e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 September 30, 2006
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 |
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Warrenton, Virginia
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20186 |
(Address of principal executive offices)
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(Zip Code) |
(540) 347-2700
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
As of November 7, 2006, the latest practicable date for determination, 3,478,960 shares
of common stock, par value $3.13 per share, of the registrant were outstanding.
FAUQUIER BANKSHARES, INC.
INDEX
Part I. FINANCIAL INFORMATION
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Page |
Item 1.
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Financial Statements |
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3 |
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Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005 |
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3 |
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Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2006
and 2005 |
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4 |
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Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2006
and 2005 |
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5 |
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Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Nine Months
Ended September 30, 2006 and 2005 |
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6 |
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Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2006
and 2005 |
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7 |
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Notes to Consolidated Financial Statements |
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8 |
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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14 |
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk |
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31 |
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Item 4.
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Controls and Procedures |
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31 |
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Part II. OTHER INFORMATION |
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31 |
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Item 1.
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Legal Proceedings |
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32 |
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Item 1A.
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Risk Factors |
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32 |
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds |
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32 |
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Item 3.
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Defaults Upon Senior Securities |
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32 |
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Item 4.
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Submission of Matters to a Vote of Security Holders |
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32 |
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Item 5.
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Other Information |
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32 |
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Item 6.
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Exhibits |
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33 |
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SIGNATURES |
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2
Part
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
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Unaudited |
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Audited |
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September 30, 2006 |
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December 31, 2005 |
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Assets |
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Cash and due from banks |
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$ |
13,710,546 |
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$ |
26,565,702 |
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Interest-bearing deposits in other banks |
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377,083 |
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680,013 |
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Federal funds sold |
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493,000 |
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Securities, at fair value |
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42,808,222 |
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48,390,771 |
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Loans, net of allowance for loan losses of $4,512,514 in 2006
and $4,238,143 in 2005 |
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413,884,375 |
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381,049,471 |
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Bank premises and equipment, net |
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7,748,553 |
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8,289,581 |
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Accrued interest receivable |
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1,689,896 |
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1,585,849 |
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Other assets |
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13,778,625 |
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14,191,023 |
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Total assets |
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493,997,300 |
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481,245,410 |
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Liabilities |
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Deposits: |
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Noninterest-bearing |
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78,861,017 |
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95,411,624 |
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Interest-bearing |
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316,387,981 |
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296,245,545 |
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Total deposits |
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395,248,998 |
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391,657,169 |
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Federal funds purchased |
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1,026,000 |
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5,000,000 |
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Dividends payable |
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Federal Home Loan Bank advances |
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48,000,000 |
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42,000,000 |
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Company-obligated mandatorily redeemable capital securities |
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8,248,000 |
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4,124,000 |
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Other liabilities |
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3,148,324 |
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2,885,096 |
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Commitments and contingent liabilities |
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Total liabilities |
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455,671,322 |
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445,666,265 |
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Shareholders Equity |
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Common stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding, 2006, 3,476,960 shares; 2005,
3,448,786 shares |
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10,882,885 |
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10,794,700 |
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Retained earnings |
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27,915,069 |
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25,440,838 |
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Accumulated other comprehensive income (loss), net |
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(471,976 |
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(656,393 |
) |
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Total shareholders equity |
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38,325,978 |
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35,579,145 |
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Total liabilities and shareholders equity |
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$ |
493,997,300 |
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$ |
481,245,410 |
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See accompanying Notes to Consolidated Financial Statements.
3
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended September 30, 2006 and 2005
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2006 |
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2005 |
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Interest Income |
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Interest and fees on loans |
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$ |
7,371,651 |
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$ |
5,855,666 |
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Interest and dividends on securities available for sale: |
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Taxable interest income |
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394,861 |
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448,791 |
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Interest income exempt from federal income taxes |
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13,189 |
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13,082 |
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Dividends |
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79,041 |
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61,656 |
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Interest on federal funds sold |
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4,783 |
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8,907 |
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Interest on deposits in other banks |
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11,877 |
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1,400 |
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Total interest income |
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7,875,402 |
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6,389,502 |
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Interest Expense |
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Interest on deposits |
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2,137,304 |
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1,275,949 |
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Interest on federal funds purchased |
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184,898 |
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31,348 |
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Interest on Federal Home Loan Bank advances |
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549,514 |
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204,282 |
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Distribution on capital securities of subsidiary trusts |
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100,490 |
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72,272 |
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Total interest expense |
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2,972,206 |
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1,583,851 |
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Net interest income |
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4,903,196 |
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4,805,651 |
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Provision for loan losses |
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60,000 |
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139,167 |
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Net interest income after
provision for loan losses |
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4,843,196 |
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4,666,484 |
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Other Income |
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Wealth management income |
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337,088 |
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432,082 |
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Service charges on deposit accounts |
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704,079 |
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675,440 |
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Other service charges, commissions and income |
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377,748 |
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353,958 |
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Gain on sale of property rights |
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Total other income |
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1,418,915 |
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1,461,480 |
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Other Expenses |
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Salaries and benefits |
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2,265,102 |
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2,102,809 |
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Net occupancy expense of premises |
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240,509 |
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244,778 |
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Furniture and equipment |
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329,785 |
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311,403 |
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Other operating expenses |
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1,290,502 |
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1,302,490 |
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Loss on sale of securities |
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Total other expenses |
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4,125,898 |
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3,961,480 |
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Income before income taxes |
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2,136,213 |
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2,166,484 |
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Income tax expense |
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652,882 |
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693,707 |
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Net Income |
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$ |
1,483,331 |
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$ |
1,472,777 |
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Earnings per Share, basic |
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$ |
0.43 |
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$ |
0.43 |
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Earnings per Share, assuming dilution |
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$ |
0.41 |
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$ |
0.41 |
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Dividends per Share |
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$ |
0.19 |
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$ |
0.16 |
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See accompanying Notes to Consolidated Financial Statements.
4
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
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2006 |
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2005 |
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Interest Income |
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Interest and fees on loans |
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$ |
20,700,435 |
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$ |
16,930,296 |
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Interest and dividends on securities
available for sale: |
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Taxable interest income |
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1,208,183 |
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1,439,268 |
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Interest income exempt from
federal income taxes |
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39,441 |
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39,218 |
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Dividends |
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201,036 |
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147,155 |
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Interest on federal funds sold |
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22,188 |
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46,403 |
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Interest on deposits in other banks |
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23,155 |
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4,230 |
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Total interest income |
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22,194,438 |
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18,606,570 |
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Interest Expense |
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Interest on deposits |
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5,554,978 |
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3,518,244 |
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Interest on federal funds purchased |
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389,348 |
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58,234 |
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Interest on Federal Home Loan Bank
advances |
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1,431,951 |
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|
626,385 |
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Distribution on capital securities of
subsidiary trusts |
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273,213 |
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201,872 |
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Total interest expense |
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7,649,490 |
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4,404,735 |
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Net interest income |
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14,544,948 |
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14,201,835 |
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Provision for loan losses |
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360,000 |
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|
472,917 |
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Net interest income after
provision for loan losses |
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14,184,948 |
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13,728,918 |
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Other Income |
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Wealth management income |
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1,000,969 |
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|
1,034,450 |
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Service charges on deposit accounts |
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2,063,531 |
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|
1,976,960 |
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Other service charges, commissions
and income |
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|
1,103,153 |
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|
979,520 |
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Gain on sale of property rights |
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|
250,000 |
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Total other income |
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4,417,653 |
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|
3,990,930 |
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Other Expenses |
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Salaries and benefits |
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6,769,925 |
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|
6,235,035 |
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Net occupancy expense of premises |
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|
744,310 |
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|
708,096 |
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Furniture and equipment |
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|
1,009,291 |
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|
948,531 |
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Other operating expenses |
|
|
4,022,870 |
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|
3,990,144 |
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Loss onssale of securities |
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|
82,564 |
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Total other expenses |
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|
12,628,960 |
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|
|
11,881,806 |
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|
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Income before income taxes |
|
|
5,973,641 |
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|
|
5,838,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income tax expense |
|
|
1,804,886 |
|
|
|
1,805,846 |
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Net Income |
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$ |
4,168,755 |
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|
$ |
4,032,196 |
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Earnings per Share, basic |
|
$ |
1.20 |
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|
$ |
1.18 |
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|
|
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Earnings per Share, assuming dilution |
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$ |
1.16 |
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|
$ |
1.13 |
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Dividends per Share |
|
$ |
0.555 |
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|
$ |
0.47 |
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|
|
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|
See accompanying Notes to Consolidated Financial Statements.
