quarter of 2010
compared with the first quarter of 2009. The decrease of legal fees was associated with the 2009
annual meeting and contested election of directors, which was atypical, and did not reoccur in
2010.
28
FDIC deposit insurance expense increased 25.9% from $145,000 for the first three months of 2009 to
$183,000 for the first three months of 2010. Projections of future FDIC expense are difficult when
taking into consideration the possibility of additional special assessments required by the FDIC.
Data processing expense increased $10,000 or 2.8% for the first quarter of 2010 compared with the
same time period in 2009. The Bank outsources much of its data processing to a third-party vendor.
Other operating expenses increased $97,000 or 13.9% in the first quarter of 2010 compared with the
first quarter of 2009. The increase was primarily due to the acceleration in the vesting of
directors restricted stock. For additional information regarding the acceleration in the vesting
of directors restricted stock, see Stock-Based Compensation in Note 7 of the Notes to
Consolidated Financial Statements contained herein.
INCOME TAXES
Income tax expense was $244,000 for the quarter ended March 31, 2010 compared with $342,000
for the quarter ended March 31, 2009. The effective tax rates were 23.3% and 27.0% for the first
quarter of 2010 and 2009, respectively. The effective tax rate differs from the statutory federal
income tax rate of 34% due to the Banks investment in tax-exempt loans and securities, and income
from the BOLI purchases.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2010 AND DECEMBER 31, 2009
Total assets were $570.6 million at March 31, 2010 compared with $568.5 million at December
31, 2009, an increase of 0.4% or $2.1 million. Balance sheet categories reflecting significant
changes included interest-bearing deposits in other banks, total loans, other real estate owned,
and deposits. Each of these categories is discussed below.
INTEREST-BEARING DEPOSITS IN OTHER BANKS. Interest-bearing deposits in other banks were $16.5
million at March 31, 2010, reflecting a decrease of $4.1 million from December 31, 2009. The
decrease in interest-bearing deposits in other banks was primarily due to the deployment of funds
from interest-bearing deposits in other banks into loans.
LOANS. Total net loan balance after allowance for loan losses was $467.4 million at March 31, 2010,
which represents an increase of $4.6 million or 1.0% from $462.8 million at December 31, 2009.
OTHER REAL ESTATE OWNED. Other real estate owned declined by $451,000 from December 31, 2009 to
$2.0 million at March 31, 2010 due to the sale of one property at a loss of $16,000. The loss was
reflected in the consolidated statement of income for the quarter ended March 31, 2010.
DEPOSITS. For the three months ended March 31, 2010, total deposits increased by $1.8 million or
0.4% when compared with total deposits at December 31, 2009. Non-interest-bearing deposits
decreased by $3.6 million and interest-bearing deposits increased by $5.4 million. Included in
interest-bearing deposits at March 31, 2010 and December 31, 2009 were $43.6 million and $57.3
million, respectively of brokered deposits as defined by the Federal Reserve. Of the $43.6 million
in brokered deposits, $22.6 million represent deposits of Bank customers, exchanged through the
CDARs network. With the CDARs program, funds are placed
into certificates of deposit issued by
other banks in the network, in increments of less than $250,000, to ensure both principal and
interest are eligible for complete FDIC coverage. These deposits are exchanged with other member
banks on a dollar-for-dollar basis, bringing the full amount of our customers deposits back to the
bank and making these funds fully available for lending in our community. The decline in the Banks
non-interest-bearing deposits and the increase in interest-bearing deposits during the first three
months of 2010 were the result of many factors difficult to segregate and quantify, and equally
difficult to use as factors for future projections. The economy, local competition, retail customer
preferences, changes in seasonal cash flows by both commercial and retail customers, changes in
business cash management practices by Bank customers, the relative pricing from wholesale funding
sources, and the Banks funding needs all contributed to the change in deposit balances. The Bank
projects to increase its transaction accounts and other deposits in 2010 and beyond through the
expansion of its branch network, as well as by offering value-added NOW and demand deposit
products, and selective rate premiums on its interest-bearing deposits.
