e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File No.:
000-25805
Fauquier Bankshares,
Inc.
(Exact name of registrant as
specified in its charter)
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Virginia
(State or other jurisdiction
of
incorporation or organization)
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54-1288193
(I.R.S. Employer
Identification No.)
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10 Courthouse Square, Warrenton, Virginia
(Address of principal
executive offices)
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20186
(Zip Code)
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(540) 347-2700
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $3.13 per share
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The NASDAQ Stock Market LLC
(NASDAQ Capital Market)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark if the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act.) Yes o No þ
The aggregate market value of the registrants common
shares held by non-affiliates of the registrant,
based upon the closing sale price of its common stock on the
NASDAQ Capital Market on June 30, 2008, was
$76.6 million. Shares held by each executive officer,
director and holder of 10% or more of the registrants
outstanding common stock have been excluded as shares held by
affiliates. Such determination of affiliate status is not a
conclusive determination for other purposes.
The registrant had 3,592,057 shares of common stock outstanding
as of March 10, 2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2009
Annual Meeting of Shareholders to be held on May 19, 2009
are incorporated by reference into Part III of this
Form 10-K.
PART I
GENERAL
Fauquier Bankshares, Inc. (the Company) was
incorporated under the laws of the Commonwealth of Virginia on
January 13, 1984. The Company is a registered bank holding
company and owns all of the voting shares of The Fauquier Bank
(the Bank). The Company engages in its business
through the Bank, a Virginia state-chartered bank that commenced
operations in 1902. The Company has no significant operations
other than owning the stock of the Bank. The Company had issued
and outstanding 3,564,317 shares of common stock, par value
$3.13 per share, held by approximately 432 holders of record on
December 31, 2008. The Bank has eight full service branch
offices located in the Virginia communities of Warrenton,
Catlett, The Plains, Sudley Road-Manassas, Old Town-Manassas,
New Baltimore and Bealeton. The executive offices of the Company
and the main office of the Bank are located at 10 Courthouse
Square, Warrenton, Virginia 20186. The Bank has leased
properties in Bristow, Virginia and Haymarket, Virginia, where
it plans to build its ninth and tenth full-service branch
offices, scheduled to open during 2009 and 2010, respectively.
THE
FAUQUIER BANK
The Banks general market area principally includes
Fauquier County, western Prince William County, and neighboring
communities and is located approximately fifty (50) miles
southwest of Washington, D.C. The Bank provides a range of
consumer and commercial banking services to individuals,
businesses and industries. The deposits of the Bank are insured
up to applicable limits by the Deposit Insurance Fund of the
Federal Deposit Insurance Corporation (FDIC). The
basic services offered by the Bank include: demand interest
bearing and non-interest bearing accounts, money market deposit
accounts, NOW accounts, time deposits, safe deposit services,
credit cards, cash management, direct deposits, notary services,
night depository, travelers checks, cashiers checks,
domestic collections, savings bonds, bank drafts, automated
teller services, drive-in tellers, internet banking, telephone
banking, and banking by mail. In addition, the Bank makes
secured and unsecured commercial and real estate loans, issues
stand-by letters of credit and grants available credit for
installment, unsecured and secured personal loans, residential
mortgages and home equity loans, as well as automobile and other
types of consumer financing. The Bank provides automated teller
machine (ATM) cards, as a part of the Star, NYCE,
and Plus ATM networks, thereby permitting customers to utilize
the convenience of larger ATM networks.
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. During 2008,
assets managed by WMS decreased by $55.2 million in market
value to $249.5 million, or 18.1%, when compared with 2007,
with revenue decreasing from $1.41 million to
$1.29 million or 8.9%, over the same time period. This was
primarily due to the decline in valuations of common stock under
management which reflected the U.S. stock markets in
general. For example, from December 31, 2007 to
December 31, 2008, stocks measured in the
Standard & Poors 500 index declined by
approximately 38.5%.
The Bank, through its subsidiary Fauquier Bank Services, Inc.,
has equity ownership interests in Bankers Insurance, LLC, a
Virginia independent insurance company; Infinex Investments,
Inc., a full service broker/dealer; and Bankers
Title Shenandoah, LLC, a title insurance company. Bankers
Insurance consists of a consortium of 36 Virginia community bank
owners; Infinex is owned by 57 banks in various states; and
Bankers Title Shenandoah is owned by 17 Virginia community
banks. On April 30, 2008, the Banks ownership of
stock in BI Investments, LLC was exchanged for Infinex stock as
part of a merger.
The revenues of the Bank are primarily derived from interest on,
and fees received in connection with, real estate and other
loans, and from interest and dividends from investment and
mortgage-backed securities, and short-term investments. The
principal sources of funds for the Banks lending
activities are its deposits, repayment of loans, the sale and
maturity of investment securities, and borrowings from the
Federal Home Loan Bank (FHLB) of Atlanta. Additional
revenues are derived from fees for deposit-related and
WMS-related services. The Banks principal expenses are the
interest paid on deposits and operating and general
administrative expenses.
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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 (SCC).
Interest rates on competing investments and general market rates
of interest influence deposit flows and costs of funds. Lending
activities are affected by the demand for financing of real
estate and other types of loans, which in turn is affected by
the interest rates at which such financing may be offered and
other factors affecting local demand and availability of funds.
The Bank faces strong competition in the attraction of deposits
(its primary source of lendable funds) and in the origination of
loans. See Competition below.
As of December 31, 2008, the Company had total consolidated
assets of $514.5 million, total loans net of allowance for
loan losses of $434.7 million, total consolidated deposits
of $400.3 million, and total consolidated
shareholders equity of $41.5 million.
LENDING
ACTIVITIES
The Bank offers a range of lending services, including real
estate, consumer and commercial loans, to individuals as well as
small-to-medium
sized businesses and other organizations that are located in or
conduct a substantial portion of their business in the
Banks market area. The Banks total loans, net of
allowance, at December 31, 2008 were $434.7 million,
or 84.5% of total assets. The interest rates charged on loans
vary with the degree of risk, maturity, and amount of the loan,
and are further subject to competitive pressures, money market
rates, availability of funds and government regulations. The
Bank has no foreign loans,
sub-prime
loans or loans for highly leveraged transactions.
The Banks general market area for lending consists of
Fauquier and Prince William Counties, Virginia and the
neighboring communities. There is no assurance that this area
will experience economic growth. Adverse conditions in any one
or more of the industries operating in Fauquier or Prince
William Counties, a slow-down in general economic conditions,
and/or
declines in the market value of local commercial
and/or
residential real estate could have an adverse effect on the
Company and the Bank.
The Banks loans are concentrated in three major areas:
real estate loans, consumer loans, and commercial loans.
Approximately 9.1% and 3.4% of the Banks loan portfolio at
December 31, 2008 consisted of commercial and consumer
loans, respectively. The majority of the Banks loans are
made on a secured basis. As of December 31, 2008,
approximately 85.5% of the loan portfolio consisted of loans
secured by mortgages on real estate. Income from loans decreased
7.7% to $26.68 million for 2008 compared with
$28.92 million for 2007 due to the decline in market
interest rates. No material part of the Banks business is
dependent upon a single or a few customers, and the loss of any
single customer would not have a materially adverse effect upon
the Banks business.
LOANS
SECURED BY REAL ESTATE
ONE TO FOUR (1-4) FAMILY RESIDENTIAL
LOANS. The Banks 1-4 family residential
mortgage loan portfolio primarily consists of conventional
loans, generally with fixed interest rates with 15 or
30 year terms, and balloon loans with fixed interest rates,
and 3, 5, 7, or
10-year
maturities but utilizing amortization schedules of 30 years
or less. As of December 31, 2008, the Banks 1-4
family residential loans amounted to $175.8 million, or
40.0% of the total loan portfolio. Substantially the Banks
entire single-family residential mortgage loans are secured by
properties located in the Banks service area. The Bank
requires private mortgage insurance if the principal amount of
the loan exceeds 80% of the value of the property held as
collateral.
CONSTRUCTION LOANS. The majority of the
Banks construction loans are made to individuals to
construct a primary residence. Such loans have a maximum term of
twelve months, a fixed rate of interest, and
loan-to-value
ratios of 80% or less of the appraised value upon completion.
The Bank requires that permanent financing, with the Bank or
some other lender, be in place prior to closing any construction
loan. Construction loans are generally considered to involve a
higher degree of credit risk than single-family residential
mortgage loans. The risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of
the propertys value at completion. The Bank also provides
construction loans and lines of credit to developers. Such loans
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generally have maximum
loan-to-value
ratios of 80% of the appraised value upon completion. The loans
are made with a fixed rate of interest. The majority of
construction loans are made to selected local developers for the
building of single-family dwellings on either a pre-sold or
speculative basis. The Bank limits the number of unsold units
under construction at one time. Loan proceeds are disbursed in
stages after inspections of the project indicate that such
disbursements are for costs already incurred and that have added
to the value of the project. Construction loans include loans to
developers to acquire the necessary land, develop the site and
construct the residential units. As of December 31, 2008,
the Banks construction loans totaled $38.0 million,
or 8.7% of the total loan portfolio.
COMMERCIAL REAL ESTATE LOANS. Loans secured by
commercial real estate comprised $160.4 million, or 36.5%
of total loans at December 31, 2008, and consist
principally of commercial loans for which real estate
constitutes a source of collateral. $96.2 million of
commercial real estate loans are owner-occupied. Commercial real
estate loans generally involve a greater degree of risk than
single-family residential mortgage loans because repayment of
commercial real estate loans may be more vulnerable to adverse
conditions in the real estate market or the economy.
CONSUMER
LOANS
The Banks consumer loan portfolio consists primarily of
loans to individuals for various consumer purposes, but includes
some business purpose loans that are payable on an installment
basis. The Bank offers a wide variety of consumer loans,
including installment loans, credit card loans, and other
secured and unsecured credit facilities. Approximately 82% of
these loans, on a dollar-value basis, are for terms of seven
years or less, and are secured by liens on motor vehicles of the
borrowers. An additional 3% of consumer loans are secured by
other personal assets of the borrower, and the remaining 15% are
made on an unsecured basis. Consumer loans are made at fixed and
variable rates, and are often based on up to a seven-year
amortization schedule. The consumer loan portfolio was
$16.0 million or 3.6% of total loans at December 31,
2008.
COMMERCIAL
LOANS
The Banks commercial loans include loans to individuals
and
small-to-medium
sized businesses located primarily in Fauquier and Prince
William Counties for working capital, equipment purchases, and
various other business purposes. Equipment or similar assets
secure approximately 85% of the Banks commercial loans, on
a dollar-value basis, and the remaining 15% of commercial loans
made on an unsecured basis. Commercial loans have variable or
fixed rates of interest. Commercial lines of credit are
typically granted on a one-year basis. Other commercial loans
with terms or amortization schedules longer than one year will
normally carry interest rates that vary with the prime lending
rate and other financial indices and will be payable in full in
three to five years.
Loan originations are derived from a number of sources,
including existing customers and borrowers, walk-in customers,
advertising, and direct solicitation by the Banks loan
officers. Certain credit risks are inherent in originating and
keeping loans on the Banks balance sheet. These include
interest rate and prepayment risks, risks resulting from
uncertainties in the future value of collateral, risks resulting
from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers. In particular,
longer maturities increase the risk that economic conditions
will change and adversely affect our ability to collect. The
Bank attempts to minimize loan losses through various means. In
particular, on larger credits, the Bank generally relies on the
cash flow of a debtor as the source of repayment and secondarily
on the value of the underlying collateral. In addition, the Bank
attempts to utilize shorter loan terms in order to reduce the
risk of a decline in the value of such collateral. The
commercial loan portfolio was $40.0 million or 9.1% of
total loans at December 31, 2008.
DEPOSIT
ACTIVITIES
Deposits are the major source of the Banks funds for
lending and other investment activities. The Bank considers its
regular savings, demand, NOW, premium NOW money market deposit
accounts, and non-brokered time deposits under $100,000 to be
core deposits. These accounts comprised approximately 79.5% of
the Banks total deposits at December 31, 2008.