5
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
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Accumulated |
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Other |
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Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
|
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|
Common Stock |
|
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Earnings |
|
|
Income (Loss) |
|
|
Income |
|
|
Total |
|
Balance, December 31, 2004 |
|
$ |
10,618,775 |
|
|
$ |
21,320,224 |
|
|
$ |
(47,934 |
) |
|
|
|
|
|
$ |
31,891,065 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
4,032,196 |
|
|
|
|
|
|
$ |
4,032,196 |
|
|
$ |
4,032,196 |
|
Other comprehensive income net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities available
for sale, net of deferred income taxes of $152,308 |
|
|
|
|
|
|
|
|
|
|
(295,655 |
) |
|
|
(295,655 |
) |
|
$ |
(295,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,736,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.47 per share) |
|
|
|
|
|
|
(1,617,192 |
) |
|
|
|
|
|
|
|
|
|
$ |
(1,617,192 |
) |
Restricted stock forfeiture |
|
|
(3,506 |
) |
|
|
(24,494 |
) |
|
|
|
|
|
|
|
|
|
$ |
(28,000 |
) |
Net issuance of restricted stock, stock incentive plan
(10,045
shares) |
|
|
31,441 |
|
|
|
218,077 |
|
|
|
|
|
|
|
|
|
|
$ |
249,518 |
|
Unearned compensation on restricted stock |
|
|
|
|
|
|
(249,518 |
) |
|
|
|
|
|
|
|
|
|
$ |
(249,518 |
) |
Amortization of unearned compensation, restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
194,720 |
|
awards |
|
|
|
|
|
|
194,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
12,764 |
|
|
|
91,937 |
|
|
|
|
|
|
|
|
|
|
$ |
104,701 |
|
Exercise of stock options |
|
|
131,219 |
|
|
|
230,747 |
|
|
|
|
|
|
|
|
|
|
$ |
361,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005 |
|
$ |
10,790,694 |
|
|
$ |
24,196,698 |
|
|
$ |
(343,590 |
) |
|
|
|
|
|
$ |
34,643,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005 |
|
$ |
10,794,700 |
|
|
$ |
25,440,838 |
|
|
$ |
(656,393 |
) |
|
|
|
|
|
$ |
35,579,146 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
4,168,755 |
|
|
|
|
|
|
$ |
4,168,755 |
|
|
|
4,168,755 |
|
Other comprehensive income net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities available
for sale, net of deferred income taxes of $95,003 |
|
|
|
|
|
|
|
|
|
|
184,417 |
|
|
|
184,417 |
|
|
|
184,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,353,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.555 per share) |
|
|
|
|
|
|
(1,928,695 |
) |
|
|
|
|
|
|
|
|
|
|
(1,928,695 |
) |
Acquisition of 1,900 shares of common stock |
|
|
(5,947 |
) |
|
|
(37,257 |
) |
|
|
|
|
|
|
|
|
|
|
(43,204 |
) |
Net issuance of restricted stock, stock incentive plan
(10,347
shares) |
|
|
32,386 |
|
|
|
228,772 |
|
|
|
|
|
|
|
|
|
|
|
261,158 |
|
Unearned compensation on restricted stock |
|
|
|
|
|
|
(261,158 |
) |
|
|
|
|
|
|
|
|
|
|
(261,158 |
) |
Amortization of unearned compensation, restricted stock
awards |
|
|
|
|
|
|
161,573 |
|
|
|
|
|
|
|
|
|
|
|
161,573 |
|
Issuance of common stock |
|
|
15,797 |
|
|
|
108,492 |
|
|
|
|
|
|
|
|
|
|
|
124,289 |
|
Exercise of stock options |
|
|
45,948 |
|
|
|
33,749 |
|
|
|
|
|
|
|
|
|
|
|
79,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006 |
|
$ |
10,882,885 |
|
|
$ |
27,915,069 |
|
|
$ |
(471,976 |
) |
|
|
|
|
|
$ |
38,325,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
6
Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,168,755 |
|
|
$ |
4,032,196 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
901,951 |
|
|
|
879,681 |
|
Provision for loan losses |
|
|
360,000 |
|
|
|
472,917 |
|
Amortization of security premiums, net |
|
|
18,958 |
|
|
|
44,714 |
|
Amortization of unearned compensation |
|
|
161,573 |
|
|
|
194,720 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (Increase) in other assets |
|
|
213,350 |
|
|
|
(21,944 |
) |
(Decrease) Increase in other liabilities |
|
|
263,228 |
|
|
|
(890,166 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
6,087,815 |
|
|
|
4,712,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Proceeds from sale of securities available for sale |
|
|
3,024,745 |
|
|
|
|
|
Proceeds from maturities, calls and principal
payments of securities available for sale |
|
|
3,192,165 |
|
|
|
9,589,469 |
|
Purchase of securities available for sale |
|
|
|
|
|
|
(524,451 |
) |
Purchase of premises and equipment |
|
|
(360,923 |
) |
|
|
(816,792 |
) |
Proceeds (Purchase) of other investment |
|
|
(373,900 |
) |
|
|
(416,300 |
) |
Net Decrease (Increase) in loans |
|
|
(33,194,904 |
) |
|
|
(29,449,058 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(27,712,817 |
) |
|
|
(21,617,132 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Net (Decrease) Increase in demand deposits, NOW accounts
and savings accounts |
|
|
(23,227,413 |
) |
|
|
(6,328,598 |
) |
Net (Decrease) Increase in certificates of deposit |
|
|
26,819,242 |
|
|
|
21,560,673 |
|
Federal Home Loan Bank advances |
|
|
70,000,000 |
|
|
|
18,000,000 |
|
Federal Home Loan Bank principal repayments |
|
|
(64,000,000 |
) |
|
|
(11,000,000 |
) |
Purchase (Repayment) of Federal Funds |
|
|
(3,974,000 |
) |
|
|
4,500,000 |
|
Proceeds from issuance of trust preferred securities |
|
|
4,124,000 |
|
|
|
|
|
Cash dividends paid on common stock |
|
|
(1,928,695 |
) |
|
|
(1,617,191 |
) |
Issuance of common stock |
|
|
203,986 |
|
|
|
28,000 |
|
Acquisition of common stock |
|
|
(43,204 |
) |
|
|
(28,000 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
7,973,916 |
|
|
|
25,114,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents |
|
|
(13,651,086 |
) |
|
|
8,209,870 |
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents |
|
|
|
|
|
|
|
|
Beginning |
|
|
27,738,715 |
|
|
|
9,166,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending |
|
$ |
14,087,629 |
|
|
$ |
17,376,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
Cash payments for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
5,357,341 |
|
|
$ |
4,264,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1,534,000 |
|
|
$ |
1,290,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale, net |
|
$ |
(279,419 |
) |
|
$ |
(447,962 |
) |
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
7
Fauquier Bankshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. General
The consolidated statements include the accounts of Fauquier Bankshares, Inc. (the Company)
and its wholly-owned subsidiary, The Fauquier Bank (the Bank), 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 September 30, 2006
and December 31, 2005 and the results of operations for the three and nine months, and cash flows
for the nine months ended September 30, 2006 and 2005.
The results of operations for the nine months ended September 30, 2006 and 2005 are not
necessarily indicative of the results expected for the full year.
2. Securities
The amortized cost of securities available for sale, with unrealized gains and losses
follows:
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
|
|
September 30, 2006 |
|
Obligations of U.S. Government corporations and
agencies |
|
$ |
32,459,283 |
|
|
$ |
2,248 |
|
|
$ |
(727,766 |
) |
|
$ |
31,733,765 |
|
Obligations of states and political subdivisions |
|
|
962,619 |
|
|
|
51,694 |
|
|
|
|
|
|
|
1,014,313 |
|
Corporate Bonds |
|
|
6,000,000 |
|
|
|
27,500 |
|
|
|
(51,250 |
) |
|
|
5,976,250 |
|
Mutual Funds |
|
|
276,515 |
|
|
|
|
|
|
|
(9,041 |
) |
|
|
267,474 |
|
FHLMC Preferred Bank Stock |
|
|
441,000 |
|
|
|
|
|
|
|
(8,500 |
) |
|
|
432,500 |
|
Restricted investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock |
|
|
3,122,000 |
|
|
|
|
|
|
|
|
|
|
|
3,122,000 |
|
Federal Reserve Bank Stock |
|
|
99,000 |
|
|
|
|
|
|
|
|
|
|
|
99,000 |
|
Community Bankers Bank Stock |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
The Bankers Bank Stock |
|
|
112,920 |
|
|
|
|
|
|
|
|
|
|
|
112,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
43,523,337 |
|
|
$ |
81,442 |
|
|
$ |
(796,557 |
) |
|
$ |
42,808,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
(Losses) |
|
|
Value |
|
|
|
December 31, 2005 |
|
Obligations of U.S. Government corporations and
agencies |
|
$ |
38,731,324 |
|
|
$ |
10,072 |
|
|
$ |
(943,127 |
) |
|
$ |
37,798,269 |
|
Obligations of states and political subdivisions |
|
|
962,013 |
|
|
|
57,516 |
|
|
|
|
|
|
|
1,019,529 |
|
Corporate Bonds |
|
|
6,000,000 |
|
|
|
|
|
|
|
(98,750 |
) |
|
|
5,901,250 |
|
Mutual Funds |
|
|
267,947 |
|
|
|
|
|
|
|
(7,144 |
) |
|
|
260,803 |
|
FHLMC Preferred Bank Stock |
|
|
441,000 |
|
|
|
|
|
|
|
(13,100 |
) |
|
|
427,900 |
|
Restricted investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock |
|
|
2,748,100 |
|
|
|
|
|
|
|
|
|
|
|
2,748,100 |
|
Federal Reserve Bank Stock |
|
|
72,000 |
|
|
|
|
|
|
|
|
|
|
|
72,000 |
|
Community Bankers Bank Stock |
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
The Bankers Bank Stock |
|
|
112,920 |
|
|
|
|
|
|
|
|
|
|
|
112,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
49,385,304 |
|
|
$ |
67,588 |
|
|
$ |
(1,062,121 |
) |
|
$ |
48,390,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
|
|
|
$ |
|
|
Due after one year through five years |
|
|
17,763,124 |
|
|
|
17,425,296 |
|
Due after five years through ten years |
|
|
3,177,852 |
|
|
|
3,111,682 |
|
Due after ten years |
|
|
18,480,926 |
|
|
|
18,187,349 |
|
Equity securities |
|
|
4,101,435 |
|
|
|
4,083,895 |
|
|
|
|
|
|
|
|
|
|
$ |
43,523,337 |
|
|
$ |
42,808,222 |
|
|
|
|
|
|
|
|
9
The following table shows the Companys investments with gross unrealized losses and their fair value, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
Description of Securities |
|
Fair Value |
|
|
(Losses) |
|
|
Fair Value |
|
|
(Losses) |
|
|
Fair Value |
|
|
(Losses) |
|
Obligations of U.S. Government, corporations and
agencies |
|
$ |
2,721,551 |
|
|
$ |
(41,509 |
) |
|
$ |
28,781,519 |
|
|
$ |
(686,257 |
) |
|
$ |
31,503,070 |
|
|
$ |
(727,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds |
|
|
|
|
|
|
|
|
|
|
3,948,750 |
|
|
|
(51,250 |
) |
|
|
3,948,750 |
|
|
|
(51,250 |
) |
|
|
|
|
|
|
|
Subtotal, debt securities |
|
|
2,721,551 |
|
|
|
(41,509 |
) |
|
|
32,730,269 |
|
|
|
(737,507 |
) |
|
|
35,451,820 |
|
|
|
(779,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
441,000 |
|
|
|
(8,500 |
) |
|
|
441,000 |
|
|
|
(8,500 |
) |
Mutual Fund |
|
|
|
|
|
|
|
|
|
|
276,515 |
|
|
|
(9,041 |
) |
|
|
276,515 |
|
|
|
(9,041 |
) |
|
|
|
|
|
|
|
Total temporary impaired securities |
|
$ |
2,721,551 |
|
|
$ |
(41,509 |
) |
|
$ |
33,447,784 |
|
|
$ |
(755,048 |
) |
|
$ |
36,169,335 |
|
|
$ |
(796,557 |
) |
|
|
|
|
|
|
|
The nature of securities which are temporarily impaired for a continuous 12 months or more can
be segregated into three groups. The first group consists of Federal Agency bonds totaling $14.9
million
with a temporary loss of approximately $293,000. The bonds within this group have Aaa/AAA ratings
from Moodys and Standard & Poors, respectively. These bonds have estimated maturity dates of 24
months to 39 months. The Company has the ability to hold these bonds to maturity.