29
ASSET QUALITY
Non-performing assets, in most cases, consist of loans that are 90 days or more past due and for
which the accrual of interest has been discontinued. Management evaluates all loans that are 90
days or more past due, as well as borrowers that have suffered financial distress, to determine if
they should be placed on non-accrual status. Factors considered by management include the net
realizable value of collateral, if any, and other resources of the borrower that may be available
to satisfy the delinquency.
Loans are placed on non-accrual status when they have been specifically determined to be impaired
or when principal or interest is delinquent for 90 days or more, unless the loans are well secured
and in the process of collection. Any unpaid interest previously accrued on such loans is reversed
from income. Interest income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans are applied as a
reduction of the loan principal balance. Interest income on other non-accrual loans is recognized
only to the extent of interest payments received.
Non-performing assets totaled $7.3 million or 1.29% of total assets at March 31, 2010, compared
with $7.1 million or 1.24% of total assets at December 31, 2009, and $3.6 million, or 0.69% of
total assets at March 31, 2009. Included in non-performing assets at March 31, 2010 were $1.8
million of non-performing pooled trust preferred bonds at market value, $2.0 million of other real
estate owned and $3.4 million of non-accrual loans. Non-accrual loans as a percentage of total
loans were 0.72% at March 31, 2010, as compared with 0.73% and 0.35% at December 31, 2009 and March
31, 2009, respectfully.
There were three loans, totaling $197,000, past due 90 days or more and still accruing interest at
March 31, 2010 compared with $354,000 and $4,000 on December 31, 2009 and March 31, 2009,
respectively. There are no loans or securities, other than those disclosed above as either
non-performing or impaired, where information known about the borrower has caused management to
have serious doubts about the borrowers ability to repay.
The following table sets forth certain information with respect to the Banks past due loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Age Analysis of Past Due Financing Receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due as |
|
|
|
30-59 Days Past |
|
|
60-89 Days Past |
|
|
Greater than 90 |
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
Due |
|
|
Due |
|
|
Days |
|
|
Total Past Due |
|
|
Total Loans |
|
|
Loans |
|
Secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,027 |
|
|
|
0.00 |
% |
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,093 |
|
|
|
0.00 |
% |
1-4 Family Residential |
|
|
2,890 |
|
|
|
505 |
|
|
|
238 |
|
|
|
3,633 |
|
|
|
193,634 |
|
|
|
1.88 |
% |
Commercial Real Estate |
|
|
500 |
|
|
|
|
|
|
|
2,177 |
|
|
|
2,677 |
|
|
|
192,731 |
|
|
|
1.39 |
% |
Commercial and Industrial |
|
|
837 |
|
|
|
47 |
|
|
|
593 |
|
|
|
1,477 |
|
|
|
27,989 |
|
|
|
5.28 |
% |
Consumer |
|
|
172 |
|
|
|
18 |
|
|
|
99 |
|
|
|
289 |
|
|
|
13,353 |
|
|
|
2.16 |
% |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,123 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,399 |
|
|
$ |
570 |
|
|
$ |
3,107 |
|
|
$ |
8,076 |
|
|
$ |
472,950 |
|
|
|
1.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due as |
|
|
|
30-59 Days Past |
|
|
60-89 Days Past |
|
|
Greater than 90 |
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
Due |
|
|
Due |
|
|
Days |
|
|
Total Past Due |
|
|
Total Loans |
|
|
Loans |
|
Secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
33,003 |
|
|
|
0.00 |
% |
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948 |
|
|
|
0.00 |
% |
1-4 Family Residential |
|
|
1,978 |
|
|
|
469 |
|
|
|
432 |
|
|
|
2,879 |
|
|
|
193,709 |
|
|
|
1.49 |
% |
Commercial Real Estate |
|
|
354 |
|
|
|
123 |
|
|
|
1,720 |
|
|
|
2,197 |
|
|
|
186,463 |
|
|
|
1.18 |
% |
Commercial and Industrial |
|
|
781 |
|
|
|
168 |
|
|
|
764 |
|
|
|
1,713 |
|
|
|
29,286 |
|
|
|
5.85 |
% |
Consumer |
|
|