Generally, the Bank attempts to maintain the rates paid on its
deposits at a competitive level. Time deposits of $100,000 and
over made up approximately 13.3% of the Banks total
deposits at December 31, 2008. During 2008, time deposits
of $100,000 and over generally paid interest at rates the same
or
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higher than certificates of less than $100,000. The majority of
the Banks deposits are generated from Fauquier and Prince
William Counties. Included in interest-bearing deposits at
December 31, 2008 were $37.4 million of brokered
deposits, or 9.3% of total deposits. All brokered deposits
represent a reciprocal arrangement for Bank customers who desire
FDIC insurance for deposits above current limits.
INVESTMENTS
The Bank invests a portion of its assets in
U.S. Government-sponsored corporation and agency
obligations, state, county and municipal obligations, corporate
obligations, mutual funds, FHLB stock and equity securities. The
Banks investments are managed in relation to loan demand
and deposit growth, and are generally used to provide for the
investment of excess funds at reduced yields and risks relative
to yields and risks of the loan portfolio, while providing
liquidity to fund increases in loan demand or to offset
fluctuations in deposits. The Bank does not currently engage in
any off-balance sheet hedging activities. The Banks total
investments, at fair value, were $37.8 million, or 7.4% of
total assets at December 31, 2008. During 2008, income from
investments totaled $1.49 million, consisting of
$1.83 million of interest and dividend income, and gain on
sale of investments of $88,000, partially offset by a loss of
$423,000 associated with recognition of other than temporary
impairment on Federal Home Loan Mortgage Corporation
(Freddie Mac) preferred stock.
GOVERNMENT
SUPERVISION AND REGULATION
GENERAL. Bank holding companies and banks are
extensively regulated under both federal and state law. The
following summary briefly addresses certain provisions of
federal and state laws that apply to the Company or the Bank.
This summary does not purport to be complete and is qualified in
its entirety by reference to the particular statutory or
regulatory provisions.
EFFECT OF GOVERNMENTAL MONETARY POLICIES. The
earnings and business of the Company and the Bank are affected
by the economic and monetary policies of various regulatory
authorities of the United States, especially the Federal
Reserve. The Federal Reserve, among other things, regulates the
supply of credit and money and setting interest rates in order
to influence general economic conditions within the United
States. The instruments of monetary policy employed by the
Federal Reserve for those purposes influence in various ways the
overall level of investments, loans, other extensions of
credits, and deposits, and the interest rates paid on
liabilities and received on assets. Federal Reserve monetary
policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to
do so in the future.
EMERGENCY ECONOMIC STABILIZATION ACT OF
2008. In response to recent unprecedented market
turmoil, the Emergency Economic Stabilization Act of 2008 (the
EESA) was enacted on October 3, 2008. The EESA
authorizes the Secretary of the U.S. Treasury (the
Treasury) to purchase up to $700 billion in
troubled assets from financial institutions under the Troubled
Asset Relief Program (TARP). The EESA increases the
maximum deposit insurance amount on certain deposit accounts
from $100,000 to $250,000 until December 31, 2009 and
removes the statutory limits on the FDIC ability to borrow from
the Treasury during this period. The FDIC may not take the
temporary increase in deposit insurance coverage into account
when setting assessments. The EESA allows financial institutions
to treat any loss on the preferred stock of the Federal National
Mortgage Association or Federal Home Loan Mortgage Corporation
as an ordinary loss for tax purposes.
Pursuant to his authority under EESA, the Secretary of the
Treasury has created the TARP Capital Purchase Program under
which the Treasury will invest up to $250 billion in senior
preferred stock of U.S. banks and savings associations or
their holding companies. Qualifying financial institutions may
issue senior preferred stock with a value equal to not less than
1% of risk-weighted assets and not more than the lesser of
$25 billion or 3% of risk-weighted assets. The Company,
after considerable analysis and deliberation, chose not to
participate in the Capital Purchase Program.
SARBANES-OXLEY ACT OF 2002. The Company is
subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended (the Exchange Act),
including the filing of annual, quarterly, and other reports
with the Securities and Exchange Commission (the
SEC). As an Exchange Act reporting company, the
Company is directly affected by the Sarbanes-Oxley Act of 2002
(the SOX), which is aimed at improving corporate
governance, internal controls and reporting procedures. The
Company is complying with applicable SEC
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and other rules and regulations implemented pursuant to the SOX
and intends to comply with any applicable rules and regulations
implemented in the future.
FINANCIAL SERVICES MODERNIZATION
LEGISLATION. The Gramm-Leach-Bliley Financial
Services Modernization Act of 1999 (the GLB Act) was
intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms
and other financial service providers under a financial
holding company structure. Under the GLB Act, bank holding
companies that are well-capitalized and well-managed and meet
other conditions can elect to become financial holding
companies. As financial holding companies, they and their
subsidiaries are permitted to acquire or engage in previously
impermissible activities such as insurance underwriting,
securities underwriting and distribution, travel agency
activities, insurance agency activities, merchant banking and
other activities that the Federal Reserve determines to be
financial in nature or complementary to these activities.
Financial holding companies continue to be subject to the
overall oversight and supervision of the Federal Reserve, but
the GLB Act applies the concept of functional regulation to the
activities conducted by subsidiaries. For example, insurance
activities would be subject to supervision and regulation by
state insurance authorities. Although the Company could qualify
to become a financial holding company under the GLB Act, it does
not contemplate seeking to do so unless it identifies
significant specific benefits from doing so. The GLB Act has not
had a material effect on the Company operations. However, to the
extent that the GLB Act permits banks, securities firms and
insurance companies to affiliate with each other, the financial
services industry may have experienced further consolidation
resulting in a growing number of financial institutions that
offer a wider variety of financial services than the Company
currently offers and that can aggressively compete in the
markets the Company currently serves.
BANK HOLDING COMPANY REGULATION. The Company
is a one-bank holding company, registered with the Federal
Reserve under the Bank Holding Company Act of 1956 (the
BHC Act). As such, the Company is subject to the
supervision, examination, and reporting requirements of the BHC
Act and the regulations of the Federal Reserve. The Company is
required to furnish to the Federal Reserve an annual report of
its operations at the end of each fiscal year and such
additional information as the Federal Reserve may require
pursuant to the BHC Act. The BHC Act generally prohibits the
Company from engaging in activities other than banking or
managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of
any company engaged in any activities other than those
activities determined by the Federal Reserve to be sufficiently
related to banking or managing or controlling banks. With some
limited exceptions, the BHC Act requires every bank holding
company to obtain the prior approval of the Federal Reserve
before: acquiring substantially all the assets of any bank;
acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or
control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares); or
merging or consolidating with another bank holding company. In
addition, and subject to some exceptions, the BHC Act and the
Change in Bank Control Act, together with the regulations
promulgated thereunder, require Federal Reserve approval prior
to any person or company acquiring control of a bank
holding company.
BANK REGULATION. The Bank is chartered under
the laws of the Commonwealth of Virginia. The FDIC insures its
deposits to the maximum extent provided by law. The Bank is
subject to comprehensive regulation, examination and supervision
by the Federal Reserve and to other laws and regulations
applicable to banks. These regulations include limitations on
loans to a single borrower and to the Banks directors,
officers and employees; restrictions on the opening and closing
of branch offices; requirements regarding the maintenance of
prescribed capital and liquidity ratios; requirements to grant
credit under equal and fair conditions; and requirements to
disclose the costs and terms of such credit. State regulatory
authorities also have broad enforcement powers over the Bank,
including the power to impose fines and other civil or criminal
penalties and to appoint a receiver in order to conserve the
Banks assets for the benefit of depositors and other
creditors.
The Bank is also subject to the provisions of the Community
Reinvestment Act of 1977 (CRA). Under the terms of
the CRA, the appropriate federal bank regulatory agency is
required, in connection with its examination of a bank, to
assess the banks record in meeting the credit needs of the
community served by that bank, including low-and moderate-income
neighborhoods. The regulatory agencys assessment of a
banks record is made available to the public. Such
assessment is required of any bank that has applied to
(i) charter a national bank, (ii) obtain deposit
insurance coverage for a newly chartered institution,
(iii) establish a new branch office that will accept
deposits,
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(iv) relocate an office, or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank
holding company applying for approval to acquire a bank or other
bank holding company, the Federal Reserve will assess the record
of each subsidiary bank of the applicant bank holding company,
and such records may be the basis for denying the application.
The Bank received a rating of satisfactory at its
last CRA performance evaluation as of February 13, 2006.
DIVIDENDS. Dividends from the Bank constitute
the primary source of funds for dividends to be paid by the
Company. There are various statutory and contractual limitations
on the ability of the Bank to pay dividends, extend credit, or
otherwise supply funds to the Company, including the requirement
under Virginia banking laws that cash dividends only be paid out
of net undivided profits and only if such dividends would not
impair the capital of the Bank. The Federal Reserve also has the
general authority to limit the dividends paid by bank holding
companies and state member banks, if the payment of dividends is
deemed to constitute an unsafe and unsound practice. The Federal
Reserve has indicated that banking organizations should
generally pay dividends only if (1) the organizations
net income available to common shareholders over the past year
has been sufficient to fund fully the dividends and (2) the
prospective rate of earnings retention appears consistent with
the organizations capital needs, asset quality and overall
financial condition. The Bank does not expect any of these laws,
regulations or policies to materially impact its ability to pay
dividends to the Company.
INSURANCE OF DEPOSITS. The Banks deposit
accounts are insured by the FDIC up to applicable maximum
limits. The FDIC issues regulations, conducts periodic
examinations, requires the filing of reports and generally
supervises the operations of its insured banks. Any insured bank
that is not operated in accordance with or does not conform to
FDIC regulations, policies and directives may be sanctioned for
non-compliance. Proceedings may be instituted against any
insured bank or any director, officer, or employee of an insured
bank engaging in unsafe and unsound practices, including the
violation of applicable laws and regulations. The FDIC has the
authority to terminate insurance of accounts pursuant to
procedures established for that purpose. The Bank is subject to
deposit insurance assessments by the FDIC pursuant to
regulations establishing a risk-related deposit insurance
assessment system. FDIC quarterly assessments are based upon the
institutions capital rating according to the supervising
regulators.
CAPITAL REQUIREMENTS. The federal bank
regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive
to differences in risk profile among banks and bank holding
companies. The resulting capital ratios represent qualifying
capital as a percentage of total risk-weighted assets and
off-balance sheet items. The guidelines establish minimums, and
the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should
maintain all ratios well in excess of the minimums and should
not allow expansion to diminish their capital ratios. The
current guidelines require all bank holding companies and
federally regulated banks to maintain a minimum risk-based total
capital ratio equal to 8%, of which at least 4% must be
Tier 1 capital. Tier 1 capital includes common
stockholders equity, retained earnings, qualifying
perpetual preferred stock, and certain hybrid capital
instruments, but excludes goodwill and most other intangibles
and excludes the allowance for loan and lease losses.
Tier 2 capital includes the excess of any preferred stock
not included in Tier 1 capital, mandatory convertible
securities, certain hybrid capital instruments, subordinated
debt and intermediate term-preferred stock, and general reserves
for loan and lease losses up to 1.25% of risk-weighted assets.
As of December 31, 2008, the Bank had a total risk-based
capital ratio of 12.40% and a Tier 1 risk-based capital
ratio of 11.26%, and the Company had a total risk-based capital
ratio of 12.52% and a Tier 1 risk-based capital ratio of
11.38%.
Each of the federal regulatory agencies has also established
leverage capital ratio guidelines for banking organizations
(Tier 1 capital to average tangible assets, or the
leverage ratio). These guidelines generally provide
for a minimum leverage ratio of 4.0% for banks and bank holding
companies (3% for institutions receiving the highest rating on
the CAMELS financial institution rating system.) As of
December 31, 2008, the Bank had a leverage ratio of 9.28%,
and the Company had a leverage ratio of 9.37%.