The second group consists of Federal agency mortgage-backed securities totaling $17.3 million
with a temporary loss of approximately $434,000. The securities within this group have Aaa/AAA
ratings
from Moodys
and Standard & Poors, respectively. The estimated maturity dates range from 18 months to 335 months,
and return principal on a monthly basis representing the repayment and prepayment of the underlying
mortgages. The Company has the ability to hold these bonds to maturity.
The third group consists of corporate bonds, rated A2 by Moodys, totaling $4 million with a
temporary loss of approximately $51,000. These bonds have an estimated maturity of 27 years, but
can be
called at par on the five year anniversary. If not called, the bonds reprice every three months at
a fixed rate
index above LIBOR. The Company has the ability to hold these bonds to maturity.
The carrying value of securities pledged to secure deposits and for other purposes amounted to
$15,847,140 and $18,317,369 at September 30, 2006 and December 31, 2005, respectively.
10
3. Loans
A summary of the balances of loans follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Real estate loans: |
|
|
|
|
|
|
|
|
Construction |
|
$ |
30,903 |
|
|
$ |
27,302 |
|
Secured by farmland |
|
|
1,158 |
|
|
|
535 |
|
Secured by 1 - to - 4 family residential |
|
|
168,570 |
|
|
|
153,997 |
|
Other real estate loans |
|
|
136,806 |
|
|
|
120,416 |
|
Commercial and industrial loans (not secured by real estate) |
|
|
39,270 |
|
|
|
35,497 |
|
Consumer installment loans |
|
|
33,132 |
|
|
|
38,677 |
|
All other loans |
|
|
9,084 |
|
|
|
9,386 |
|
|
|
|
|
|
|
|
Total loans |
|
$ |
418,923 |
|
|
$ |
385,810 |
|
Unearned income |
|
|
(526 |
) |
|
|
(523 |
) |
Allowance for loan losses |
|
|
4,513 |
|
|
|
4,238 |
|
|
|
|
|
|
|
|
Net loans |
|
$ |
413,884 |
|
|
$ |
381,049 |
|
|
|
|
|
|
|
|
Analysis of the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
Nine Months |
|
|
Twelve Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2005 |
|
Balance at beginning of period |
|
$ |
4,238,143 |
|
|
$ |
4,060,321 |
|
|
$ |
4,060,321 |
|
Provision charged to operating expense |
|
|
360,000 |
|
|
|
472,917 |
|
|
|
472,917 |
|
Recoveries added to the allowance |
|
|
113,112 |
|
|
|
46,657 |
|
|
|
53,331 |
|
Loan losses charged to the allowance |
|
|
(198,741 |
) |
|
|
(241,739 |
) |
|
|
(348,426 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
4,512,514 |
|
|
$ |
4,338,156 |
|
|
$ |
4,238,143 |
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(Thousands) |
|
Nonaccrual loans |
|
$ |
1,652 |
|
|
$ |
13 |
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
1,652 |
|
|
|
13 |
|
Foreclosed property |
|
|
79 |
|
|
|
182 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
1,731 |
|
|
$ |
195 |
|
|
|
|
|
|
|
|
Total loans past due 90 days and still accruing interest totaled $11,000 on September 30, 2006
and $ 679,000 on December 31, 2005.
11
4. Company-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trusts
On March 26, 2002, one of the Companys wholly-owned Connecticut statutory business trusts
privately issued $4 million face amount of the trusts Floating Rate Capital Securities in a pooled
capital securities offering. Simultaneously, the trust used the proceeds of that sale to purchase
$4 million principal amount of the Companys Floating Rate Junior Subordinated Deferrable Interest
Debentures due 2032. Both the capital securities and the 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.
On September 21, 2006, the Companys second 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. Simultaneously, the trust used the proceeds of that sale to purchase
$4 million principal amount of the Companys Floating Rate Junior Subordinated Deferrable Interest
Debentures due 2036. Both the capital securities and the 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.
The capital securities
are presented in the consolidated balance sheets of the Company under
the caption Company-obligated mandatorily redeemable capital
securities. The Company records
distributions payable on the capital securities as an interest expense in its consolidated
statements of income. The cost of issuance associated with the
capital securities issued on March 26,
2002 was approximately $128,000. This cost is being amortized over a five year period from the
issue date. There was no cost of issuance associated with the capital
securities issued on September
21, 2006.
5. Earning 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 |
|
|
Nine Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
|
|
|
|
Per Share |
|
|
|
|
|
|
Per Share |
|
|
|
|
|
|
Per Share |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Basic earnings per share |
|
|
3,477,402 |
|
|
$ |
0.43 |
|
|
|
3,471,194 |
|
|
$ |
1.20 |
|
|
|
3,429,161 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities, stock options |
|
|
105,039 |
|
|
|
|
|
|
|
110,137 |
|
|
|
|
|
|
|
129,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
|
3,582,441 |
|
|
$ |
0.41 |
|
|
|
3,581,331 |
|
|
$ |
1.16 |
|
|
|
3,558,761 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
6. Stock-Based Compensation
At September 30, 2006, the Company has a stock-based compensation plan. Effective January 1,
2006 the Company adopted the provisions of FASB Statement No. 123 (R), Share-Based Payment, which
requires that the Company recognize expense related to the fair value of stock-based compensation
awards in net income. Prior to January 1, 2006, the Company accounted for its stock-based
compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly, stock compensation expense
was not recognized in net income, as all stock options granted had an exercise price equal to
market value of the underlying common stock on the date of grant. However, prior years financial
statements included pro forma disclosures of the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation, to stock-based compensation.
The following table illustrates the effect on net income and earnings per share for the
Company had the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, been applied to stock-based compensation for the nine months ended
September 30, 2006 and September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Net Income, as reported |
|
$ |
4,168,755 |
|
|
$ |
4,032,196 |
|
Deduct: Total stock-based employee
compensation expense determined based
on fair value method of awards, net
of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
4,168,755 |
|
|
$ |
4,032,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
1.20 |
|
|
$ |
1.18 |
|
Basic pro forma |
|
|
1.20 |
|
|
|
1.18 |
|
Diluted as reported |
|
|
1.16 |
|
|
|
1.13 |
|
Diluted pro forma |
|
|
1.16 |
|
|
|
1.13 |
|
7. Employee Benefit Plan
The following table provides a reconciliation of the changes in the defined benefit pension
plans obligations for the nine months ended September 30, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
519,381 |
|
|
$ |
287,240 |
|
Interest cost |
|
|
281,991 |
|
|
|
170,240 |
|
Expected return on plan assets |
|
|
(296,880 |
) |
|
|
(150,858 |
) |
Amortization of transition (asset) |
|
|
(14,235 |
) |
|
|
(9,490 |
) |
Amortization of prior service cost |
|
|
5,826 |
|
|
|
3,884 |
|
Recognized net actuarial loss |
|
|
45,717 |
|
|
|
31,156 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
541,800 |
|
|
$ |
332,172 |
|
|
|
|
|
|
|
|
The Company previously disclosed in its financial statements for the year ended December 31,
2005, that it expected to contribute $790,709 to its pension plan in 2006. As of September
30, 2006, contributions totaling $424,456 have been made, which is the maximum allowable
contribution for tax purposes. The company presently anticipates no additional contributions.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
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 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 and the shape of the interest
rate yield curve, 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 and accounting principles, policies and guidelines. These risks and
uncertainties should be considered in evaluating the 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.
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), a Virginia state-chartered bank that commenced
operations in 1902. The Company engages in its business through the Bank, and has no significant
operations other than owning the stock of the Bank. The Company had issued and outstanding
3,476,960 shares of common stock, par value $3.13 per share, held by approximately 442 holders of
record on September 30, 2006.
The Bank has eight full service branch offices located in the Virginia communities of Warrenton,
Catlett, The Plains, New Baltimore, Sudley Road-Manassas, Old Town-Manassas and Bealeton. The
executive offices of the Company and the main office of the Bank are located at 10 Courthouse
Square, Warrenton, Virginia 20186. During the March 2005 quarter, the Bank signed a lease for its
ninth full service branch in Haymarket, Virginia, scheduled to open in 2007. The Banks general
market area principally includes Fauquier County, western Prince William County, and neighboring
communities and is located approximately 50 miles southwest of Washington, D.C.
The Bank provides a range of consumer and commercial banking services to individuals and
businesses. The deposits of the Bank are insured up to applicable limits by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation (the FDIC). The basic services offered by the Bank
include: demand deposit accounts, savings and money market deposit accounts, NOW accounts, time
deposits, safe deposit services, credit cards, cash management, automated clearing house services
(ACH) including direct deposits, notary services, night depository, travelers checks, cashiers
checks, domestic collections, savings bonds, automated teller services, drive-in tellers, internet
banking, banking by telephone, 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 Star and Plus ATM networks, thereby permitting
customers to utilize the convenience of larger ATM networks.
14
The Bank operates a Wealth Management Services (WMS) 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; Bankers Investments Group, LLC, a
full service broker/dealer; and Bankers Title Shenandoah, LLC, a title insurance company. Bankers
Insurance consists of a consortium of 53 Virginia community bank owners; Bankers Investments Group
is owned by 30 Virginia, West Virginia, and Maryland community banks; and Bankers Title Shenandoah
is owned by 10 Virginia community banks.
The revenues of the Bank are derived primarily from interest and fees earned on real estate and
other loans; interest and dividends from investment and mortgage-backed securities; and fees on
deposit products and WMS services. 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 and other banks. The principal
expenses of the Bank are the interest paid on deposits and borrowings, 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.
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 financial
statements 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) 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) 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) U.S. Securities
and Exchange Commission 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.