137 |
|
|
|
30 |
|
|
|
41 |
|
|
|
208 |
|
|
|
10,390 |
|
|
|
2.00 |
% |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,559 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,250 |
|
|
$ |
790 |
|
|
$ |
2,957 |
|
|
$ |
6,997 |
|
|
$ |
468,358 |
|
|
|
1.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past due as |
|
|
|
30-59 Days Past |
|
|
60-89 Days Past |
|
|
Greater than 90 |
|
|
|
|
|
|
|
|
|
|
Percentage of |
|
|
|
Due |
|
|
Due |
|
|
Days |
|
|
Total Past Due |
|
|
Total Loans |
|
|
Loans |
|
Secured by real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
41,313 |
|
|
|
0.00 |
% |
Farmland |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,281 |
|
|
|
0.00 |
% |
1-4 Family Residential |
|
|
753 |
|
|
|
576 |
|
|
|
460 |
|
|
|
1,789 |
|
|
|
180,921 |
|
|
|
0.99 |
% |
Commercial Real Estate |
|
|
|
|
|
|
1,470 |
|
|
|
|
|
|
|
1,470 |
|
|
|
165,942 |
|
|
|
0.89 |
% |
Commercial and Industrial |
|
|
1,886 |
|
|
|
507 |
|
|
|
228 |
|
|
|
2,621 |
|
|
|
35,128 |
|
|
|
7.46 |
% |
Consumer |
|
|
181 |
|
|
|
25 |
|
|
|
127 |
|
|
|
333 |
|
|
|
14,255 |
|
|
|
2.34 |
% |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,016 |
|
|
|
0.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,820 |
|
|
$ |
2,578 |
|
|
$ |
815 |
|
|
$ |
6,213 |
|
|
$ |
448,856 |
|
|
|
1.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
At March 31, 2010, no concentration of loans to commercial borrowers engaged in similar
activities exceeded 10% of total loans. The largest industry concentration at March 31, 2010 was
approximately 5.0% of loans to the hospitality industry (hotels, motels, inns, etc.). For more
information regarding the Banks concentration of loans collateralized by real estate, please refer
to the discussion under Risk Factors in Item 1A of the Companys Annual Report on Form 10-K for
the year ended December 31, 2009 entitled The Company has a high concentration of loans secured by
both residential and commercial real estate and a downturn in either or both markets, for any
reason, may continue to increase the Companys credit losses, which would negatively affect our
financial results.
Based on regulatory guidelines, the Bank is required to monitor the commercial investment real
estate loan portfolio for: (a) concentrations above 100% of Tier 1 capital and loan loss reserve
for construction and land loans and (b) 300% for permanent investor real estate loans. As of March
31, 2010, construction and land loans were $31.1 million or 53.5% of the concentration limit.
Commercial real estate loans, including construction and land loans, were $124.8 million or 214.3%
of the concentration level.
Potential Problem Loans: For additional information regarding non-performing assets and potential
loan problems, see Allowance for Loan Losses in Note 4 of the Notes to Consolidated Financial
Statements contained herein.
CONTRACTUAL OBLIGATIONS
As of March 31, 2010, there have been no other material changes outside the ordinary course of
business to the contractual obligations disclosed in Managements Discussion and Analysis in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2010, there have been no material changes to the off-balance sheet
arrangements disclosed in Managements Discussion and Analysis in the Companys Annual Report on
Form 10-K for the year ended December 31, 2009.
CAPITAL
The Company and the Bank are subject to various regulatory capital requirements administered
by banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and
discretionary actions by regulators that could have a direct material effect on the Companys
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Companys and the Banks capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk
weightings and other factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets
(as defined in the regulations), and of Tier 1 Capital to average assets (as defined in the
regulations). Management believes, as of March 31, 2010, that the Company and the Bank more than
satisfy all capital adequacy requirements to which they are subject.