The FDIC Improvement Act of 1991 (FDICIA) made a
number of reforms addressing the safety and soundness of deposit
insurance funds, supervision, accounting, and prompt regulatory
action with respect to insured institutions such as the Bank
which have total assets of $250 million or more. Annual
full-scope,
on-site
regulatory
8
examinations are required of all insured depository
institutions. The cost for conducting an examination of an
institution may be assessed to the institution, with special
consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks
also are precluded from engaging as principal in any type of
activity that is impermissible for a national bank, including
activities relating to insurance and equity investments. FDICIA
also re-codified current law under the Federal Reserve Act
restricting extensions of credit to insiders.
FDICIA also contains prompt corrective action
provisions pursuant to which banks are classified into one of
five categories based upon capital adequacy, ranging from
well capitalized to critically
undercapitalized and which require (subject to certain
exceptions) the appropriate federal banking agency to take
prompt corrective action with respect to an institution which
becomes significantly undercapitalized or
critically undercapitalized.
The FDIC has issued regulations to implement the prompt
corrective action provisions of FDICIA. In general, the
regulations define the five capital categories as follows:
(i) an institution is well capitalized if it
has a total risk-based capital ratio of 10% or greater, has a
Tier 1 risk-based capital ratio of 6% or greater, has a
leverage ratio of 5% or greater and is not subject to any
written order or directive to meet and maintain a specific
capital level for any capital measure; (ii) an institution
is adequately capitalized if it has a total
risk-based capital ratio of 8% or greater, has a Tier 1
risk-based capital ratio of 4% or greater, and has a leverage
ratio of 4% or greater; (iii) an institution is
undercapitalized if it has a total risk-based
capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that
is less than 4%; (iv) an institution is significantly
undercapitalized if it has a total risk-based capital
ratio that is less than 6%, a Tier 1 risk-based capital
ratio that is less than 3% or has a leverage ratio that is less
than 3%; and (v) an institution is critically
undercapitalized if its tangible equity is
equal to or less than 2% of its total assets. The FDIC may take
various corrective actions against any undercapitalized bank and
any bank that fails to submit an acceptable capital restoration
plan or fails to implement a plan accepted by the FDIC. These
powers include, but are not limited to, requiring the
institution to be recapitalized, prohibiting asset growth,
restricting interest rates paid, requiring prior approval of
capital distributions by any bank holding company that controls
the institution, requiring divestiture by the institution of its
subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the
dismissal of directors and officers. The Bank was notified by
the Federal Reserve Bank of Richmond that, at December 31,
2008, both the Company and the Bank were considered well
capitalized.
FEDERAL HOME LOAN BANK OF ATLANTA. The Bank is
a member of the FHLB of Atlanta, which is one of twelve regional
FHLBs that provide funding to their members for making housing
loans as well as loans for affordable housing and community
development lending. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to its members
(i.e., advances) in accordance with policies and procedures
established by the Board of Directors of the FHLB. As a member,
the Bank is required to purchase and maintain stock in the FHLB
in an amount equal to at least 5% of the aggregate outstanding
advances made by the FHLB to the Bank. In addition, the Bank is
required to pledge collateral for outstanding advances. The
borrowing agreement with the FHLB of Atlanta provides for the
pledge by the Bank of various forms of securities and mortgage
loans as collateral.
USA PATRIOT ACT. The USA PATRIOT Act became
effective on October 26, 2001 and provides for the
facilitation of information sharing among governmental entities
and financial institutions for the purpose of combating
terrorism and money laundering. Among other provisions, the USA
PATRIOT Act permits financial institutions, upon providing
notice to the United States Treasury, to share information with
one another in order to better identify and report to the
federal government concerning activities that may involve money
laundering or terrorists activities. The USA PATRIOT Act
is considered a significant banking law in terms of information
disclosure regarding certain customer transactions. Certain
provisions of the USA PATRIOT Act impose the obligation to
establish anti-money laundering programs, including the
development of a customer identification program, and the
screening of all customers against any government lists of known
or suspected terrorists. Although it does create a reporting
obligation and a cost of compliance, the USA PATRIOT Act has not
materially affected the Banks products, services, or other
business activities.
9
MORTGAGE BANKING REGULATION. The Banks
mortgage banking activities are subject to the rules and
regulations of, and examination by the Department of Housing and
Urban Development, the Federal Housing Administration, the
Department of Veterans Affairs and state regulatory authorities
with respect to originating, processing and selling mortgage
loans. Those rules and regulations, among other things,
establish standards for loan origination, prohibit
discrimination, provide for inspections and appraisals of
property, require credit reports on prospective borrowers and,
in some cases, restrict certain loan features, and fix maximum
interest rates and fees. In addition to other federal laws,
mortgage origination activities are subject to the Equal Credit
Opportunity Act,
Truth-in-Lending
Act, Home Mortgage Disclosure Act, Real Estate Settlement
Procedures Act, and Home Ownership Equity Protection Act, and
the regulations promulgated under these acts. These laws
prohibit discrimination, require the disclosure of certain basic
information to mortgagors concerning credit and settlement
costs, limit payment for settlement services to the reasonable
value of the services rendered and require the maintenance and
disclosure of information regarding the disposition of mortgage
applications based on race, gender, geographical distribution
and income level.
CONSUMER LAWS AND REGULATIONS. The Bank is
also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While
the list set forth herein is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, and the Fair Housing Act, among
others. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits,
making loans to or engaging in other types of transactions with
such customers.
LOANS TO
INSIDERS
The Federal Reserve Act and related regulations impose specific
restrictions on loans to directors, executive officers and
principal shareholders of banks. Under Section 22(h) of the
Federal Reserve Act, loans to a director, an executive officer
and to a principal shareholder of a bank, and some affiliated
entities of any of the foregoing, may not exceed, together with
all other outstanding loans to such person and affiliated
entities, the banks
loan-to-one
borrower limit. Loans in the aggregate to insiders and their
related interests as a class may not exceed two times the
banks unimpaired capital and unimpaired surplus until the
banks total assets equal or exceed $100 million, at
which time the aggregate is limited to the banks
unimpaired capital and unimpaired surplus. Section 22(h)
also prohibits loans, above amounts prescribed by the
appropriate federal banking agency, to directors, executive
officers and principal shareholders of a bank or bank holding
company, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of
the bank with any interested director not
participating in the voting. The FDIC has prescribed the loan
amount, which includes all other outstanding loans to such
person, as to which such prior board of director approval is
required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Section 22(h) requires that loans
to directors, executive officers and principal shareholders be
made on terms and underwriting standards substantially the same
as offered in comparable transactions to other persons.
FUTURE
REGULATORY UNCERTAINTY
Because federal regulation of financial institutions changes
regularly and is the subject of constant legislative debate, the
Company cannot forecast how federal regulation of financial
institutions may change in the future and impact its operations.
Although Congress in recent years has sought to reduce the
regulatory burden on financial institutions with respect to the
approval of specific transactions, the Company fully expects
that the financial institution industry will remain heavily
regulated in the near future and that additional laws or
regulations may be adopted further regulating specific banking
practices.
COMPETITION
The Company encounters strong competition both in making loans
and in attracting deposits. In one or more aspects of its
business, the Bank competes with other commercial banks, savings
and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries. Most of these
competitors, some of which are affiliated with bank holding
10
companies, have substantially greater resources and lending
limits, and may offer certain services that the Bank does not
currently provide. In addition, many of the Banks non-bank
competitors are not subject to the same level of federal
regulation that governs bank holding companies and federally
insured banks. Recent federal and state legislation has
heightened the competitive environment in which financial
institutions must conduct their business, and the potential for
competition among financial institutions of all types has
increased significantly. To compete, the Bank relies upon
specialized services, responsive handling of customer needs, and
personal contacts by its officers, directors, and staff. Large
multi-branch banking institutions tend to compete based
primarily on price and the number and location of branches while
smaller, independent financial institutions tend to compete
primarily on price and personal service.
EMPLOYEES
As of December 31, 2008, the Company and the Bank employed
131 full-time employees and 25 part-time employees
compared with 128 full-time and 28 part-time employees
as of December 31, 2007. No employee is represented by a
collective bargaining unit. The Company and the Bank consider
relations with employees to be good.
AVAILABLE
INFORMATION
The Company files annual, quarterly and current reports, proxy
statements and other information with the SEC. The
Companys SEC filings are filed electronically and are
available to the public over the internet at the SECs
website at
http://www.sec.gov.
In addition, any document filed by the Company with the SEC can
be read and copied at the SECs public reference facilities
at 100 F Street, N.E., Washington, D.C. 20549.
Copies of documents can be obtained at prescribed rates by
writing to the Public Reference Section of the SEC at
100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the public
reference room by calling
1-800-SEC-0330.
The Companys website is
http://www.fauquierbank.com.
The Company makes its SEC filings available through this website
under Investor Relations, Documents as
soon as practicable after filing or furnishing the material to
the SEC. Copies of documents can also be obtained free of charge
by writing to Secretary, Fauquier Bankshares, Inc. at 10
Courthouse Square, Warrenton, Virginia 20186 or by calling
540-347-2700.
The
Company may be adversely affected by economic conditions in our
market area, as well as national and international economic
conditions.
The Companys marketplace is primarily in Fauquier and
western Prince William Counties, Virginia and the neighboring
communities. Many, if not most, of the Companys customers
live and/or
work in the greater Washington, D.C. metropolitan area.
Because the Companys lending, deposit gathering, and
wealth management services are concentrated in this market, the
Company is affected by the general economic conditions in the
greater Washington area. Changes in the economy may influence
the growth rate of the Companys loans and deposits, the
quality of the loan portfolio and loan and deposit pricing and
the performance of the Companys wealth management
business. A significant decline in economic conditions caused by
inflation, recession, unemployment or other factors beyond the
Companys control could decrease the demand for banking
products and services generally
and/or
impair the ability of existing borrowers to repay their loans,
which could negatively affect the Companys financial
condition and performance.
In recent years, there has been a proliferation of technology
and communications businesses in the Companys market area.
Although the Company does not have significant credit exposure
to these businesses, a downturn in these industries could have a
negative impact on local economic conditions and real estate
collateral values generally, which could negatively affect the
Companys profitability. In addition, a downturn in
Washington-based federal government employment could have a
negative impact on local economic conditions and real estate
collateral values, and could also negatively affect the
Companys profitability.
Within the Banks investment portfolio are municipal bonds
issued by state
and/or local
governments outside of the Banks own market area. At
December 31, 2008, the Bank had $4.2 million in
municipal bonds, all from geographic areas outside of the
Banks market area. Also within the Banks investment
portfolio are corporate bonds
11
that are Class B or subordinated
mezzanine tranche of pooled trust preferred
securities. The trust preferred securities are collateralized by
the interest and principal payments made on trust preferred
capital offerings by a geographically diversified pool of
approximately 50 different financial institutions, which, for
the most part, are outside the Banks market area.
The
Company has a high concentration of loans secured by real estate
and a downturn in the real estate market, for any reason, may
increase the Companys credit losses, which would
negatively affect its financial results.
The Company offers a variety of secured loans, including
commercial lines of credit, commercial term loans, real estate,
construction, home equity, consumer and other loans. Most of the
Companys loans are secured by real estate (both
residential and commercial) in its market area. At
December 31, 2008, approximately 40.0% and 36.5% of the
Companys $440 million loan portfolio were secured by
post-construction residential and commercial real estate
including farmland, respectively, with construction loans
representing an additional 8.7% of its loans secured by real
estate. Changes in the real estate market, such as deterioration
in market value of collateral, or a decline in local employment,
could adversely affect the Companys customers
ability to pay these loans, which in turn could impact the
Companys profitability. If the value of real estate
serving as collateral for the loan portfolio were to decline
materially, a significant part of the loan portfolio could
become under-collateralized. If the loans that are secured by
real estate become troubled when real estate market conditions
are declining or have declined, in the event of foreclosure, the
Company may not be able to realize the amount of collateral that
was anticipated at the time of originating the loan. In that
event, the Company might have to increase the provision for loan
losses, which could have a material adverse effect on its
operating results and financial condition.
If the
Companys allowance for loan losses becomes inadequate, its
results of operations may be adversely affected.