15
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 terms 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 allowance.
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.
Through the merger and consolidation of other area banks, the Bank has become the primary
independent community bank in its immediate geographic market. The Bank continually seeks to be the
principal financial service provider for its market area by providing high quality customer
service, efficient technological support, value-added products, and a strong commitment to the
community.
Net income of $1.48 million for the quarter ended September 30, 2006 was a 0.7% increase from the
September 2005 quarter net income of $1.47 million. Net income was $4.17 million for the nine-month
period ended September 30, 2006, a 3.4% increase above the net income of $4.03 million for the
nine-month period ended September 2005. The net income results were consistent with managements
internal projections. The Company and the Bank have continued to experience growth across all of
the primary operating businesses: specifically, commercial and retail lending, retail deposits, and
assets under WMS management. Net loans outstanding increased 12.8% from September 30, 2005 to
September 30, 2006. Total deposits increased 1.4% from September 30, 2005 to September 30, 2006.
WMS assets under management grew from approximately $254.1 million at September 30, 2005 to $305.0
million at September 30, 2006, an increase of 20.0%.
16
Management continues the expansion of its branch network into western Prince William
County, having signed a lease for a full service branch in Haymarket, Virginia, scheduled to
open in 2007. The Bank seeks to further add to its branch network in western Prince William
County, as well as in Fauquier County, looking toward these new retail markets for growth in
deposits and WMS income. Management also seeks to increase the level of its fee income from
deposits and WMS through the increase of its market share within its current marketplace.
Beginning in April 2006, the Bank introduced a new line of Free Checking products in order
to better serve the growing population in its marketplace. Each checking account is designed
to meet many of the specific individual needs of the customer. All of our new checking
accounts offer free ATM access virtually anywhere in the United States and in most foreign
countries, where the Bank will pay the customers ATM fees charged by other institutions, up
to four times a month.
COMPARISION OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER
30, 2005
NET INCOME. Net income for the three months ended September 30, 2006 was $1.48 million or
$0.41 per diluted share compared with $1.47 million or $0.41 per diluted share for the three
months ended September 30, 2005. The growth in net income was primarily due to a $98,000 or
2.0% increase in net interest income and a $79,000 reduction in provision for loan losses
primarily offset by a $164,000 or 4.2% increase in total other expenses.
NET INTEREST INCOME. Net interest income increased $98,000 or 2.0% to $4.90 million for the
three months ended September 30, 2006 compared with $4.81 million for the three months ended
September 30, 2005. The increase in net interest income resulted from increased interest and
fee income on loans as a result of the increase in volume of loans outstanding. The net
interest margin, computed on a tax-equivalent basis, for the September 2006 quarter was
4.17%, compared with 4.63% for the same quarter one year earlier. The primary reasons for
the decrease in the net interest margin are the impact of the flattening yield curve coupled
with competitive pressures on the pricing of interest-earning assets and interest-bearing
liabilities.
Average interest-earning assets grew 13.0% to $464.4 million for the third quarter of 2006
compared with $411.0 million for the third quarter of 2005. The yield on average
interest-earning assets was 6.70% for the September 2006 quarter compared with 6.15% for the
September 2005 quarter. Total interest income increased $1.49 million or 23.3% to $7.88
million for the three months ended September 30, 2006, compared with $6.39 million for the
three months ended September 30, 2005, as a result of the growth in the volume of
interest-earning assets and in the average rate of interest earned. Interest and dividends
on investment securities decreased $36,000 or 7.0%. During the first quarter of 2006, the
Bank sold $3.0 million of lower yielding investment securities and utilized the proceeds
from the sale to retire higher cost borrowed funds. Investment securities averaged $42.8
million for the third quarter of 2006 compared with $50.2 million for the same quarter one
year earlier. The yield on investment securities was 4.62% on a tax-equivalent basis for the
third quarter of 2006, compared with 4.23% for the third quarter of 2005. Interest and fees
on loans increased $1.52 million or 25.9% to $7.37 million for the September 2006 quarter
compared with the same quarter one year earlier. Average loans outstanding totaled $420.6
million and earned 6.91% on a tax-equivalent basis for the quarter ended September 30, 2006,
compared with $359.3 million and 6.44%, respectively, for the quarter ended September 30,
2005.
Total interest expense increased $1.39 million or 87.7% to $2.97 million for the three
months ended September 30, 2006 from $1.58 million for the three months ended September 30,
2005.
Average interest-bearing liabilities grew 17.2% to $376.7 million for the third quarter of
2006
17
compared with $321.3 million for the third quarter of 2005, while the average cost on
interest-bearing liabilities increased to 3.12% from 1.95% for the same respective time
periods. The increase in total interest expense and the average cost of interest-bearing
liabilities is primarily due to the overall increase in short-term interest rates, as well
as significantly increased balances in higher cost funding sources such as the premium
interest rate money market account, time deposits, federal funds purchased and FHLB of
Atlanta borrowings. The average balance for the premium interest rate money market account
was $54.2 million with an average cost of 4.06% for the three months ended September 30,
2006 compared with $5.3 million with an average cost of 3.12% for the September 2005
quarter. Average time deposit balances for the third quarter of 2006 were $126.4 million at
an average cost of 4.25%, compared with $100.3 million at an average cost of 3.15% for the
same quarter one year earlier. Interest-bearing NOW account deposits averaged $64.4 million
at an average cost of 1.91% for the September 2006 quarter, compared with $94.9 million at
an average cost of 2.16% for the September 2005 quarter. Other interest-bearing money market
deposits averaged $34.5 million at an average cost of 1.38% for the quarter ended September
30, 2006, compared with $53.2 million at an average cost of 1.42% for the same quarter one
year earlier. Savings account deposits averaged $36.7 million at an average cost of 0.37%
for the September 2006 quarter, compared with $41.9 million at an average cost of 0.32% for
the September 2005 quarter. Federal funds purchased averaged
$13.7 million at an average cost of
5.37% for the September 2006 quarter compared with $2.95 million at an average cost of 4.22%
for the September 2005 quarter. Average FHLB of Atlanta advances were $42.3 million at an
average cost of 5.08% for the third quarter of 2006, and $18.8 million at an average cost of
4.25% one year earlier.
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, 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 2006 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. Additionally, the
Banks balance sheet is positioned for a stable or rising interest rate environment. This
means that net interest income is projected to increase if market interest rates rise, and
to decrease if market interest rates fall, assuming no change in the shape of the interest
rate 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 specific nature of the Banks variability in net
interest income due to changes in interest rates, also known as interest rate risk, is to a
large degree the result of the Banks deposit base structure. During the third quarter of
2006, demand deposits, NOW accounts, and savings deposits averaged 20.7%, 16.2%, and 9.2% of
total average deposits, respectively, while the more interest-rate sensitive money market
accounts, premium money market accounts and certificates of deposit averaged 8.6%, 13.6% and
31.7% of total average deposits, respectively.
The following table sets forth information relating to the Companys average balance sheet
and reflects the average yield on assets and the average annualized cost of liabilities for
the three- month periods ended September 30, 2006 and 2005. These yields and costs are
derived by annualizing the income or expense for the periods presented, and dividing the
product of the
annualization by the respective average daily balances of assets and liabilities for the
periods presented.
18
AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
Three Months Ended September 30, 2005 |
|
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
|
Balances |
|
|
Expense |
|
|
Rate |
|
|
Balances |
|
|
Expense |
|
|
Rate |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
410,750 |
|
|
$ |
7,274 |
|
|
|
6.94 |
% |
|
$ |
352,164 |
|
|
$ |
5,771 |
|
|
|
6.42 |
% |
Tax-exempt (1) |
|
|
8,194 |
|
|
|
149 |
|
|
|
7.09 |
% |
|
|
7,010 |
|
|
|
128 |
|
|
|
7.17 |
% |
Nonaccrual |
|
|
1,691 |
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
420,635 |
|
|
|
7,423 |
|
|
|
6.91 |
% |
|
|
359,265 |
|
|
|
5,899 |
|
|
|
6.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
41,782 |
|
|
|
474 |
|
|
|
4.54 |
% |
|
|
49,124 |
|
|
|
510 |
|
|
|
4.16 |
% |
Tax-exempt (1) |
|
|
1,011 |
|
|
|
20 |
|
|
|
7.91 |
% |
|
|
1,029 |
|
|
|
20 |
|
|
|
7.70 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
42,793 |
|
|
|
494 |
|
|
|
4.62 |
% |
|
|
50,153 |
|
|
|
530 |
|
|
|
4.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in banks |
|
|
630 |
|
|
|
12 |
|
|
|
7.36 |
% |
|
|
717 |
|
|
|
1 |
|
|
|
0.76 |
% |
Federal funds sold |
|
|
371 |
|
|
|
5 |
|
|
|
5.04 |
% |
|
|
902 |
|
|
|
9 |
|
|
|
3.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
464,429 |
|
|
|
7,934 |
|
|
|
6.70 |
% |
|
|
411,037 |
|
|
|
6,439 |
|
|
|
6.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reserve for loan losses |
|
|
(4,515 |
) |
|
|
|
|
|
|
|
|
|
|
(4,362 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
16,526 |
|
|
|
|
|
|
|
|
|
|
|
18,146 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment, net |
|
|
7,920 |
|
|
|
|
|
|
|
|
|
|
|
8,459 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
15,601 |
|
|
|
|
|
|
|
|
|
|
|
15,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
499,961 |
|
|
|
|
|
|
|
|
|
|
$ |
448,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
82,615 |
|
|
|
|
|
|
|
|
|
|
$ |
90,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
64,439 |
|
|
|
74 |
|
|
|
1.91 |
% |
|
|
94,864 |
|
|
|
216 |
|
|
|
2.16 |
% |
Money market accounts |
|
|
34,498 |
|
|
|
120 |
|
|
|
1.38 |
% |
|
|
53,169 |
|
|
|
190 |
|
|
|
1.42 |
% |
Premium money market accounts |
|
|
54,173 |
|
|
|
554 |
|
|
|
4.06 |
% |
|
|
5,278 |
|
|
|
42 |
|
|
|
3.12 |
% |
Savings accounts |
|
|
36,702 |
|
|
|
34 |
|
|
|
0.37 |
% |
|
|
41,868 |
|
|
|
34 |
|
|
|
0.32 |
% |
Time deposits |
|
|
126,358 |
|
|
|
1,355 |
|
|
|
4.25 |
% |
|
|
100,263 |
|
|
|
795 |
|
|
|
3.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
316,170 |
|
|
|
2,137 |
|
|
|
2.68 |
% |
|
|
295,442 |
|
|
|
1,277 |
|
|
|
1.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold
under agreements to repurchase |
|
|
13,653 |
|
|
|
185 |
|
|
|
5.37 |
% |
|
|
2,946 |
|
|
|
31 |
|
|
|
4.22 |
% |
Federal Home Loan Bank advances |
|
|
42,293 |
|
|
|
550 |
|
|
|
5.08 |
% |
|
|
18,804 |
|
|
|
204 |
|
|
|
4.25 |
% |
Capital Securities of Subsidiary Trusts |
|
|
4,572 |
|
|
|
100 |
|
|
|
8.60 |
% |
|
|
4,124 |
|
|
|
72 |
|
|
|
6.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
376,688 |
|
|
|
2,972 |
|
|
|
3.12 |
% |
|
|
321,316 |
|
|
|
1,584 |
|
|
|
1.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
3,020 |
|
|
|
|
|
|
|
|
|
|
|
2,377 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
37,638 |
|
|
|
|
|
|
|
|
|
|
|
34,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity |
|
$ |
499,961 |
|
|
|
|
|
|
|
|
|
|
$ |
448,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
$ |
4,962 |
|
|
|
3.58 |
% |
|
|
|
|
|
$ |
4,855 |
|
|
|
4.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense as a percent of average
earning assets |
|
|
|
|
|
|
|
|
|
|
2.53 |
% |
|
|
|
|
|
|
|
|
|
|
1.53 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
4.17 |
% |
|
|
|
|
|
|
|
|
|
|
4.63 |
% |
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax-equivalent basis using a federal
tax rate of 34%. |
19
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest income and
interest expense of the Company for the three-month periods ended September 30, 2006 and
2005. 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 the prior period rate) and changes in rate (change in rate multiplied by the
prior period volume). Changes which cannot be separately identified are allocated
proportionately between changes in volume and changes in rate.