At March 31, 2010 and December 31, 2009, the Company exceeded its regulatory capital ratios, as set
forth in the following table:
31
RISK BASED CAPITAL RATIOS
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
Shareholders Equity |
|
$ |
43,342 |
|
|
$ |
42,639 |
|
Plus:
Unrealized loss on securities available for sale/defined benefit
retirement obligations, net |
|
|
1,625 |
|
|
|
1,923 |
|
Less: Unrealized loss on equity securities, net |
|
|
(3 |
) |
|
|
(4 |
) |
Plus: Company-obligated madatorily
redeemable capital securities |
|
|
4,000 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
Total Tier 1 Capital |
|
|
48,964 |
|
|
|
48,558 |
|
|
|
|
|
|
|
|
|
|
Tier 2 Capital: |
|
|
|
|
|
|
|
|
Allowable Allowance for Loan Losses |
|
|
5,470 |
|
|
|
5,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital: |
|
|
54,434 |
|
|
|
54,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Weighted Assets: |
|
$ |
448,976 |
|
|
$ |
442,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios: |
|
|
|
|
|
|
|
|
Leverage Ratio |
|
|
8.66 |
% |
|
|
8.68 |
% |
Tier 1 to Risk Weighted Assets |
|
|
10.91 |
% |
|
|
10.97 |
% |
Total Capital to Risk Weighted Assets |
|
|
12.12 |
% |
|
|
12.21 |
% |
CAPITAL RESOURCES AND LIQUIDITY
Shareholders equity totaled $43.3 million at March 31, 2010 compared with $42.6 million at
December 31, 2009 and $40.8 million at March 31, 2009. The amount of equity reflects managements
desire to increase shareholders return on equity while maintaining a strong capital base. The
Company initiated an open market stock buyback program in 1998, but did not repurchase any shares
during the first three months of 2010 and 2009, respectively.
Accumulated other comprehensive income/loss decreased to an unrealized loss net of tax benefit of
$1.6 million at March 31, 2010 compared with $1.9 million at December 31, 2009. The decline in the
magnitude of the accumulated other comprehensive loss was primarily attributable to the realization
of an other-than temporary impairment loss of $476,000 on pooled trust preferred investment
securities held available for sale.
As discussed in Company-obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust
in Note 5 of the Notes to Consolidated Financial Statements contained herein, during 2006, the
Company established a subsidiary trust that issued $4.0 million of capital securities as part of a
separate pooled trust preferred security offering with other financial institutions. Under
applicable regulatory guidelines, the capital securities are treated as Tier 1 capital for purposes
of the Federal Reserves capital guidelines for bank holding companies, as long as the capital
securities and all other cumulative preferred securities of the Company together do not exceed 25%
of Tier 1 capital. As discussed above under Capital, banking regulations have established minimum
capital requirements for financial institutions, including risk-based capital ratios and leverage
ratios. As of March 31, 2010, the appropriate regulatory authorities have categorized the Company
and the Bank as well capitalized.
The primary sources of funds are deposits, repayment of loans, maturities of investments, funds
provided from operations, federal funds lines of credit with the Federal Reserve and other banks,
and advances from the FHLB of Atlanta. While scheduled repayments of loans and maturities of
investment securities are predictable sources of funds, deposit flows and loan repayments are
greatly influenced by the general level of interest rates, economic conditions and competition. The
Bank uses its sources of funds to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other interest-earning assets,
to maintain liquidity, and to meet operating expenses. Management monitors projected liquidity
needs and determines the desirable funding level based in part on the Banks commitments to make
loans and managements assessment of the Banks ability to generate funds. Management is not aware
of any market or institutional trends, events or uncertainties that are expected to have a material
effect on the liquidity, capital resources or operations of the Company or the Bank. Nor is
management aware of any current recommendations by regulatory authorities that would have a
material effect on liquidity, capital resources or operations. The Banks internal sources of such
32
liquidity are deposits, loan and investment repayments, and securities available for sale. The
Banks primary external sources of liquidity are federal funds lines of credit with the Federal
Reserve Bank and other banks and advances from the FHLB of Atlanta.