The Company maintains an allowance for loan losses that it
believes is a reasonable estimate of known and inherent losses
in the Companys loan portfolio. Through periodic review of
the Companys loan portfolio, it determines the amount of
the allowance for loan losses by considering general market
conditions, credit quality of the loan portfolio, the collateral
supporting the loans and performance of the Companys
customers relative to their financial obligations with us. The
amount of future losses is susceptible to changes in economic
and other market conditions, including changes in interest rates
and collateral values that are beyond the Companys
control, and these future losses may exceed current estimates.
Rapidly growing loan portfolios are, by their nature,
unseasoned. As a result, estimating loan loss allowances is more
difficult, and may be more susceptible to changes in estimates,
and to losses exceeding estimates, than more seasoned
portfolios. Although the Company believes the allowance for loan
losses is a reasonable estimate of known and inherent losses in
the its loan portfolio, it cannot fully predict such losses or
that the loan loss allowance will be adequate in the future.
Excessive loan losses could have a material impact on its
financial performance.
Federal and state regulators periodically review the
Companys allowance for loan losses and may require us to
increase the provision for loan losses or recognize further loan
charge-offs, based on judgments different than those of
management. Any increase in the amount of the Companys
provision or loans charged-off as required by these regulatory
agencies could have a negative effect on its operating results.
The
Company may incur losses if it is unable to successfully manage
interest rate risk.
The Companys profitability depends in substantial part
upon the spread between the interest rates earned on investments
and loans and interest rates paid on deposits and other
interest-bearing liabilities. The Company may selectively pay
above-market rates to attract deposits as it has done in some of
the Companys marketing promotions in the past. Changes in
interest rates will affect the Companys operating
performance and financial condition in diverse ways including
the pricing of securities, loans and deposits, which, in turn,
may affect the growth in loan and retail deposit volume. The
Company attempts to minimize the Companys exposure to
interest rate risk, but cannot eliminate it. The Companys
net interest income will be adversely affected if market
interest rates change so that the interest it pays on deposits
and borrowings increases faster than the interest earned on
loans and investments. Changes in interest rates also affect the
value of the Companys loans. An increase in interest rates
could adversely
12
affect the Companys borrowers ability to pay the
principal or interest on existing loans or reduce their desire
to borrow more money. This may lead to an increase in
nonperforming assets or a decrease in loan originations, either
of which could have a material and negative effect on the
Companys results of operations. The Companys net
interest spread will depend on many factors that are partly or
entirely outside its control, including competition, federal
economic, monetary and fiscal policies, and economic conditions
generally. Fluctuations in market rates are neither predictable
nor controllable and may have a material and negative effect on
the Companys business, financial condition and results of
operations.
The
Companys profitability may suffer because of rapid and
unpredictable changes in the highly regulated environment in
which the Company operates.
The Company is subject to extensive supervision by several
governmental regulatory agencies at the federal and state
levels. Recently enacted, proposed and future banking
legislation and regulations have had, will continue to have, or
may have a significant impact on the financial services
industry. These regulations, which are intended to protect
depositors and not the Companys shareholders, and the
interpretation and application of them by federal and state
regulators, are beyond its control, may change rapidly and
unpredictably and can be expected to influence its earnings and
growth. The Companys success depends on its continued
ability to maintain compliance with these regulations. Failure
to comply with existing or new laws, regulations or policies
could result in sanctions by regulatory agencies, civil money
penalties
and/or
reputation damage, which could have an adverse effect on the
Companys business, financial condition and results of
operations. Regulatory changes may increase costs, limit the
types of financial services and products offered
and/or
increase the ability of non-banks to offer competing financial
services and products and thus place other entities that are not
subject to similar regulation in stronger, more favorable
competitive positions, which could adversely affect the
Companys growth.
Efforts
to comply with the Sarbanes-Oxley Act will involve significant
expenditures, and non-compliance with the Sarbanes-Oxley Act may
adversely affect us.
The Sarbanes-Oxley Act of 2002, and the related rules and
regulations promulgated by the Securities and Exchange
Commission that apply to us, have increased the scope,
complexity and cost of corporate governance, reporting and
disclosure practices. The Company has experienced, and expects
to continue to experience, greater compliance costs, including
costs related to internal controls, as a result of the
Sarbanes-Oxley Act. For example, the Company was required to
comply with Section 404 of the Sarbanes-Oxley Act and issue
a report on the Companys internal controls for the year
ended December 31, 2008. These new rules and regulations
increase accounting, legal and other costs, and make some
activities more difficult, time consuming and costly. In the
event that the Company is unable to comply with the
Sarbanes-Oxley Act and related rules, it may be adversely
affected.
The
Company depends on the services of the its key personnel, and a
loss of any of those personnel would disrupt operations and
result in reduced revenues.
The Companys success depends upon the continued service of
the senior management team and upon their ability to attract and
retain qualified financial services personnel. Competition for
qualified employees is intense. In the Companys
experience, it can take a significant period of time to identify
and hire personnel with the combination of skills and attributes
required in carrying out its strategy. If the Company loses the
services of key personnel, or are unable to attract additional
qualified personnel, its business, financial condition, results
of operations and cash flows could be materially adversely
affected.
The
Companys future success is dependent on its ability to
compete effectively in the highly competitive banking
industry.
The Northern Virginia and the greater Washington, D.C.
metropolitan area in which the Company operates is considered
highly attractive from an economic and demographic viewpoint,
and is therefore a highly competitive banking and mortgage
banking market. The Company faces vigorous competition from
other banks and other financial service institutions in the
Companys market area. A number of these banks and other
financial institutions are significantly larger and have
substantially greater access to capital and other resources,
larger lending limits, wider branch networks, and larger
marketing budgets. To a limited extent, the Company also
competes with other
13
providers of financial services, such as money market mutual
funds, brokerage firms, consumer finance companies, insurance
companies and governmental organizations which may offer more
favorable financing than it can. Many of the Companys
non-bank competitors are not subject to the same extensive
regulations
and/or tax
laws that govern us. As a result, these non-bank competitors
have advantages over us in providing certain services. Failure
to compete effectively to attract new customers
and/or
retain existing customers may reduce or limit the Companys
margins and market share and may adversely affect its results of
operations and financial condition.
If the
Company needs additional capital in the future to continue its
growth, it may not be able to obtain it on terms that are
favorable. This could negatively affect its performance and the
value of the Companys common stock.
The Companys business strategy calls for continued growth.
The Company anticipates that it will be able to support the
Companys growth strategy primarily through the generation
of retained earnings. However, it may need to raise additional
capital in the future to support the Companys growth and
to maintain capital levels. The Companys ability to raise
capital through the sale of additional securities will depend
primarily upon its financial condition and the condition of
financial markets at that time, and may not be able to obtain
additional capital when needed on terms that are satisfactory to
us. This could negatively affect the Companys performance
and the value of common stock. The Companys growth may be
constrained if it is unable to raise additional capital as
needed.
The
Company may be adversely affected if it is unable to
successfully implement the Companys branch network
expansion.
The Company anticipates that it will need to expand its branch
network to support its growth strategy. However, the timing and
cost of entry into new branch locations is substantial, and the
economic payback on new branches may be impeded and delayed,
which could negatively constrain the Companys growth, and
adversely affect its performance and the value of common stock.
The
Banks ability to pay dividends is subject to regulatory
limitations which may affect the Companys ability to pay
its obligations and pay dividends.
The Company is a separate legal entity from the Bank and its
subsidiaries and does not have significant operations which
generate cash. It currently depends on the Banks cash and
liquidity, transferred to the Company as dividends from the
Bank, to pay the Companys operating expenses and dividends
to shareholders. No assurance can be made that in the future the
Bank will have the capacity to pay the necessary dividends or
that the Company will not require dividends from the Bank to
satisfy the Companys obligations. The availability of
dividends from the Bank is limited by various statutes and
regulations. It is possible, depending upon the financial
condition of the Company and other factors, that the state
and/or
federal bank regulators could assert that payment of dividends
or other payments by the Bank are an unsafe or unsound practice.
In the event the Bank is unable to pay sufficient dividends to
the Company, the Company may not be able to service its
obligations as they become due, or pay dividends on the
Companys common stock. Consequently, the inability to
receive dividends from the Bank could adversely affect the
Companys financial condition, results of operations, cash
flows and prospects.
The
Companys recent operating results may not be indicative of
future operating results.
The Companys historical results of operations are not
necessarily indicative of future operations.
If the
Company cannot maintain its corporate culture as it grows, its
business could be harmed.
The Company believes that a critical contributor to its success
has been its corporate culture, which focuses on building
personal relationships with its customers. As the Companys
organization grows, and management is required to implement more
complex organizational management structures, it may find it
increasingly difficult to maintain the beneficial aspects of the
Companys corporate culture. This could negatively impact
future success.
14
Changes
in accounting standards may affect the Companys
performance.
The Companys accounting policies and methods are
fundamental to how it records and reports its financial
condition and results of operations. From time to time there are
changes in the financial accounting and reporting standards that
govern the preparation of the Companys financial
statements. These changes can be difficult to predict and can
materially impact how it records and reports the Companys
financial condition and statements of operations. In some cases,
the Company could be required to apply a new or revised standard
retroactively, resulting in restating prior period financial
statements.
The
Companys disclosure controls and procedures may not
prevent or detect all errors or acts of fraud.
The Companys disclosure controls and procedures are
designed to reasonably assure that information required to be
disclosed by the Company in reports it files or submits under
the Securities Exchange Act of 1934 is accumulated and
communicated to management, and recorded, processed, summarized
and reported within the time periods specified in the SECs
rules and forms. The Company believes that any disclosure
controls and procedures or internal controls and procedures, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. These inherent limitations include the
realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or omission.
Additionally, controls can be circumvented by individual acts,
by collusion by two or more people
and/or by
override of the established controls. Accordingly, because of
the inherent limitations in the Companys control systems
and in human nature, misstatements due to error or fraud may
occur and not be detected.
The
Companys information systems may experience an
interruption or breach in security.
The Company relies heavily on communications and information
systems to conduct the Companys business. Any failure,
interruption or breach of security of these systems could result
in failures or disruptions in the Companys customer
relationship management, transaction processing systems and
various accounting and data management systems. While it has
policies and procedures designed to prevent
and/or limit
the effect of the failure, interruption or security breach of
the Companys communication and information systems, there
can be no assurance that any such failures, interruptions or
security breaches will not occur, or, if they do occur, they
will be adequately addressed on a timely basis. The occurrence
of failures, interruptions or security breaches of the
Companys communication and information systems could
damage the Companys reputation, result in a loss of
customer business, subject us to additional regulatory scrutiny,
or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on
its financial condition and results of operations.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
The Bank owns or leases property and operates branches at the
following locations:
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Lease/Own
|
|
Rent (Annual)
|
|
Expiration
|
|
|
Renewal
|
|
Main Office *
P.O. Box 561
10 Courthouse Square
Warrenton, VA 20186
|
|
Own
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Catlett Office
Rt. 28 and 806
Catlett, VA 20119
|
|
Own
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
15
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Lease/Own
|
|
Rent (Annual)
|
|
Expiration
|
|
|
Renewal
|
|
Sudley Road Office
8091 Sudley Rd.
Manassas, VA 20109
|
|
Lease
|
|
$ 54,135 for 2009;
$200,000 for 2010
to 2014; $230,000
for 2015 to 2019;
$264,500 for 2020
to 2024; $304,175
for 2025 to 2029
|
|
|
2029
|
|
|
None
|
Old Town Office
Center Street
Manassas, VA 20110
|
|
Lease
|
|
$ 40,700 from
2007 to 2011.
|
|
|
2011
|
|
|
Two additional
options for 10 years
each.
|
New Baltimore Office
5119 Lee Highway
Warrenton, VA 20187
|
|
Own
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
The Plains Office
6464 Main Street
The Plains, VA 20198
|
|
Own
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
View Tree Office
216 Broadview Avenue
Warrenton, VA 20186
|
|
Rent
|
|
$180,000
|
|
|
2010
|
|
|
None
|
View Tree Property
87 Lee Highway
Warrenton, VA 20186
|
|
Own
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Finance/Accounting Office
98 Alexandria Pike
Warrenton, VA 20186
|
|
Lease
|
|
$36,648
|
|
|
2010
|
|
|
None
|
Bealeton Office
US Rt. 17 & Station
Dr. Bealeton, VA 22712
|
|
Own
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Haymarket Property
Market Square at Haymarket
Haymarket, VA 20169
|
|
Lease
|
|
$150,000 for first
12 months of
occupancy
and increasing 3%
annually.
|
|
|
2025
|
|
|
Two additional
options for 5 years
each.
|
Bristow Property
Bristow Shopping Center
10250 Bristow Center Drive
Bristow, VA 20136
|
|
Lease
|
|
$150,000 for first
12 months of
occupancy
and increasing 3%
annually.
|
|
|
2018
|
|
|
Two additional
options for 5 years
|
|
|
|
* |
|
The Bank and the Company occupy this location. |
All of these properties are in good operating condition and are
adequate for the Companys and the Banks present and
anticipated future needs. The Bank maintains comprehensive
general liability and casualty loss insurance covering its
properties and activities conducted in or about its properties.