RATE / VOLUME VARIANCE
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 Compared to |
|
|
|
Three Months Ended September 30, 2005 |
|
|
|
|
|
|
|
Due to |
|
|
Due to |
|
|
|
Change |
|
|
Volume |
|
|
Rate |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Loans; taxable |
|
$ |
1,503 |
|
|
$ |
947 |
|
|
$ |
556 |
|
Loans; tax-exempt (1) |
|
|
20 |
|
|
|
22 |
|
|
|
(2 |
) |
Securities; taxable |
|
|
(37 |
) |
|
|
(53 |
) |
|
|
16 |
|
Securities; tax-exempt (1) |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Deposits in banks |
|
|
11 |
|
|
|
|
|
|
|
11 |
|
Federal funds sold |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
1,494 |
|
|
|
911 |
|
|
|
583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
(141 |
) |
|
|
(157 |
) |
|
|
16 |
|
Money market accounts |
|
|
(70 |
) |
|
|
(67 |
) |
|
|
(3 |
) |
Premium money market accounts |
|
|
512 |
|
|
|
385 |
|
|
|
127 |
|
Savings accounts |
|
|
|
|
|
|
(4 |
) |
|
|
4 |
|
Time deposits |
|
|
560 |
|
|
|
207 |
|
|
|
353 |
|
Federal funds purchased and securities
sold under agreements to repurchase |
|
|
154 |
|
|
|
114 |
|
|
|
40 |
|
Federal Home Loan Bank Advances |
|
|
345 |
|
|
|
255 |
|
|
|
90 |
|
Capital Securities of Subsidiary Trusts |
|
|
28 |
|
|
|
8 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
1,388 |
|
|
|
741 |
|
|
|
647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
106 |
|
|
$ |
170 |
|
|
$ |
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax-equivalent basis using a
federal tax rate of 34%. |
The monitoring and management of net interest income is the responsibility of the
Banks Asset and Liability Management Committee (ALCO). ALCO meets no less than once a
month, and is comprised of the Banks senior management.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $60,000 and $139,000 for the
three months ended September 30, 2006 and 2005, respectively. The respective amounts of the
provision for loan losses were determined 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.
There can be no assurances, however, that future losses will not exceed estimated amounts,
or that additional provisions for loan losses will not be required in future periods. Please
refer to the section entitled Critical Accounting Policies: Allowance for Loan Losses
above for an explanation of the allowance methodology.
20
TOTAL OTHER INCOME. Total other income decreased by $43,000 or 2.9% from $1.46 million for
the three months ended September 30, 2005 to $1.42 million for the three months ended
September 30, 2006. Wealth management income decreased $95,000 or 22.0% to $337,000 for the
September 2006 quarter compared with $432,000 for the same quarter one year earlier. During
the third quarter of 2005, WMS recognized approximately $50,000 in estate settlement fees
that were largely absent during the third quarter in 2006. Management seeks to increase the
level of its future fee income from WMS through the increase of its market share within the
Companys marketplace. WMS fees are projected to show moderate growth through the remainder
of 2006 and 2007. Service charges on deposit accounts increased $29,000 or 4.2% to $704,000
for the quarter ended September 30, 2006, compared with $675,000 for the same quarter one
year earlier. Income on other service charges, commission and fees increased $24,000 or 6.7%
to $378,000 for the quarter ended September 30, 2006 compared with $354,000 one year earlier
primarily due to increased income from VISA check card fees.
TOTAL OTHER EXPENSES. Total other expenses increased 4.2% or $164,000 to $4.13 million
for the three months ended September 30, 2006, compared with $3.96 million for the three
months ended September 30, 2005. Salary and benefits expenses increased $162,000, or 7.7%
from the September 2005 quarter to the September 2006 quarter. Annual salary and promotion
increases and payroll taxes were the primary cause for the growth in salary and benefits
expense. Net occupancy expenses decreased $4,000 or 1.7% from the September 2005 quarter to
the September 2006 quarter. Furniture and equipment expenses increased $18,000 or 5.9% over
the same time period, primarily reflecting the increase in computer software depreciation.
Other operating expenses decreased $12,000 or 0.9%.
Management expects the costs associated with Sarbanes-Oxley compliance in connection with
implementing the requirements of Section 404 regarding Managements Report on Internal
Controls to decrease during the remainder of 2006. The aggregate market value of the
Companys common stock held by non-affiliates was approximately $68 million as of June 30,
2006. Therefore, the Company will not be required to comply with Section 404 until the year
ending December 31, 2007. The Bank expects 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 provide. The Bank projects to increase
staff from its September 30, 2006 level of 137 full-time equivalent personnel by
approximately five additional full-time equivalent
personnel during the remainder of 2006 at an approximate additional salary and benefit cost
of $50,000.
COMPARISION OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER
30, 2005
NET INCOME. Net income for the nine months ended September 30, 2006 was $4.17 million or
$1.16 per diluted share compared with $4.03 million or $1.13 per diluted share for the nine
months ended September 30, 2005. The growth in net income was primarily due to a $343,000 or
2.4% increase in net interest income and a $427,000 or 10.7% increase in total other income,
which includes a $250,000 pre-tax gain resulting from the cancellation of a property usage
contract, largely offset by a $747,000 or 6.3% increase in total other expenses, which
includes a loss of $83,000 on the sale of investment securities.
NET INTEREST INCOME. Net interest income increased $343,000 or 2.4% to $14.54 million for
the nine months ended September 30, 2006 compared with $14.20 million for the nine months
ended September 30, 2005. The increase in net interest income resulted from increased
interest and fee income on loans as a result of the increase in volume of loans outstanding.
The net
21
interest margin, computed on a tax-equivalent basis, for the first nine months of
2006 was 4.29%, compared with 4.63% for the same period one year earlier. The primary
reasons for the decrease in the net interest margin are the impact of the flattening yield
curve coupled with competitive pressures on the pricing of interest-earning assets and
interest-bearing liabilities. Average interest-earning assets grew 10.5% to $451.6 million
for the first nine months of 2006 compared with $408.6 million for the first nine months of
2005. The yield on average interest-earning assets was 6.54% for the first nine months of
2006 compared with 6.07% for the first nine months of 2005.
Total interest income increased $3.59 million or 19.3% to $22.19 million for the nine months
ended September 30, 2006, compared with $18.61 million for the nine months ended September
30, 2005, as a result of the growth in the volume of interest-earning assets and in the
average rate of interest earned. Interest and dividends on investment securities decreased
$177,000 or 10.9%. Investment securities averaged $44.3 million for the first nine months of
2006 compared with $53.8 million for the same period one year earlier. The yield on
investment securities was 4.42% on a tax-equivalent basis for the first nine months of 2006,
compared with 4.08% for the first nine months of 2005. Interest and fees on loans increased
$3.77 million or 22.3% to $20.70 million for the first nine months of 2006 compared with
$16.93 million for the same period one year earlier. Average loans outstanding totaled
$406.0 million and earned 6.78% on a tax-equivalent basis for the nine months ended
September 30, 2006, compared with $352.4 million and 6.40%, respectively, for the nine
months ended September 30, 2005.
Total interest expense increased $3.24 million or 73.7% to $7.65 million for the nine months
ended September 30, 2006 from $4.40 million for the nine months ended September 30, 2005.