Cash and amounts due from depository institutions, interest-bearing deposits in other banks, and
federal funds sold totaled $23.5 million at March 31, 2010 compared with $26.2 million at December
31, 2009. These assets provide a primary source of liquidity for the Bank. In addition, management
has designated the entire investment portfolio as available of sale, of which approximately $14.3
million was unpledged and readily salable at March 31, 2010. Furthermore, the Bank has an available
line of credit with the FHLB of Atlanta with a borrowing limit of approximately $122.2 million at
March 31, 2010 to provide additional sources of liquidity, as well as available
federal funds purchased lines of credit with the Federal Reserve and various other commercial banks
totaling approximately $69.6 million. At March 31, 2010, $50.0 million of the FHLB of Atlanta line
of credit and none of federal funds purchased lines of credit were in use.
Management is not aware of any market or institutional trends, events or uncertainties that are
expected to have a material effect on the liquidity, capital resources or operation of the Company
or the Bank. Nor is management aware of any current recommendations by regulatory authorities that
would have a material effect on liquidity, capital resources or operations.
The following table sets forth information relating to the Companys sources of liquidity and the
outstanding commitments for use of liquidity at March 31, 2010 and December 31, 2009. The liquidity
coverage ratio is derived by dividing the total sources of liquidity by the outstanding commitments
for use of liquidity.
LIQUIDITY SOURCES AND USES
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Total |
|
|
In Use |
|
|
Available |
|
|
Total |
|
|
In Use |
|
|
Available |
|
Sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds borrowing lines of credit |
|
$ |
69,562 |
|
|
$ |
|
|
|
$ |
69,562 |
|
|
$ |
72,563 |
|
|
$ |
|
|
|
$ |
72,563 |
|
Federal Home Loan Bank advances |
|
|
122,222 |
|
|
|
50,000 |
|
|
|
72,222 |
|
|
|
108,310 |
|
|
|
50,000 |
|
|
|
58,310 |
|
Federal funds sold and interest-bearing
deposits in other banks, excluding
requirements |
|
|
|
|
|
|
|
|
|
|
7,799 |
|
|
|
|
|
|
|
|
|
|
|
13,617 |
|
Securities, available for sale and unpledged
at fair value |
|
|
|
|
|
|
|
|
|
|
14,271 |
|
|
|
|
|
|
|
|
|
|
|
10,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term funding sources |
|
|
|
|
|
|
|
|
|
$ |
163,854 |
|
|
|
|
|
|
|
|
|
|
$ |
155,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments and
lending lines of credit |
|
|
|
|
|
|
|
|
|
$ |
76,584 |
|
|
|
|
|
|
|
|
|
|
$ |
71,523 |
|
Letters of credit |
|
|
|
|
|
|
|
|
|
|
6,558 |
|
|
|
|
|
|
|
|
|
|
|
8,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential short-term funding uses |
|
|
|
|
|
|
|
|
|
$ |
83,142 |
|
|
|
|
|
|
|
|
|
|
$ |
80,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of short-term funding sources to
potential short-term funding uses |
|
|
|
|
|
|
|
|
|
|
197.1 |
% |
|
|
|
|
|
|
|
|
|
|
193.8 |
% |
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes presented elsewhere in this
document have been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative purchasing power of
money over time and due to inflation. Unlike most industrial companies, virtually all the assets
and liabilities of the Company and the Bank are monetary in nature. The impact of inflation is
33
reflected in the increased cost of operations. As a result, interest rates have a greater impact on
our performance than inflation does. Interest rates do not necessarily move in the same direction
or to the same extent as the prices of goods and services.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
An important component of both earnings performance and liquidity is management of interest rate
sensitivity. Interest rate sensitivity reflects the potential effect on net interest income and
economic value of equity from a change in market interest rates. The Bank is subject to interest
rate sensitivity to the degree that its interest-earning assets mature or reprice at different time
intervals than its interest-bearing liabilities. However, the Bank is not subject to the other
major categories of market risk such as foreign currency exchange rate risk or commodity price
risk. The Bank uses a number of tools to manage its interest rate risk, including simulating net
interest income under various scenarios, monitoring the present value change in equity under the
same scenarios, and monitoring the difference or gap between rate sensitive assets and rate
sensitive liabilities over various time periods. Management believes that rate risk is best
measured by simulation modeling.