Management believes this insurance provides adequate protection
for liabilities or losses that might arise out of the ownership
and use of these properties.
|
|
ITEM 3.
|
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 entity.
16
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of shareholders during the
fourth quarter of the fiscal year ended December 31, 2008.
EXECUTIVE
OFFICERS OF THE REGISTRANT
|
|
|
|
|
|
|
|
|
|
|
|
|
Position Held with Company and/or
|
|
First Year as
|
|
|
Age as of
|
|
|
|
Principal Occupations and Directorships
|
|
Executive Officer
|
|
|
December 31,
|
|
Name
|
|
During Past Five Years
|
|
of Company
|
|
|
2008
|
|
|
Randy K. Ferrell.
|
|
Chief Executive Officer of the Company since May 2004. President
of the Company since May 2003. Senior Vice President of the
Company from 1994 to May 2003. Chief Executive Officer of the
Bank since May 2003. President of the Bank since 2002. Chief
Operating Officer of the Bank from 2002 to June, 2003. Director
of the Company since December 2003. Director of the Bank since
2002.
|
|
|
1994
|
|
|
|
58
|
|
Gregory D. Frederick
|
|
Executive Vice President and Chief Operating Officer of the
Company since January 2007. President, Chief Operating Officer,
and Director of Virginia Community Bank in Louisa, Virginia from
2002 to 2006. From 1996 to 2002, Senior Vice President
Correspondent Banking at RBC Centura, Rocky Mount, North
Carolina.
|
|
|
2007
|
|
|
|
49
|
|
Eric P. Graap
|
|
Executive Vice President of the Company and the Bank since May
2007. Chief Financial Officer of the Company and the Bank since
2000. Senior Vice President of the Company and the Bank from
November 2000 to May 2007. Director of the Company and Bank
since January 2009.
|
|
|
2000
|
|
|
|
55
|
|
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Companys common stock trades on the NASDAQ Capital
Market of the NASDAQ Stock Market LLC (NASDAQ) under
the symbol FBSS. The Companys common stock
commenced trading on NASDAQ on December 27, 1999. As of
March 10, 2009, there were 3,592,057 shares outstanding of
the Companys common stock, which is the Companys
only class of stock outstanding. These shares were held by
approximately 437 holders of record. As of March 10, 2009,
the closing market price of the Companys common stock was
$9.01.
STOCK
PERFORMANCE
The following stock performance graph presents the cumulative
total return comparison through December 31, 2008 of stock
appreciation for our common stock, the NASDAQ Composite Index
measuring all NASDAQ domestic and international based common
type stocks listed on The NASDAQ Stock Market (NASDAQ
Composite), the SNL Securities Index including banks
between $250 million and $500 million in total assets
(SNL Bank $250M-$500M Index), and the SNL Securities
Index including banks between $500 million and
$1 billion in total assets (SNL $500M-$1B
Index). Returns assume an initial investment of $100 at
the market close of December 31, 2002 and reinvestment of
dividends. We believe the Companys performance is more
accurately compared to companies in
17
the banking industry, rather than the NASDAQ Composite Index,
which includes companies in diverse industries with market
capitalizations many times the size of the Companys market
capitalization.
Total
Return Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
Index
|
|
|
12/31/03
|
|
|
|
12/31/04
|
|
|
|
12/31/05
|
|
|
|
12/31/06
|
|
|
|
12/31/07
|
|
|
|
12/31/08
|
|
Fauquier Bankshares, Inc.
|
|
|
|
100.00
|
|
|
|
|
111.15
|
|
|
|
|
114.22
|
|
|
|
|
117.87
|
|
|
|
|
83.44
|
|
|
|
|
65.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
108.59
|
|
|
|
|
110.08
|
|
|
|
|
120.56
|
|
|
|
|
132.39
|
|
|
|
|
78.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Bank $500M-$1B
|
|
|
|
100.00
|
|
|
|
|
113.32
|
|
|
|
|
118.18
|
|
|
|
|
134.41
|
|
|
|
|
107.71
|
|
|
|
|
69.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SNL Bank $250M-$500M
|
|
|
|
100.00
|
|
|
|
|
113.50
|
|
|
|
|
120.50
|
|
|
|
|
125.91
|
|
|
|
|
102.33
|
|
|
|
|
58.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the high and low sales prices as
reported by NASDAQ for the Companys common stock and the
amounts of the cash dividends paid for each full quarterly
period within the two most recent fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Dividends per Share
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
2007
|
|
|
1st Quarter
|
|
$
|
18.98
|
|
|
$
|
15.30
|
|
|
$
|
26.50
|
|
|
$
|
24.95
|
|
|
$
|
0.20
|
|
|
$
|
0.19
|
|
2nd Quarter
|
|
$
|
19.99
|
|
|
$
|
16.00
|
|
|
$
|
26.27
|
|
|
$
|
22.41
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
3rd Quarter
|
|
$
|
18.92
|
|
|
$
|
14.80
|
|
|
$
|
23.65
|
|
|
$
|
16.96
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
4th Quarter
|
|
$
|
16.94
|
|
|
$
|
9.30
|
|
|
$
|
22.00
|
|
|
$
|
16.05
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
The Companys future dividend policy is subject to the
discretion of the Board of Directors (The Board) and
will depend upon a number of factors, including future earnings,
financial condition, cash requirements, and general business
conditions. The Companys ability to pay cash dividends
will depend entirely upon the Banks ability to pay
dividends to the Company. Transfers of funds from the Bank to
the Company in the form of loans, advances and cash dividends
are restricted by federal and state regulatory authorities. As
of December 31, 2008, the aggregate amount of unrestricted
funds that could be transferred from the Bank to the Company
without prior regulatory approval totaled $7.66 million.
In September 1998, the Company announced a stock repurchase
program for its common stock. Initially, the program authorized
the Company to repurchase up to 73,672 shares of its common
stock through December 31, 1999. Annually, the Board resets
the amount of shares authorized to be repurchased during the
year under the buyback program. On January 18, 2008, the
Board authorized the Company to repurchase up to
212,241 shares (6% of the shares of common stock
outstanding on January 1, 2008) beginning
January 1, 2008 and continuing until the next Board reset.
9,301 shares of common stock were repurchased during 2008.
On January 15, 2009, the Board authorized the Company to
repurchase up to 106,929 shares (3% of the shares of common
stock outstanding on January 1, 2009) beginning
January 1, 2009.
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected consolidated financial data set forth below should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operation and the consolidated financial statements and
accompanying notes included elsewhere in this report. The
historical results are not necessarily indicative of results to
be expected for any future period.
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
EARNINGS STATEMENT DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
28,573
|
|
|
$
|
30,944
|
|
|
$
|
30,152
|
|
|
$
|
25,414
|
|
|
$
|
21,978
|
|
Interest expense
|
|
|
9,388
|
|
|
|
12,268
|
|
|
|
10,902
|
|
|
|
6,338
|
|
|
|
4,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
19,185
|
|
|
|
18,676
|
|
|
|
19,250
|
|
|
|
19,076
|
|
|
|
17,567
|
|
Provision for loan losses
|
|
|
3,227
|
|
|
|
717
|
|
|
|
360
|
|
|
|
473
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
15,958
|
|
|
|
17,959
|
|
|
|
18,890
|
|
|
|
18,603
|
|
|
|
17,027
|
|
Noninterest income
|
|
|
6,236
|
|
|
|
6,063
|
|
|
|
5,908
|
|
|
|
5,268
|
|
|
|
5,086
|
|
Securities gains (losses)
|
|
|
(335
|
)
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
(47
|
)
|
Noninterest expense
|
|
|
16,840
|
|
|
|
16,982
|
|
|
|
16,648
|
|
|
|
15,653
|
|
|
|
14,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,019
|
|
|
|
7,040
|
|
|
|
8,067
|
|
|
|
8,218
|
|
|
|
7,218
|
|
Income taxes
|
|
|
1,366
|
|
|
|
2,087
|
|
|
|
2,463
|
|
|
|
2,517
|
|
|
|
2,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,653
|
|
|
$
|
4,953
|
|
|
$
|
5,604
|
|
|
$
|
5,701
|
|
|
$
|
4,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
1.04
|
|
|
$
|
1.41
|
|
|
$
|
1.61
|
|
|
$
|
1.66
|
|
|
$
|
1.49
|
|
Net income per share, diluted
|
|
$
|
1.03
|
|
|
$
|
1.39
|
|
|
$
|
1.56
|
|
|
$
|
1.60
|
|
|
$
|
1.41
|
|
Cash dividends
|
|
$
|
0.80
|
|
|
$
|
0.79
|
|
|
$
|
0.745
|
|
|
$
|
0.645
|
|
|
$
|
0.56
|
|
Average basic shares outstanding
|
|
|
3,525,821
|
|
|
|
3,504,761
|
|
|
|
3,472,217
|
|
|
|
3,434,093
|
|
|
|
3,329,367
|
|
Average diluted shares outstanding
|
|
|
3,557,677
|
|
|
|
3,563,343
|
|
|
|
3,582,241
|
|
|
|
3,562,564
|
|
|
|
3,509,032
|
|
Book value at period end
|
|
$
|
11.64
|
|
|
$
|
11.82
|
|
|
$
|
11.08
|
|
|
$
|
10.32
|
|
|
$
|
9.40
|
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
514,515
|
|
|
$
|
489,896
|
|
|
$
|
521,854
|
|
|
$
|
481,245
|
|
|
$
|
429,199
|
|
Loans, net
|
|
|
434,678
|
|
|
|
409,107
|
|
|
|
416,061
|
|
|
|
381,049
|
|
|
|
337,792
|
|
Investment securities , at fair value
|
|
|
37,839
|
|
|
|
37,377
|
|
|
|
40,353
|
|
|
|
48,391
|
|
|
|
58,595
|
|
Deposits
|
|
|
400,294
|
|
|
|
404,559
|
|
|
|
416,071
|
|
|
|
391,657
|
|
|
|
374,656
|
|
Shareholders equity
|
|
|
41,488
|
|
|
|
41,828
|
|
|
|
38,534
|
|
|
|
35,579
|
|
|
|
31,891
|
|
PERFORMANCE RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin(1)
|
|
|
4.19
|
%
|
|
|
4.14
|
%
|
|
|
4.28
|
%
|
|
|
4.67
|
%
|
|
|
4.68
|
%
|
Return on average assets
|
|
|
0.73
|
%
|
|
|
1.01
|
%
|
|
|
1.14
|
%
|
|
|
1.27
|
%
|
|
|
1.21
|
%
|
Return on average equity
|
|
|
8.65
|
%
|
|
|
12.16
|
%
|
|
|
14.86
|
%
|
|
|
16.94
|
%
|
|
|
16.82
|
%
|
Dividend payout
|
|
|
78.13
|
%
|
|
|
56.46
|
%
|
|
|
46.21
|
%
|
|
|
38.95
|
%
|
|
|
37.60
|
%
|
Efficiency ratio(2)
|
|
|
65.40
|
%
|
|
|
67.96
|
%
|
|
|
66.23
|
%
|
|
|
63.77
|
%
|
|
|
64.90
|
%
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSET QUALITY RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period end loans, net
|
|
|
1.09
|
%
|
|
|
1.02
|
%
|
|
|
1.07
|
%
|
|
|
1.11
|
%
|
|
|
1.19
|
%
|
Non-performing loans to allowance for loan losses
|
|
|
89.43
|
%
|
|
|
50.85
|
%
|
|
|
39.11
|
%
|
|
|
4.60
|
%
|
|
|
4.51
|
%
|
Non-performing assets to period end loans and other repossessed
assets owned
|
|
|
0.97
|
%
|
|
|
0.51
|
%
|
|
|
0.42
|
%
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
Net charge-offs to average loans
|
|
|
0.62
|
%
|
|
|
0.24
|
%
|
|
|
0.03
|
%
|
|
|
0.08
|
%
|
|
|
0.02
|
%
|
CAPITAL RATIOS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
|
9.37
|
%
|
|
|
9.49
|
%
|
|
|
9.54
|
%
|
|
|
8.66
|
%
|
|
|
8.30
|
%
|
Risk Based Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
11.38
|
%
|
|
|
11.90
|
%
|
|
|
11.80
|
%
|
|
|
10.83
|
%
|
|
|
10.87
|
%
|
Total capital
|
|
|
12.52
|
%
|
|
|
12.98
|
%
|
|
|
12.90
|
%
|
|
|
11.97
|
%
|
|
|
12.10
|
%
|
|
|
|
(1) |
|
Net interest margin is calculated as fully taxable equivalent
net interest income divided by average earning assets and
represents the Companys net yield on its earning assets. |
|
(2) |
|
Efficiency ratio is computed by dividing non-interest expense by
the sum of fully taxable equivalent net interest income and
non-interest income. Gains and losses on the sale or impairment
of securities and the gain on cancellation of property rights
are excluded from non-interest income in the calculation of this
ratio. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
FORWARD-LOOKING
STATEMENTS
In addition to the historical information contained herein, this
report contains forward-looking statements. Forward-looking
statements are based on certain assumptions and describe future
plans, strategies, and expectations of the Company and the Bank,
and are generally identifiable by use of the words
believe, expect, intend,
anticipate, estimate,
project may, will or similar
expressions. Although we believe our plans, intentions and
expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these plans,
intentions, or expectations will be achieved. Our ability to
predict results or the actual effect of future plans or
strategies is inherently uncertain, and actual results could
differ materially from those contemplated. Factors that could
have a material adverse effect on our operations and future
prospects include, but are not limited to, changes in: interest
rates, general economic conditions, the legislative/regulatory
climate, monetary and fiscal policies of the
U.S. Government, including policies of the
U.S. Treasury and the Board of Governors of the Federal
Reserve System, the quality or composition of the Banks
loan or investment portfolios, demand for loan products, deposit
flows, competition, demand for financial services in our market
area, our plans to expand our branch network and increase our
market share, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered
in evaluating forward-looking statements in this report and you
should not place undue reliance on such statements, which
reflect our position as of the date of this report.