Average interest-bearing liabilities grew 11.6% to $360.4 million for the first nine months
of 2006 compared with $322.9 million for the first nine months of 2005, while the average
cost on interest-bearing liabilities increased to 2.83% from 1.82% for the same respective
time periods. The increase in total interest expense and the average cost of
interest-bearing liabilities is primarily due to the overall increase in short-term interest
rates, as well as significantly increased balances in higher cost funding sources such as
the premium interest rate money market account, time deposits and FHLB of Atlanta
borrowings. The average balance for the premium interest rate money market account was $48.5
million with an average cost of 3.95% for the nine months ended September 30, 2006; this
product was first introduced in September 2005, and as result, the
relative impact on average deposit balances was $2.3 million with an average cost of 3.09%
for the nine months ended September 30, 2005. Average time deposit balances for the first
nine months of 2006 were $115.7 million at an average cost of 3.89%, compared with $92.3
million at an average cost of 3.01% for the same period one year earlier. Interest-bearing
NOW account deposits averaged $68.4 million at an average cost of 0.52% for the nine months
ended September 30, 2006, compared with $101.9 million at an average cost of 0.97% for the
nine months ended September 30, 2005. Other interest-bearing money market deposits averaged
$38.0 million at an average cost of 1.38% for the nine months ended September 30, 2006,
compared with $58.1 million at an average cost of 1.24% for the same period one year
earlier. Savings account deposits averaged $37.8 million at an average cost of 0.34% for the
first nine months of 2006, compared with $42.5 million at an average cost of 0.33% for the
first nine months of 2005. Federal funds purchased averaged $9.8 million at an average cost
of 5.34% for the nine months ended September 30, 2006 compared with $2.4 million at an
average cost of 3.30% for the first nine months of 2005. Average FHLB of Atlanta advances
were $38.0 million at an average cost of 4.97% for the first nine months of 2006, and $19.3
million at an average cost of 4.27% for the same period one year earlier.
The following table sets forth information relating to the Companys average balance sheet
and reflects the average yield on assets and the average annualized cost of liabilities for
the nine- month periods ended September 30, 2006 and 2005. These yields and costs are
derived by annualizing the income or expense for the periods presented, and dividing the
product of the annualization by the respective average daily balances of assets and
liabilities for the periods presented.
22
AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
Nine Months Ended September 30, 2005 |
|
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
Average |
|
|
Income/ |
|
|
Average |
|
|
|
Balances |
|
|
Expense |
|
|
Rate |
|
|
Balances |
|
|
Expense |
|
|
Rate |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
$ |
396,714 |
|
|
$ |
20,404 |
|
|
|
6.79 |
% |
|
$ |
345,089 |
|
|
$ |
16,674 |
|
|
|
6.38 |
% |
Tax-exempt (1) |
|
|
8,085 |
|
|
|
449 |
|
|
|
7.32 |
% |
|
|
7,147 |
|
|
|
388 |
|
|
|
7.16 |
% |
Nonaccrual |
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans |
|
|
405,977 |
|
|
|
20,853 |
|
|
|
6.78 |
% |
|
|
352,360 |
|
|
|
17,062 |
|
|
|
6.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
43,283 |
|
|
|
1,409 |
|
|
|
4.34 |
% |
|
|
52,742 |
|
|
|
1,586 |
|
|
|
4.01 |
% |
Tax-exempt (1) |
|
|
1,016 |
|
|
|
60 |
|
|
|
7.84 |
% |
|
|
1,023 |
|
|
|
59 |
|
|
|
7.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities |
|
|
44,299 |
|
|
|
1,469 |
|
|
|
4.42 |
% |
|
|
53,765 |
|
|
|
1,645 |
|
|
|
4.08 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in banks |
|
|
662 |
|
|
|
23 |
|
|
|
4.61 |
% |
|
|
360 |
|
|
|
4 |
|
|
|
1.57 |
% |
Federal funds sold |
|
|
645 |
|
|
|
22 |
|
|
|
4.53 |
% |
|
|
2,114 |
|
|
|
46 |
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets |
|
|
451,583 |
|
|
|
22,367 |
|
|
|
6.54 |
% |
|
|
408,599 |
|
|
|
18,757 |
|
|
|
6.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reserve for loan losses |
|
|
(4,396 |
) |
|
|
|
|
|
|
|
|
|
|
(4,217 |
) |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
|
17,098 |
|
|
|
6.78 |
% |
|
|
|
|
|
|
16,890 |
|
|
|
|
|
|
|
|
|
Bank premises and equipment, net |
|
|
8,104 |
|
|
|
|
|
|
|
|
|
|
|
8,461 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
15,181 |
|
|
|
|
|
|
|
|
|
|
|
14,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
487,570 |
|
|
|
|
|
|
|
|
|
|
$ |
444,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
87,236 |
|
|
|
|
|
|
|
|
|
|
$ |
86,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
68,424 |
|
|
|
264 |
|
|
|
0.52 |
% |
|
|
101,888 |
|
|
|
739 |
|
|
|
0.97 |
% |
Money market accounts |
|
|
38,010 |
|
|
|
393 |
|
|
|
1.38 |
% |
|
|
58,093 |
|
|
|
540 |
|
|
|
1.24 |
% |
Premium money market accounts |
|
|
48,469 |
|
|
|
1,432 |
|
|
|
3.95 |
% |
|
|
2,303 |
|
|
|
53 |
|
|
|
3.09 |
% |
Savings accounts |
|
|
37,782 |
|
|
|
97 |
|
|
|
0.34 |
% |
|
|
42,495 |
|
|
|
105 |
|
|
|
0.33 |
% |
Time deposits |
|
|
115,695 |
|
|
|
3,368 |
|
|
|
3.89 |
% |
|
|
92,329 |
|
|
|
2,081 |
|
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
308,380 |
|
|
|
5,554 |
|
|
|
2.41 |
% |
|
|
297,108 |
|
|
|
3,518 |
|
|
|
1.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold
under agreements to repurchase |
|
|
9,752 |
|
|
|
389 |
|
|
|
5.34 |
% |
|
|
2,363 |
|
|
|
58 |
|
|
|
3.30 |
% |
Federal Home Loan Bank advances |
|
|
37,978 |
|
|
|
1,432 |
|
|
|
4.97 |
% |
|
|
19,337 |
|
|
|
626 |
|
|
|
4.27 |
% |
Capital Securities of Subsidiary Trusts |
|
|
4,275 |
|
|
|
273 |
|
|
|
8.43 |
% |
|
|
4,124 |
|
|
|
202 |
|
|
|
6.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
360,385 |
|
|
|
7,648 |
|
|
|
2.83 |
% |
|
|
322,932 |
|
|
|
4,404 |
|
|
|
1.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
2,759 |
|
|
|
|
|
|
|
|
|
|
|
2,022 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
37,190 |
|
|
|
|
|
|
|
|
|
|
|
33,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity |
|
$ |
487,570 |
|
|
|
|
|
|
|
|
|
|
$ |
444,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
$ |
14,719 |
|
|
|
3.72 |
% |
|
|
|
|
|
$ |
14,353 |
|
|
|
4.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense as a percent of average earning assets |
|
|
|
|
|
|
|
|
|
|
2.26 |
% |
|
|
|
|
|
|
|
|
|
|
1.44 |
% |
Net interest margin |
|
|
|
|
|
|
|
|
|
|
4.29 |
% |
|
|
|
|
|
|
|
|
|
|
4.63 |
% |
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax-equivalent basis using a federal tax rate of 34%. |
23
RATE/VOLUME ANALYSIS
The following table sets forth certain information regarding changes in interest income and
interest expense of the Company for the nine-month periods ended September 30, 2006 and
2005. 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 the prior period rate) and changes in rate (change in rate multiplied by the
prior period volume). Changes which cannot be separately identified are allocated
proportionately between changes in volume and changes in rate.
RATE / VOLUME VARIANCE
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 Compared to |
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
Due to |
|
|
Due to |
|
|
|
Change |
|
|
Volume |
|
|
Rate |
|
INTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Loans; taxable |
|
$ |
3,730 |
|
|
$ |
2,407 |
|
|
$ |
1,323 |
|
Loans; tax-exempt (1) |
|
|
61 |
|
|
|
51 |
|
|
|
10 |
|
Securities; taxable |
|
|
(177 |
) |
|
|
(241 |
) |
|
|
64 |
|
Securities; tax-exempt (1) |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Deposits in banks |
|
|
19 |
|
|
|
4 |
|
|
|
15 |
|
Federal funds sold |
|
|
(24 |
) |
|
|
(32 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income |
|
|
3,610 |
|
|
|
2,189 |
|
|
|
1,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts |
|
|
(475 |
) |
|
|
(487 |
) |
|
|
12 |
|
Money market accounts |
|
|
(147 |
) |
|
|
(187 |
) |
|
|
40 |
|
Premium money market accounts |
|
|
1,379 |
|
|
|
1,069 |
|
|
|
310 |
|
Savings accounts |
|
|
(8 |
) |
|
|
(12 |
) |
|
|
4 |
|
Time deposits |
|
|
1,287 |
|
|
|
527 |
|
|
|
760 |
|
Federal funds purchased and securities
sold under agreements to repurchase |
|
|
331 |
|
|
|
182 |
|
|
|
149 |
|
Federal Home Loan Bank Advances |
|
|
806 |
|
|
|
604 |
|
|
|
202 |
|
Capital Securities of Subsidiary Trusts |
|
|
71 |
|
|
|
7 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense |
|
|
3,244 |
|
|
|
1,703 |
|
|
|
1,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income |
|
$ |
366 |
|
|
$ |
486 |
|
|
$ |
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax-equivalent basis using a
federal tax rate of 34%. |
The monitoring and management of net interest income is the responsibility of the
Banks Asset and Liability Management Committee (ALCO). ALCO meets no less than once a
month, and is comprised of the Banks senior management.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $360,000 and $473,000 for the
nine months ended September 30, 2006 and 2005, respectively. The respective amounts of the
provision for loan losses were determined 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. There can be no
assurances, however, that future losses will not exceed estimated amounts, or that
additional provisions for loan losses will not be required in future periods.
24
TOTAL OTHER INCOME. Total other income increased by $427,000 or 10.7% from $3.99 million
for the nine months ended September 30, 2005 to $4.42 million for the nine months ended
September 30, 2006, primarily due to a $250,000 pre-tax gain in the first quarter of 2006
resulting from the cancellation of a property usage contract. Wealth management income
decreased $33,000 to $1.00 million for the nine months ended September 30, 2006 compared
with $1.03 million for the same period one year earlier. Service charges on deposit accounts
increased $87,000, or 4.4% to $1.00 million for the nine months ended September 30, 2006,
compared with $2.06 million for the same nine-month period one year earlier. Income on other
service charges, commission and fees increased $124,000 or 12.6% to $1.10 million for the
nine months ended September 30, 2006 compared with $980,000 one year earlier primarily due
to increased income from VISA check card fees. During the first quarter of 2006,
the Bank entered into an agreement cancelling a property usage contract, as mentioned above,
for which the Bank received a one-time payment of $250,000, or approximately $165,000 net of
applicable income taxes.