There have been no material changes to the quantitative and qualitative disclosures made in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide assurance
that the information required to be disclosed in the reports filed or submitted under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time
periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of
the design and operations of the Companys disclosure controls and procedures at the end of the
period covered by this report was carried out under the supervision and with the participation of
the management of Fauquier Bankshares, Inc., including the Chief Executive Officer and the Chief
Financial Officer. Based on such an evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded the Companys disclosure controls and procedures were effective as of the end of
such period.
As of March 31, 2010, management has assessed the effectiveness of the internal control over
financial reporting based on the criteria for effective internal control over financial reporting
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the assessment, management determined that it
maintained effective internal control over the financial reporting as of March 31, 2010, based on
those criteria, and the Companys Chief Executive Officer and Chief Financial Officer
34
can provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
Smith Elliott Kearns & Company, LLC, the independent registered public accounting firm that audited
the Companys consolidated financial statements included in the Companys Annual Report on 10-K for
the year ended December 31, 2009, has issued an audit report on the Companys effectiveness of
internal control over financial reporting as of December 31, 2009. The auditors report is
incorporated for reference in the Companys Annual Report on 10-K for the year ended December 31,
2009 in Item 8 under the heading Report of Independent Public Accounting Firm.
No changes were made in Managements internal control over financial reporting during the quarter
ended March 31, 2010 that have materially affected, or that are reasonably likely to materially
affect, Managements internal control over financial reporting.
PART II, OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
There are no pending or threatened legal proceedings to which the Company or the Bank is a party or
to which the property of either the Company or the Bank is subject to that, in the opinion of
management, may materially impact the financial condition of either the Company or the Bank.
There have been no material changes to the risk factors faced by the Company from those disclosed
in Companys Annual Report on Form 10-K for the year ended December 31, 2009.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None. On January 21, 2010, the Board authorized the Company to repurchase up to 107,840 shares (3%
of common stock outstanding on January 1, 2010) beginning January 1, 2010. No shares were
repurchased during the first quarter ended March 31, 2010.
|
|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
None
|
|
|
ITEM 4. |
|
(REMOVED AND RESERVED) |
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
None
|
|
|
Exhibit |
|
Exhibit |
Number |
|
Description |
3.1
|
|
Articles of Incorporation of Fauquier Bankshares, Inc., as amended, incorporated by reference
to Exhibit 3.1 to Form 10-K filed March 15, 2010. |
|
|
|
3.2
|
|
Bylaws of Fauquier Bankshares, Inc., as amended and restated, incorporated by reference to
Exhibit 3.2 to Form 8-K filed November 15, 2007. |
35
|
|
|
Exhibit |
|
Exhibit |
Number |
|
Description |
31.1
|
|
Certification of CEO pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of CFO pursuant to Rule 13a-14(a). |
|
|
|
32.1
|
|
Certification of CEO pursuant to 18 U.S.C. Section 1350. |
|
|
|
32.2
|
|
Certification of CFO pursuant to 18 U.S.C. Section 1350. |
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
FAUQUIER BANKSHARES, INC.
(Registrant)
|
|
|
/s/ Randy K. Ferrell
|
|
|
Randy K. Ferrell |
|
|
President & Chief Executive Officer Dated: May 10, 2010 |
|
|
|
|
|
|
/s/ Eric P. Graap
|
|
|
Eric P. Graap |
|
|
Executive Vice President & Chief Financial Officer Dated: May 10, 2010 |
|
|
37