For additional discussion of risk factors that may cause our
actual future results to differ materially from the results
indicated within forward-looking statements, please see
Risk Factors in Item 1A of this report.
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.
20
A variety of factors could affect the ultimate value that is
obtained either when earning income, recognizing an expense,
recovering an asset or relieving a liability. We use historical
loss factors as one factor in determining the inherent loss that
may be present in our loan portfolio. Actual losses could differ
significantly from the historical factors that we use in our
estimates. In addition, GAAP itself may change from one
previously acceptable accounting method to another method.
Although the economics of the Companys transactions would
be the same, the timing of events that would impact the
Companys transactions could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for
loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on three basic
principles of accounting: (i) 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) SEC Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance Methodology and Documentation
Issues, which requires adequate documentation to support
the allowance for loan losses estimate.
The Companys allowance for loan losses has two basic
components: the specific allowance and the general allowance.
Each of these components is determined based upon estimates that
can and do change when the actual events occur. The specific
allowance is used to individually allocate an allowance for
larger balance, non-homogeneous loans. The specific allowance
uses various techniques to arrive at an estimate of loss. First,
analysis of the borrowers overall financial condition,
resources and payment record, the prospects for support from
financial guarantors, and the fair market value of collateral
are used to estimate the probability and severity of inherent
losses. Then the migration of historical default rates and loss
severities, internal risk ratings, industry and market
conditions and trends, and other environmental factors are
considered. The use of these values is inherently subjective and
our actual losses could be greater or less than the estimates.
The general allowance is used for estimating the loss on pools
of smaller-balance, homogeneous loans; including 1-4 family
mortgage loans, installment loans, other consumer loans, and
outstanding loan commitments. Also, the general allowance is
used for the remaining pool of larger balance, non-homogeneous
loans which were not allocated a specific allowance upon their
review. The general allowance begins with estimates of probable
losses inherent in the homogeneous portfolio based upon various
statistical analyses. These include analysis of historical and
peer group delinquency and credit loss experience, together with
analyses that reflect current trends and conditions. The Company
also considers trends and changes in the volume and term of
loans, changes in the credit process
and/or
lending policies and procedures, and an evaluation of overall
credit quality. The general allowance uses a historical loss
view as an indicator of future losses. As a result, even though
this history is regularly updated with the most recent loss
information, it could differ from the loss incurred in the
future. The general allowance also captures losses that are
attributable to various economic events, industry or geographic
sectors whose impact on the portfolio have occurred but have yet
to be recognized in the specific allowances.
EXECUTIVE
OVERVIEW
This discussion is intended to focus on certain financial
information regarding the Company and the Bank and may not
contain all the information that is important to the reader. The
purpose of this discussion is to provide the reader with a more
thorough understanding of our financial statements. As such,
this discussion should be read carefully in conjunction with the
consolidated financial statements and accompanying notes
contained elsewhere in this report.
The Bank is the primary independent community bank in its
immediate market area as measured by deposit market share. It
seeks to be the primary financial service provider for its
market area by providing the right mix of consistently high
quality customer service, efficient technological support,
value-added products, and a strong commitment to the community.
Net income of $3.65 million in 2008 was a 26.2% decrease
from 2007 net income of $4.95 million. The Company and
the Banks primary operating businesses are in commercial
and retail lending, deposit accounts and core deposits, and
assets under WMS management. Loans, net of reserve, increased
6.3% in 2008 compared with a decline of 1.7% in 2007 and growth
of 9.2%, 12.8%, and 14.4% of net loans in 2006, 2005, and 2004,
respectively.
21
Deposits decreased 1.1% in 2008 compared with a decrease of 2.8%
in 2007, an increase of 6.2% in 2006, and an increase of 4.5%
from year-end 2004 to year-end 2005. The market value of assets
under WMS management decreased 18.1% from 2007 to 2008, but
increased 1.9% and 17.8%, respectively, from 2006 to 2007 and
from 2005 to 2006. The changes in assets under WMS management
reflect, in large part, the changes in the overall U.S. and
international bond and stock markets.
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 2009 and beyond as average
interest-earning assets increase, but this may be offset in part
or in whole by a possible contraction in the Banks net
interest margin resulting from competitive market conditions and
a flat or inverted yield curve. A steeper yield curve is
projected to result in an increase in net interest income, while
a flatter or inverted yield curve is projected to result in a
decrease in net interest income. The 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 2008, demand deposits, NOW, and savings deposits averaged
17%, 21%, and 8% of total average deposits, respectively, while
the more interest-rate sensitive Premium money market accounts,
money market accounts, and certificates of deposit averaged 17%,
6% and 31% of total average deposits, respectively.
The Banks non-performing assets totaled $4.28 million
or 0.97% of total loans and other real estate owned at
December 31, 2008, as compared with $2.13 million or
0.51% of total loans at December 31, 2007. The provision
for loan losses was $3.2 million for 2008 compared with
$717,000 for 2007. Loan chargeoffs, net of recoveries, totaled
$2.6 million or 0.62% of total average loans for 2008,
compared with $1.00 million or 0.24% of total average loans
for 2007.
Management seeks to continue the expansion of its branch
network. The Bank has leased properties in Bristow, Virginia and
Haymarket, Virginia, where it plans to build its ninth and tenth
full-service branch offices, respectively, both scheduled to
open during 2009 and 2010, respectively. The Bank is looking
toward these new retail markets for growth in deposits and WMS
income. Management seeks to increase the level of its fee income
from deposits and WMS through the increase of its market share
within its marketplace.
22
The following table presents a quarterly summary of earnings for
the last two years.
EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2008
|
|
|
Three Months Ended 2007
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
June 30
|
|
|
Mar. 31
|
|
|
|
(In thousands, except per share data)
|
|
|
Interest income
|
|
$
|
7,035
|
|
|
$
|
7,201
|
|
|
$
|
7,061
|
|
|
$
|
7,274
|
|
|
$
|
7,730
|
|
|
$
|
7,706
|
|
|
$
|
7,746
|
|
|
$
|
7,762
|
|
Interest expense
|
|
|
2,258
|
|
|
|
2,351
|
|
|
|
2,194
|
|
|
|
2,584
|
|
|
|
2,940
|
|
|
|
3,097
|
|
|
|
3,044
|
|
|
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
4,777
|
|
|
|
4,850
|
|
|
|
4,867
|
|
|
|
4,690
|
|
|
|
4,790
|
|
|
|
4,609
|
|
|
|
4,702
|
|
|
|
4,575
|
|
Provision for loan losses
|
|
|
1,506
|
|
|
|
431
|
|
|
|
834
|
|
|
|
456
|
|
|
|
357
|
|
|
|
120
|
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
3,271
|
|
|
|
4,419
|
|
|
|
4,033
|
|
|
|
4,234
|
|
|
|
4,433
|
|
|
|
4,489
|
|
|
|
4,582
|
|
|
|
4,455
|
|
Other income
|
|
|
1,431
|
|
|
|
1,251
|
|
|
|
1,651
|
|
|
|
1,569
|
|
|
|
1,589
|
|
|
|
1,538
|
|
|
|
1,513
|
|
|
|
1,423
|
|
Other expense
|
|
|
3,793
|
|
|
|
4,256
|
|
|
|
4,395
|
|
|
|
4,396
|
|
|
|
4,245
|
|
|
|
4,283
|
|
|
|
4,265
|
|
|
|
4,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
909
|
|
|
|
1,414
|
|
|
|
1,289
|
|
|
|
1,407
|
|
|
|
1,777
|
|
|
|
1,744
|
|
|
|
1,830
|
|
|
|
1,689
|
|
Income tax expense
|
|
|
142
|
|
|
|
479
|
|
|
|
347
|
|
|
|
398
|
|
|
|
487
|
|
|
|
534
|
|
|
|
550
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
767
|
|
|
$
|
935
|
|
|
$
|
942
|
|
|
$
|
1,009
|
|
|
$
|
1,290
|
|
|
$
|
1,210
|
|
|
$
|
1,280
|
|
|
$
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
0.22
|
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.29
|
|
|
$
|
0.37
|
|
|
$
|
0.34
|
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
Net income per share, diluted
|
|
$
|
0.22
|
|
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.28
|
|
|
$
|
0.36
|
|
|
$
|
0.34
|
|
|
$
|
0.36
|
|
|
$
|
0.33
|
|
2008
COMPARED WITH 2007
Net income of $3.65 million in 2008 was a 26.3% decrease
from 2007 net income of $4.95 million. Earnings per
share on a fully diluted basis were $1.03 in 2008 compared to
$1.39 in 2007. Profitability as measured by return on average
equity decreased from 12.16% in 2007 to 8.65% in 2008.
Profitability as measured by return on average assets decreased
from 1.01% in 2007 to 0.73% in 2008. The year to year decline in
net income was primarily due to the $2.51 million increase
in the provision for loan losses from 2007 to 2008.
2007
COMPARED WITH 2006
Net income of $4.95 million in 2007 was a 11.6% decrease
from 2006 net income of $5.60 million. Earnings per
share on a fully diluted basis were $1.39 in 2007 compared to
$1.56 in 2006. Profitability as measured by return on average
equity decreased from 14.86% in 2006 to 12.16% in 2007.
Profitability as measured by return on average assets decreased
from 1.14% in 2006 to 1.01% in 2007.