TOTAL OTHER EXPENSES. Total other expenses increased 6.3% or $747,000 to $12.63 million for
the nine months ended September 30, 2006, compared with $11.88 million for the nine months
ended September 30, 2005. This increase in total other expenses includes a loss of $83,000
on the sale of securities during the quarter ended March 31, 2006. Salary and benefits
expenses increased $535,000, or 8.6% for the first nine months of 2006 compared with the
first nine months of 2005. Annual salary and promotion increases and payroll taxes were the
primary cause for the growth in salary and benefits expense. Net occupancy expenses
increased $36,000 or 5.1% from the first nine months of 2005 to the first nine months of
2006 primarily reflecting increases in branch office maintenance and repair. Furniture and
equipment expenses increased $61,000 or 6.4% over the same time period, primarily reflecting
the increase in computer hardware and software depreciation. Other operating expenses
increased $33,000 or 0.8%, primarily reflecting increases in marketing and data processing
expenses, as well as increased contributions to various community not-for-profit groups,
largely offset by decreased accounting fees associated with the delay in implementing
Section 404 of Sarbanes-Oxley until the year ending December 31, 2007.
COMPARISON OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005 FINANCIAL CONDITION
Assets totaled $494.0 million at September 30, 2006, an increase of 2.6% or $12.8 million
from $481.2 million at December 31, 2005. Balance sheet categories reflecting significant
changes include cash and due from banks, loans, deposits, federal funds purchased and FHLB
of Atlanta advances. Each of these categories is discussed below.
CASH AND DUE FROM BANKS. At September 30, 2006, cash and due from banks totaled $13.7
million, reflecting a decrease of $12.8 million from $26.6 million at December 31, 2005. The
decrease in cash and due from banks was the result of temporarily increasing the Banks
deposits with the Federal Reserve Bank of Richmond at December 31, 2005 in order to satisfy
reserve requirements.
LOANS. Net loans were $413.9 million at September 30, 2006, which is an increase of $32.8
million or 8.6% from $381.0 million at December 31, 2005. The growth in total loans is
primarily attributable to an increase of $16.4 million in mortgage loans collateralized by
non-residential real estate, an increase of $14.6 million in mortgage loans collateralized
by 1-to-4 family residential real estate, and an increase of $3.8 million in commercial and
industrial loans. The Banks loans are made primarily to customers located within the Banks
primary market area.
25
DEPOSITS. At September 30, 2006, total deposits were $395.2 million, reflecting an increase
of $3.6 million or 0.9% from $391.7 million at December 31, 2005. The growth was
attributable to growth in interest-bearing deposits, which increased $20.1 million, largely
offset by a $16.6 million decline in noninterest-bearing deposits. Included in the growth of
interest-bearing deposits was $15.7 million of brokered deposits. All brokered deposits are
individually less than $100,000, and approximately $5.7 million of brokered deposits
represent a reciprocal arrangement for Bank customers who desire FDIC insurance for deposits
above $100,000.
The Bank expects to increase its deposits during the remainder of 2006 and beyond through
the continued expansion of its branch network, as well as by offering a wide array of
value-added demand deposit products, and rate premiums on specific interest-bearing
deposits.
FEDERAL FUNDS PURCHASED and FEDERAL HOME LOAN ADVANCES. Federal funds purchased were $1.0
million at September 30, 2006, compared with $5.0 million at December 31, 2005. FHLB of
Atlanta advances were $48.0 million at September 30, 2006, compared with $42.0 million at
December 31, 2005. The $4.0 million decrease in federal funds purchased largely offset the
$6.0 million increase in FHLB of Atlanta advances.
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 loans that have suffered financial distress, to
determine if they should be placed on non-accrual status. Factors considered by management
include the estimated value of collateral, if any, and other resources of the borrower that may be available to
satisfy the delinquency. Non-performing assets totaled $1.73 million or 0.41% of total loans
at September 30, 2006, as compared with $195,000, or 0.05% of total loans at December 31,
2005, and $233,000, or 0.06% of total loans at September 30, 2005. The increase from
December 31, 2005 to September 30, 2006 was primarily due to the addition to non-performing
status of $1.04 million of loans to one borrower. Of the $1.04 million, approximately
$970,000 has a 75% federal government guarantee from the Small Business Administration.
The provision for loan losses was $360,000 for the first nine months of 2006 compared with
$473,000 for the first nine months of 2005.
There were two loans totaling $11,000 that are 90 days past due and accruing interest at
September 30, 2006 compared with $679,000 at December 31, 2005. There are no loans, other
than those disclosed above as either non-performing or impaired, where known information
about the borrower has caused management to have serious doubts about the borrowers ability
to repay the loan. There are also no other interest-bearing assets that would be subject to
disclosure as either non-performing or impaired if such interest-bearing assets were loans.
The largest concentrations of loans to borrowers engaged in similar activities are $16.6
million for hotel/motel/inn loans, and $15.1 million for land development loans. These two
loan concentrations represent 4.0% and 3.7% of total loans, respectively, at September 30,
2006.
CONTRACTUAL OBLIGATIONS
As of September 30, 2006, there have been no 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, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2006, 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, 2005.
26
CAPITAL RESOURCES
Total shareholders equity was $38.3 million at September 30, 2006 compared to $35.6 million
at December 31, 2005, an increase of $2.7 million, or 7.7%. Retained earnings increased by
$2.5 million or 9.7% from December 31, 2005 to September 30, 2006. The change in the
accumulated other comprehensive loss component of shareholders equity from December 31,
2005 to September 30, 2006 increased shareholders equity by $184,000.
There were repurchases of 1,900 shares of the Companys common stock at an average cost of
$22.74 per share during the first nine months of 2006. 14,680 shares of the Companys common
stock were newly issued at an average price of $5.43 in connection with stock option
exercises under the Companys stock compensation plans during the first nine months of 2006
for a total addition to shareholders equity of $80,000. In addition, 10,347 shares of the
Companys common stock were newly issued at an average price of $25.24 in connection with
restricted stock awards granted under the Companys stock compensation plans during the
first nine months of 2006 for a total addition to shareholders equity of $261,000.
In 2004, the Company implemented a dividend reinvestment and stock purchase plan (the
DRSPP) that allows participating shareholders to purchase additional shares of the
Companys common stock through automatic reinvestment of dividends or optional cash
investments at 100% of the market price of the common stock, which is the average of the
closing bid and asked quotations for a share of common stock on the day before the purchase
date for shares acquired directly from the Company under the DRSPP. For the quarter and nine
months ended September 30, 2006, the Company issued 1,535 and
5,047 newly outstanding shares, respectively, through the DRSPP at an average price of $24.50 and $24.63 for a total
addition to shareholders equity of $38,000 and $124,000, respectively. The Company has
236,529 shares available for issuance under the DRSPP at September 30, 2006.
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. Simultaneously, the trust used the proceeds of that
sale to purchase $4 million principal amount of the Companys Floating Rate Junior
Subordinated Deferrable Interest Debentures due 2032. Both the capital securities and the
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. The purpose of the
September 2006 issuance is to use the proceeds to redeem the existing capital securities
issued on March 26, 2002 on or about the five year anniversary of their initial
issuance in 2007. Because of changes in the market pricing of capital securities from 2002
to 2006, the September 2006 issuance is priced 190 basis points less than that of the
March 2002 issuance, and the repayment of the March 2002 issuance in March 2007 will
reduce the interest expense associated with the distribution on capital securities of
subsidiary trust by $76,000 annually.
Banking regulations have established minimum capital requirements for financial
institutions, including risk-based capital ratios and leveraged ratios. Under these
guidelines, the aggregate $8.0 million and $4.0 million of capital securities issued by the
Companys subsidiary trusts at September 30, 2006 and December 31, 2005, respectively, 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. At both September 30, 2006 and
December 31, 2005, the Company and the Bank exceed their minimum regulatory capital ratios.
The following table sets forth the regulatory capital ratio calculations for the Company:
27
REGULATORY CAPITAL RATIOS
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
Tier 1 Capital: |
|
|
|
|
|
|
|
|
Shareholders Equity |
|
$ |
38,326 |
|
|
$ |
35,579 |
|
Plus: Unrealized loss on securities available for sale |
|
|
472 |
|
|
|
636 |
|
Less: Intangible assets, net |
|
|
(31 |
) |
|
|
(32 |
) |
Plus: Company-obligated madatorily redeemable capital
securities |
|
|
8,000 |
|
|
|
4,000 |
|
|
|
|
|
|
|
|
Total Tier 1 Capital |
|
|
46,767 |
|
|
|
40,183 |
|
|
|
|
|
|
|
|
|
|
Tier 2 Capital: |
|
|
|
|
|
|
|
|
Allowable Allowance for Loan Losses |
|
|
4,513 |
|
|
|
4,238 |
|
|
|
|
|
|
|
|
Total Capital |
|
$ |
51,280 |
|
|
$ |
44,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Weighted Assets: |
|
$ |
395,671 |
|
|
$ |
371,193 |
|
|
|
|
|
|
|
|
|
|
Regulatory Capital Ratios: |
|
|
|
|
|
|
|
|
Leverage Ratio |
|
|
9.35 |
% |
|
|
8.66 |
% |
Tier 1 to Risk Weighted Assets |
|
|
11.82 |
% |
|
|
10.83 |
% |
Total Capital to Risk Weighted Assets |
|
|
12.96 |
% |
|
|
11.97 |
% |
LIQUIDITY
The primary sources of funds are deposits, repayment of loans, maturities of investments,
funds provided from operations and advances from the FHLB of Atlanta. While scheduled
repayments of loans and maturities of investment securities are predictable sources of
funds, deposit flows and loan repayments are greatly influenced by the general level of
interest rates, economic conditions and competition. 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. Cash and amounts due
from depository institutions, interest-bearing deposits in other banks, and federal funds
sold totaled $14.1 million at September 30, 2006 compared with $27.7 million at December 31,
2005. These assets provide the primary source of liquidity for the Bank. In addition,
management has designated the entire investment portfolio as available for sale, of which
approximately $23.6 million is unpledged and readily salable. Furthermore, the Bank has an
available line of credit with the FHLB of Atlanta with a borrowing limit of approximately
$138.2 million at September 30, 2006 to provide additional sources of liquidity, as well as
federal funds borrowing lines of credit with the Federal Reserve and various commercial
banks totaling approximately $51.9 million. At September 30, 2006, $48.0 million of the FHLB
of Atlanta line of credit and $1.0 million of federal funds borrowing lines of credit were
in use. Capital expenditures for the building of the Haymarket branch are estimated to be
$1.6 million to be paid over a period beginning in the fourth quarter of 2006.