NET
INTEREST INCOME AND EXPENSE
2008
COMPARED WITH 2007
Net interest income increased $509,000 or 2.7% to
$19.19 million for the year ended December 31, 2008
from $18.68 million for the year ended December 31,
2007. The increase in net interest income was due to the
Companys net interest margin increasing from 4.14% in 2007
to 4.19% in 2008, and the impact of total average earning assets
increasing from $457.5 million in 2007 to
$465.4 million in 2008. The percentage of average earning
assets to total assets decreased in 2008 to 92.9% from 93.1% in
2007.
Total interest income decreased $2.37 million or 7.7% to
$28.57 million in 2008 from $30.94 million in 2007.
This decrease was due to the 61 basis point decrease in the
average yield on assets, partially offset by the increase in
total average earning assets of $7.9 million or 1.7%, from
2007 to 2008. The yield on earning assets declined from 6.82% in
2007 to 6.21% in 2008 due to the decline in market interest
rates in the economy at large.
23
Average loan balances increased 2.2% from $415.5 million in
2007 to $424.7 million in 2008. The tax-equivalent average
yield on loans decreased to 6.33% in 2008 compared with 7.01% in
2007. Together, this resulted in a $2.24 million decrease
in interest and fee income from loans for 2008 compared with
2007.
Average investment security balances decreased $1.9 million
from $39.3 million in 2007 to $37.4 million in 2008.
The tax-equivalent average yield on investments increased from
5.00% in 2007 to 5.20% in 2008. Together, there was a decrease
in interest and dividend income on security investments of
$77,000 or 4.0%, from $1.90 million in 2007 to
$1.83 million in 2008. On a tax-equivalent basis, the
year-to-year decrease in interest and dividend income on
security investments was $16,000. Interest income on federal
funds sold decreased $59,000 from 2007 to 2008 as average
balances and yield declined $572,000 and 235 basis points,
respectively, from 2007 to 2008.
Total interest expense decreased $2.88 million or 23.5%
from $12.27 million in 2007 to $9.39 million in 2008
primarily due to the decline in market interest rates in the
economy. Interest paid on deposits decreased $2.55 million
or 25.9% from $9.85 million in 2007 to $7.30 million
in 2008. Average premium money market account balances decreased
$3.0 million from 2007 to 2008 while their average rate
decreased from 3.99% to 2.23% over the same period resulting in
$1.32 million less interest expense in 2008. Average time
deposit balances decreased $1.4 million from 2007 to 2008
while the average rate on time deposits decreased from 4.44% to
3.67% resulting in $1.02 million less interest expense in
2008. Average NOW deposit balances increased $11.9 million
from 2007 to 2008 while the average rate on NOW accounts
decreased from 1.28% to 0.95% resulting in $124,000 less
interest expense in 2008.
Interest expense on federal funds purchased decreased $125,000
from 2007 to 2008 due to the decline in the average rate paid
from 5.42% in 2007 to 2.18% in 2008. Interest expense on FHLB of
Atlanta advances decreased $33,000 from 2007 to 2008 due to the
decline in the average rate paid from 5.28% in 2007 to 3.66% in
2008, partially offset by the $14.3 million increase in
average FHLB advances. The average rate on total
interest-bearing liabilities decreased from 3.30% in 2007 to
2.42% in 2008.
2007
COMPARED WITH 2006
Net interest income decreased $574,000 or 3.0% to
$18.68 million for the year ended December 31, 2007
from $19.25 million for the year ended December 31,
2006. The decrease in net interest income was due to the
Companys net interest margin decreasing from 4.28% in 2006
to 4.14% in 2007, primarily due to the flat and inverted yield
curve through the first three quarters of 2007, as well as
competitive pricing. Partially offsetting the impact of the
declining net interest margin was the relatively small impact of
total average earning assets increasing from $455.5 million
in 2006 to $457.5 million in 2007. The percentage of
average earning assets to total assets increased in 2007 to
93.1% from 92.8% in 2006.
The net interest margin pressure caused by the economic
environment of a flat and inverted yield curve proved to be
challenging for the Bank during much of 2007. At June 30,
2004, just as the Federal Open Market Committee (the
Fed) began raising the federal funds rate, the yield
on a three month maturity treasury bond was 1.37% or
253 basis points below the 3.90% yield on a five year
treasury and 332 basis points below the 4.69% yield on a
10 year treasury. At October 30, 2006, that yield had
inverted to the point that a three month treasury was yielding
5.12%, while the five year and ten year treasury were yielding
4.74% and 4.77%, respectively. The yield curve changed from a
more than 250 basis point premium for a longer investment
to a position where there is no premium or, in fact, a discount.
This presented funding and interest margin management pressures,
as a flat or inverted yield curve significantly increased
competition for deposits and their cost. While deposit costs
rapidly increased, the lack of a similar movement in longer-term
rates limited the yield increase on fixed rate loans. During the
fourth quarter of 2007, the Fed began lowering the federal funds
rate, and the shape of the yield curve became less flat and more
positively sloped. As a result, the net interest margin for the
fourth quarter of 2007 improved to 4.16% as compared to 3.98%
for the fourth quarter of 2006.
24
Total interest income increased $792,000 or 2.6% to
$30.94 million in 2007 from $30.15 million in 2006.
This increase was due to the increase in total average earning
assets of $2.0 million or 0.4%, from 2006 to 2007, as well
as the 15 basis point increase in the average yield.
Average loan balances increased from $409.6 million in 2006
to $415.5 million in 2007. The average yield on loans
increased to 7.01% in 2007 compared with 6.90% in 2006.
Together, this resulted in an $877,000 increase in interest and
fee income from loans for 2007 compared with 2006.
Average investment security balances decreased $4.3 million
from $43.6 million in 2006 to $39.3 million in 2007.
The tax-equivalent average yield on investments increased from
4.63% in 2006 to 5.00% in 2007. Together, there was a decrease
in interest and dividend income on security investments of
$91,000 or 4.5%, from $1.99 million in 2006 to
$1.90 million in 2007. Interest income on federal funds
sold decreased $1,000 from 2006 to 2007 as average balances and
yield were virtually the same in both 2006 and 2007.
Total interest expense increased $1.37 million or 12.5%
from $10.90 million in 2006 to $12.27 million in 2007
primarily due to the outflow of deposits from the Banks
noninterest-bearing demand deposits and the growth in the
Banks Premium money market account, as well as its time
deposit accounts and NOW deposit accounts. Interest paid on
deposits increased $1.97 million or 25.0% from
$7.88 million in 2006 to $9.85 million in 2007.
Average Premium money market account balances increased
$21.3 million from 2006 to 2007 while their average rate
increased from 3.98% to 3.99% over the same period resulting in
an additional $856,000 of interest expense in 2007. Average time
deposit balances increased $5.2 million from 2006 to 2007
while the average rate on time deposits increased from 4.06% to
4.44% resulting in an additional $693,000 of interest expense in
2007. Average NOW deposit balances increased $5.2 million
from 2006 to 2007 while the average rate on NOW accounts
increased from 0.59% to 1.28% resulting in an additional
$528,000 of interest expense in 2007.
Interest expense on federal funds purchased decreased $209,000
from 2006 to 2007 due to the $3.9 million decrease in
average federal funds purchased. Interest expense on FHLB of
Atlanta advances decreased $333,000 from 2006 to 2007 due to the
$7.3 million decrease in average FHLB advances. The average
rate on total interest-bearing liabilities increased from 2.99%
in 2006 to 3.30% in 2007.
25
The following table sets forth information relating to the
Companys average balance sheet and reflects the average
yield on assets and average cost of liabilities for the periods
indicated and the average yields and rates paid for the periods
indicated. These yields and costs are derived by dividing income
or expense by the average daily balances of assets and
liabilities, respectively, for the periods presented.
AVERAGE
BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND
RATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Months Ended
|
|
|
|
12 Months Ended December 31, 2008
|
|
|
12 Months Ended December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
Average
|
|
|
Income/
|
|
|
Average
|
|
|
|
Balances
|
|
|
Expense
|
|
|
Rate
|
|
|
Balances
|
|
|
Expense
|
|
|
Rate
|
|
|
Balances
|
|
|
Expense
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
ASSETS:
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
414,000
|
|
|
$
|
26,275
|
|
|
|
6.35
|
%
|
|
$
|
406,545
|
|
|
$
|
28,551
|
|
|
|
7.02
|
%
|
|
$
|
400,218
|
|
|
$
|
27,647
|
|
|
|
6.91
|
%
|
Tax-exempt(1)
|
|
|
8,304
|
|
|
|
610
|
|
|
|
7.35
|
%
|
|
|
7,613
|
|
|
|
554
|
|
|
|
7.28
|
%
|
|
|
8,069
|
|
|
|
595
|
|
|
|
7.37
|
%
|
Nonaccrual(2)
|
|
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans
|
|
|
424,709
|
|
|
|
26,885
|
|
|
|
6.33
|
%
|
|
|
415,487
|
|
|
|
29,105
|
|
|
|
7.01
|
%
|
|
|
409,570
|
|
|
|
28,242
|
|
|
|
6.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
32,077
|
|
|
|
1,591
|
|
|
|
4.96
|
%
|
|
|
36,679
|
|
|
|
1,781
|
|
|
|
4.86
|
%
|
|
|
42,615
|
|
|
|
1,941
|
|
|
|
4.55
|
%
|
Tax-exempt(1)
|
|
|
5,362
|
|
|
|
356
|
|
|
|
6.64
|
%
|
|
|
2,619
|
|
|
|
182
|
|
|
|
6.95
|
%
|
|
|
1,015
|
|
|
|
80
|
|
|
|
7.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
37,439
|
|
|
|
1,947
|
|
|
|
5.20
|
%
|
|
|
39,298
|
|
|
|
1,963
|
|
|
|
5.00
|
%
|
|
|
43,630
|
|
|
|
2,021
|
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits in banks
|
|
|
2,030
|
|
|
|
36
|
|
|
|
1.77
|
%
|
|
|
921
|
|
|
|
34
|
|
|
|
3.64
|
%
|
|
|
501
|
|
|
|
26
|
|
|
|
5.25
|
%
|
Federal funds sold
|
|
|
1,227
|
|
|
|
33
|
|
|
|
2.69
|
%
|
|
|
1,800
|
|
|
|
92
|
|
|
|
5.04
|
%
|
|
|
1,832
|
|
|
|
92
|
|
|
|
5.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
465,405
|
|
|
|
28,901
|
|
|
|
6.21
|
%
|
|
|
457,506
|
|
|
|
31,194
|
|
|
|
6.82
|
%
|
|
|
455,533
|
|
|
|
30,381
|
|
|
|
6.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reserve for loan losses
|
|
|
(4,359
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,451
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,426
|
)
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
14,115
|
|
|
|
|
|
|
|
|
|
|
|
15,037
|
|
|
|
|
|
|
|
|
|
|
|
16,457
|
|
|
|
|
|
|
|
|
|
Bank premises and equipment, net
|
|
|
8,226
|
|
|
|
|
|
|
|
|
|
|
|
7,399
|
|
|
|
|
|
|
|
|
|
|
|
7,996
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
17,722
|
|
|
|
|
|
|
|
|
|
|
|
16,057
|
|
|
|
|
|
|
|
|
|
|
|
15,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
501,109
|
|
|
|
|
|
|
|
|
|
|
$
|
491,548
|
|
|
|
|
|
|
|
|
|
|
$
|
490,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & SHAREHOLDERS EQUITY:
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
67,541
|
|
|
|
|
|
|
|
|
|
|
$
|
75,446
|
|
|
|
|
|
|
|
|
|
|
$
|
84,988
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
84,294
|
|
|
|
799
|
|
|
|
0.95
|
%
|
|