The following table sets forth information relating to the Companys sources of liquidity
and the outstanding commitments for use of liquidity at September 30, 2006 and December 31,
2005. The liquidity coverage ratio is derived by dividing the total sources of liquidity by
the outstanding commitments for use of liquidity.
28
LIQUIDITY SOURCES AND USES
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
December 31, 2005 |
|
|
|
Total |
|
|
In Use |
|
|
Available |
|
|
Total |
|
|
In Use |
|
|
Available |
|
Sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds borrowing lines of credit |
|
$ |
51,920 |
|
|
$ |
1,026 |
|
|
$ |
50,894 |
|
|
$ |
52,020 |
|
|
$ |
5,000 |
|
|
$ |
47,020 |
|
Federal Home Loan Bank advances |
|
|
138,218 |
|
|
|
48,000 |
|
|
|
90,218 |
|
|
|
106,420 |
|
|
|
42,000 |
|
|
|
64,420 |
|
Federal funds sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
493 |
|
Securities, available for sale and unpledged
at fair value |
|
|
|
|
|
|
|
|
|
|
23,575 |
|
|
|
|
|
|
|
|
|
|
|
27,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term funding sources |
|
$ |
190,138 |
|
|
$ |
49,026 |
|
|
$ |
164,687 |
|
|
$ |
158,440 |
|
|
$ |
47,000 |
|
|
$ |
139,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments and
lending lines of credit |
|
|
|
|
|
|
|
|
|
$ |
115,363 |
|
|
|
|
|
|
|
|
|
|
$ |
106,542 |
|
Letters of credit |
|
|
|
|
|
|
|
|
|
|
9,974 |
|
|
|
|
|
|
|
|
|
|
|
5,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential short-term funding uses |
|
|
|
|
|
|
|
|
|
$ |
125,337 |
|
|
|
|
|
|
|
|
|
|
$ |
112,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of short-term funding sources to
potential short-term funding uses |
|
|
|
|
|
|
|
|
|
|
131.4 |
% |
|
|
|
|
|
|
|
|
|
|
123.7 |
% |
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 liquidity are deposits,
loan and investment repayments, and securities available for sale. The Banks primary
external source of liquidity is advances from the FHLB of Atlanta.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 expresses the SEC staffs views regarding the process
of quantifying financial statement misstatements. These interpretations were issued to
address diversity in practice and the potential under current practice for the build up of
improper amounts on the balance sheet. SAB 108 expresses the SEC staffs view that a
registrants materiality evaluation of an identified unadjusted error should quantify the
effects of the error on each financial statement and related financial statement disclosures
and that prior year misstatements should be considered in quantifying misstatements in
current year financial statements. SAB 108 also states that correcting prior year financial
statements for immaterial errors would not require previously filed reports to be amended.
Such correction may be made the next time the registrant files the prior year financial
statements. Registrants electing not to restate prior periods should reflect the effects of
initially applying the guidance in SAB 108 in their annual financial statements covering the
first fiscal year ending after November 15, 2006. The cumulative effect of the initial
application should be reported in the carrying amounts of assets and liabilities as of the
beginning of that fiscal year and the offsetting adjustment should be made to the opening
balance of retained earnings for that year. Registrants should disclose the nature and
amount of each individual error being corrected in the cumulative adjustment. The
disclosure should also
include when and how each error arose and the fact that the errors had previously been
considered immaterial. The SEC staff encourages early application of the guidance in SAB
108 for interim periods of the first fiscal year ending after November 15, 2006. The
Company does not expect the implementation of SAB 108 to have a material impact on its
financial statements.
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments
an amendment of FASB Statements No. 133 and 140 (SFAS 155). SFAS 155 permits fair
value measurement of any hybrid financial instrument that contains an embedded derivative
that
29
otherwise would require bifurcation. SFAS 155 also clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS 133. It establishes a
requirement to evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that contain an
embedded derivative requiring bifurcation. SFAS 155 also clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives. Finally, SFAS 155
amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest other than
another derivative financial instrument. SFAS 155 is effective for all financial
instruments acquired or issued after the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Company does not expect the implementation of SFAS 155
to have a material impact on its financial statements.
In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156,
Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140
(SFAS 156). SFAS 156 requires an entity to recognize a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering
into certain servicing contracts. SFAS 156 also requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair value, if
practicable. SFAS 156 permits an entity to choose between the amortization and fair value
methods for subsequent measurements. At initial adoption, SFAS 156 permits a one-time
reclassification of available for sale securities to trading securities by entities with
recognized servicing rights. SFAS 156 also requires separate presentation of servicing
assets and servicing liabilities subsequently measured at fair value in the statement of
financial position and additional disclosures for all separately recognized servicing assets
and servicing liabilities. SFAS 156 is effective as of the beginning of an entitys first
fiscal year that begins after September 15, 2006. The Company does not expect the
implementation of SFAS 156 to have a material impact on its financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does not require any new fair value
measurements but may change current practice for some entities. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those years. The Company does not expect the implementation of SFAS 157 to
have a material impact on its financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an
amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires an
employer to recognize the over-funded or under-funded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income. The funded status of a benefit plan will be measured as the
difference between plan assets at fair value and the benefit obligation. For a pension
plan, the benefit obligation is the projected benefit obligation. For any other
postretirement plan, the benefit obligation is the accumulated postretirement benefit
obligation. SFAS 158 also requires an employer to measure the funded status of a plan as of
the date of its year-end statement of financial position. The Statement also requires
additional disclosure in the notes to financial statements about certain effects on net
periodic benefit cost for the next fiscal year that arise from delayed recognition of the
gains or losses, prior service costs or credits, and transition asset or obligation. The
Company is required to initially recognize the funded status of a defined benefit
postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after December 15,
2006. The requirement to measure plan assets and benefit obligations as of the date of the
employers fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. The impact on the Companys accumulated other comprehensive
income (loss) is currently projected to be a loss of approximately $1.75 million.
30
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes: An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial statements in
accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement
principles for the financial statement recognition and measurement of tax positions taken or
expected to be taken on a tax return. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company does not expect the implementation of FIN 48 to have a
material impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2005.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures that is designed to
ensure that material information is accumulated and communicated to management, including
the Companys chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. As required, management, with the
participation of the Companys chief executive officer and chief financial officer,
evaluated the effectiveness of the design and operation of the Companys disclosure controls
and procedures as of the end of the period covered by this report. Based on this evaluation,
the Companys chief executive officer and chief financial officer concluded that the
Companys disclosure controls and procedures were operating effectively to ensure that
information required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized,
and reported within the time periods specified in the SECs rules and forms.
Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that the Companys disclosure controls and procedures will detect
or uncover every situation involving the failure of persons within the Company or its
subsidiary to disclose material information otherwise required to be set forth in the
Companys periodic reports.
The Companys management is also responsible for establishing and maintaining adequate
internal control over financial reporting to 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. There were no changes
in the Companys internal control over financial reporting during the quarter ended
September 30, 2006 that have materially affected, or are reasonably likely to materially
affect, the Companys 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 that, in the opinion of management, may materially
impact the financial condition of either company.
31
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors faced by the Company from those
disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Average |
|
Total Number of |
|
|
|
|
Number of |
|
Price |
|
Shares Purchased as |
|
Maximum Number of |
|
|
Shares |
|
Paid per |
|
Part of Publicly |
|
Shares that May Yet Be |
|
|
Purchased |
|
Share |
|
Announced Plan |
|
Purchased Under the Plan |
July 1 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
206,927 |
|
August 1 31, 2006 |
|
|
100 |
|
|
$ |
21.99 |
|
|
|
100 |
|
|
|
206,827 |
|
September 1 30, 2006 |
|
|
1,800 |
|
|
$ |
22.78 |
|
|
|
1,800 |
|
|
|
205,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total |
|
|
1,900 |
|
|
|
|
|
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
In September 1998, the Company announced an open market buyback program for its common
stock. Initially, the plan authorized the Company to repurchase up to 73,672 shares of its
common stock through December 31, 1999. Periodically, the Board resets the amount of shares
authorized to be repurchased during the year under the buyback program. On May 20, 2004, the
Board authorized the Company to repurchase up to 264,325 shares (8% of the shares of common
stock outstanding on January 1, 2003) beginning January 1, 2003 and continuing until the
next Board reset, which occurred on January 19, 2006. The Company repurchased 51,977 shares
under the program from January 1, 2003 through December 31, 2005. On January 19, 2006, the
Board authorized the Company to repurchase up to 206,927 shares (6% of the shares of common
stock outstanding on January 1, 2006) beginning January 1, 2006 and continuing until the
next Board reset. 1,900 shares were repurchased under the program during the quarter ended
September 30, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
32
ITEM 6. EXHIBITS
3.1 |
|
Articles of Incorporation of Fauquier Bankshares, Inc., as amended,
incorporated by reference to Exhibit 3(i) to registration statement on Form 10 filed
April 16, 1999 |
|
3.2 |
|
Amended and Restated Bylaws of Fauquier Bankshares, Inc., incorporated
by reference to Exhibit 3.2 to Form 8-K filed March 22, 2006 |
|
|
|
Certain instruments relating to capital securities not being registered have
been omitted in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The
registrant will furnish a copy of any such instrument to the Securities and Exchange
Commission upon its request. |
|
11 |
|
Refer to Part I, Item 1, Footnote 5 to the Consolidated Financial Statements |
|
31.1 |
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) |
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31.2 |
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) |
|
32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer |
|
32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer |
33
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.
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FAUQUIER BANKSHARES, INC.
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(Registrant) |
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Date: November 10, 2006
|
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/s/ Randy K. Ferrell |
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Randy K. Ferrell |
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President and Chief Executive Officer |
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(principal executive officer) |
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Date: November 10, 2006
|
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/s/ Eric P. Graap |
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Eric P. Graap Senior |
|
|
|
|
Vice President and Chief Financial Officer |
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|
|
|
(principal financial and accounting officer) |
|
|
34