|
72,403
|
|
|
|
923
|
|
|
|
1.28
|
%
|
|
|
67,190
|
|
|
|
395
|
|
|
|
0.59
|
%
|
Money market accounts
|
|
|
21,764
|
|
|
|
306
|
|
|
|
1.41
|
%
|
|
|
26,516
|
|
|
|
391
|
|
|
|
1.47
|
%
|
|
|
36,159
|
|
|
|
504
|
|
|
|
1.39
|
%
|
Premium money market accounts
|
|
|
68,420
|
|
|
|
1,524
|
|
|
|
2.23
|
%
|
|
|
71,385
|
|
|
|
2,850
|
|
|
|
3.99
|
%
|
|
|
50,134
|
|
|
|
1,994
|
|
|
|
3.98
|
%
|
Savings accounts
|
|
|
31,482
|
|
|
|
148
|
|
|
|
0.47
|
%
|
|
|
32,499
|
|
|
|
137
|
|
|
|
0.42
|
%
|
|
|
36,972
|
|
|
|
131
|
|
|
|
0.35
|
%
|
Time deposits
|
|
|
123,424
|
|
|
|
4,524
|
|
|
|
3.67
|
%
|
|
|
124,850
|
|
|
|
5,547
|
|
|
|
4.44
|
%
|
|
|
119,650
|
|
|
|
4,854
|
|
|
|
4.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
329,384
|
|
|
|
7,301
|
|
|
|
2.22
|
%
|
|
|
327,653
|
|
|
|
9,848
|
|
|
|
3.01
|
%
|
|
|
310,105
|
|
|
|
7,878
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased
|
|
|
5,411
|
|
|
|
118
|
|
|
|
2.18
|
%
|
|
|
4,484
|
|
|
|
243
|
|
|
|
5.42
|
%
|
|
|
8,427
|
|
|
|
452
|
|
|
|
5.37
|
%
|
Federal Home Loan Bank advances
|
|
|
48,398
|
|
|
|
1,769
|
|
|
|
3.66
|
%
|
|
|
34,107
|
|
|
|
1,802
|
|
|
|
5.28
|
%
|
|
|
41,373
|
|
|
|
2,136
|
|
|
|
5.16
|
%
|
Capital securities of subsidiary trust
|
|
|
4,124
|
|
|
|
200
|
|
|
|
4.85
|
%
|
|
|
5,118
|
|
|
|
375
|
|
|
|
7.32
|
%
|
|
|
5,276
|
|
|
|
436
|
|
|
|
8.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
387,317
|
|
|
|
9,388
|
|
|
|
2.42
|
%
|
|
|
371,362
|
|
|
|
12,268
|
|
|
|
3.30
|
%
|
|
|
365,181
|
|
|
|
10,902
|
|
|
|
2.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
4,038
|
|
|
|
|
|
|
|
|
|
|
|
4,011
|
|
|
|
|
|
|
|
|
|
|
|
2,909
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
42,213
|
|
|
|
|
|
|
|
|
|
|
|
40,729
|
|
|
|
|
|
|
|
|
|
|
|
37,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities & Shareholders Equity
|
|
$
|
501,109
|
|
|
|
|
|
|
|
|
|
|
$
|
491,548
|
|
|
|
|
|
|
|
|
|
|
$
|
490,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
$
|
19,513
|
|
|
|
3.79
|
%
|
|
|
|
|
|
$
|
18,926
|
|
|
|
3.52
|
%
|
|
|
|
|
|
$
|
19,479
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense as a percent of average earning assets
|
|
|
|
|
|
|
|
|
|
|
2.02
|
%
|
|
|
|
|
|
|
|
|
|
|
2.68
|
%
|
|
|
|
|
|
|
|
|
|
|
2.39
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
|
|
4.14
|
%
|
|
|
|
|
|
|
|
|
|
|
4.28
|
%
|
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax
equivalent basis using a federal tax rate of 34%. |
|
(2) |
|
Nonaccrual loans are included in the average balance of total
loans and total earning assets. |
26
RATE/VOLUME
ANALYSIS
The following table sets forth certain information regarding
changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided on
changes attributable to changes in volume (change in volume
multiplied by old rate); and changes in rates (change in rate
multiplied by old volume). Changes in rate-volume, which cannot
be separately identified, are allocated proportionately between
changes in rate and changes in volume.
RATE/VOLUME
VARIANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Compared to 2007
|
|
|
2007 Compared to 2006
|
|
|
|
|
|
|
Due to
|
|
|
Due to
|
|
|
|
|
|
Due to
|
|
|
Due to
|
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
|
(In thousands)
|
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans; taxable
|
|
$
|
(2,276
|
)
|
|
$
|
47
|
|
|
$
|
(2,323
|
)
|
|
$
|
903
|
|
|
$
|
261
|
|
|
$
|
642
|
|
Loans; tax-exempt(1)
|
|
|
56
|
|
|
|
50
|
|
|
|
6
|
|
|
|
(40
|
)
|
|
|
(34
|
)
|
|
|
(6
|
)
|
Securities; taxable
|
|
|
(190
|
)
|
|
|
(194
|
)
|
|
|
4
|
|
|
|
(158
|
)
|
|
|
(255
|
)
|
|
|
97
|
|
Securities; tax-exempt(1)
|
|
|
174
|
|
|
|
191
|
|
|
|
(17
|
)
|
|
|
102
|
|
|
|
126
|
|
|
|
(24
|
)
|
Deposits in banks
|
|
|
2
|
|
|
|
40
|
|
|
|
(38
|
)
|
|
|
7
|
|
|
|
22
|
|
|
|
(15
|
)
|
Federal funds sold
|
|
|
(59
|
)
|
|
|
(32
|
)
|
|
|
(27
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
(2,293
|
)
|
|
|
102
|
|
|
|
(2,395
|
)
|
|
|
813
|
|
|
|
119
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
(124
|
)
|
|
|
151
|
|
|
|
(275
|
)
|
|
|
528
|
|
|
|
31
|
|
|
|
497
|
|
Money market accounts
|
|
|
(85
|
)
|
|
|
(70
|
)
|
|
|
(15
|
)
|
|
|
(113
|
)
|
|
|
(134
|
)
|
|
|
21
|
|
Premium money market accounts
|
|
|
(1,326
|
)
|
|
|
(55
|
)
|
|
|
(1,271
|
)
|
|
|
856
|
|
|
|
845
|
|
|
|
11
|
|
Savings accounts
|
|
|
11
|
|
|
|
(4
|
)
|
|
|
15
|
|
|
|
5
|
|
|
|
(16
|
)
|
|
|
21
|
|
Time deposits
|
|
|
(1,023
|
)
|
|
|
(12
|
)
|
|
|
(1,011
|
)
|
|
|
693
|
|
|
|
211
|
|
|
|
482
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
(125
|
)
|
|
|
50
|
|
|
|
(175
|
)
|
|
|
(209
|
)
|
|
|
(212
|
)
|
|
|
3
|
|
Federal Home Loan Bank advances
|
|
|
(33
|
)
|
|
|
756
|
|
|
|
(789
|
)
|
|
|
(333
|
)
|
|
|
(375
|
)
|
|
|
42
|
|
Capital securities of subsidiary trust
|
|
|
(175
|
)
|
|
|
(73
|
)
|
|
|
(102
|
)
|
|
|
(61
|
)
|
|
|
(13
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
(2,880
|
)
|
|
|
743
|
|
|
|
(3,623
|
)
|
|
|
1,366
|
|
|
|
337
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
587
|
|
|
$
|
(641
|
)
|
|
$
|
1,228
|
|
|
$
|
(553
|
)
|
|
$
|
(218
|
)
|
|
$
|
(335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Income and rates on non-taxable assets are computed on a tax
equivalent basis using a federal tax rate of 34%. |
PROVISION
FOR LOAN LOSSES, ALLOWANCE FOR LOAN LOSSES, AND ASSET
QUALITY
The provision for loan losses was $3.23 million for 2008,
$717,000 for 2007, and $360,000 for 2006. The amount of the
provision for loan loss for 2008, 2007, and 2006 was based upon
managements continual evaluation of the adequacy of the
allowance for loan losses, which encompasses the overall risk
characteristics of the loan portfolio, trends in the Banks
delinquent and non-performing loans, estimated values of
collateral, and the impact of economic conditions on borrowers.
Greater weight is given to the loss history by loan category,
prolonged changes in portfolio delinquency trends by loan
category, and changes in economic trends. There can be no
assurances, however, that future losses will not exceed
estimated amounts, or that increased amounts of provisions for
loan losses will not be required in future periods.
The increase in the provision for loan losses during 2008 was
largely in response to the increase in non-performing assets and
net loan chargeoffs in 2008, as well as the impact of a slowing
economy, declining real estate values, and continued growth in
new loan originations during 2008 and 2007. The increase in the
provision for loan
27
losses from 2006 to 2007 was largely in response to the increase
in net loan chargeoffs. Loan chargeoffs, net of recoveries,
totaled $2.6 million for 2008, $1.0 million for 2007,
and $127,000 for 2006.
LOAN
PORTFOLIO
At December 31, 2008, 2007, and 2006, net loans accounted
for 84.5%, 83.5%, and 79.7% of total assets, respectively, and
were the largest category of the Companys earning assets.
Loans are shown on the balance sheets net of unearned discounts
and the allowance for loan losses. Interest is computed by
methods that result in level rates of return on principal. Loans
are charged-off when deemed by management to be uncollectible,
after taking into consideration such factors as the current
financial condition of the customer and the underlying
collateral and guarantees.
The Company has adopted Financial Accounting Standards Board
(FASB) Statement No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by FASB
Statement No. 118, Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures.
FASB Statement No. 114, as amended, requires that the
impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided solely by
the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment is
to be based on the net realizable value of the collateral. FASB
Statement No. 114, as amended, also requires certain
disclosures about investments in impaired loans and the
allowance for loan losses and interest income recognized on
loans.
A loan is considered impaired when it is probable that the Bank
will be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement.
Factors involved in determining impairment include, but are not
limited to, expected future cash flows, financial condition of
the borrower, and the current economic conditions. A performing
loan may be considered impaired if the factors above indicate a
need for impairment. A loan on non-accrual status may not be
impaired if it is in the process of collection or if the
shortfall in payment is insignificant. A delay of less than
30 days or a shortfall of less than 5% of the required
principal and interest payments generally is considered
insignificant and would not indicate an impairment
situation, if in managements judgment the loan will be
paid in full. Loans that meet the regulatory definitions of
doubtful or loss generally qualify as impaired loans under FASB
Statement No. 114. As is the case for all loans,
charge-offs for impaired loans occur when the loan or portion of
the loan is determined to be uncollectible.
The Bank considers all consumer installment loans and
residential mortgage loans to be homogenous loans. These loans
are not subject to individual impairment under FASB Statement
No. 114.
ASSET
QUALITY
Non-performing assets, in most cases, consist of loans that are
90 days or more past due and for which the accrual of
interest has been discontinued. Management evaluates all loans
that are 90 days or more past due, as well as borrowers
that have suffered financial distress, to determine if they
should be placed on non-accrual status. Factors considered by
management include the net realizable value of collateral, if
any, and other resources of the borrower that may be available
to satisfy the delinquency.
Loans are placed on non-accrual status when they have been
specifically determined to be impaired or when principal or
interest is delinquent for 90 days or more, unless the
loans are well secured and in the process of collection. Any
unpaid interest previously accrued on such loans is reversed
from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is
remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on
other non-accrual loans is recognized only to the extent of
interest payments received.
Non-performing assets totaled $4.3 million or 0.97% of
total loans and other real estate owned at December 31,
2008, as compared with $2.1 million or 0.51% of total loans
at December 31, 2007 and $1.75 million, or 0.42% of
total loans at December 31, 2006. Non-performing assets as
a percentage of the allowance for loan losses were 89.4%, 50.8%
and 39.1% at December 31, 2008, 2007 and 2006,
respectively. The number of non-performing loan
28
relationships increased from seventeen at December 31, 2006
to thirty-two at December 31, 2007, but decreased to
nineteen at December 31, 2008. The reduction in the number
of non-performing loan relationships from the end of 2007 to the
end of 2008 was primarily due to the reduction in non-performing
consumer loans, primarily auto loans, over that same time
period. The Banks other real estate owned consists of two
properties with a total value, net of cost to sell, of
$3,034,000 at December 31, 2008 compared with none at
December 31, 2007 and 2006. The first property has a net
value of approximately $2 million and consists of
47 acres of undeveloped land in Opal, Virginia. The second
property has a net value of approximately $1 million and
consists of a 5,500 square foot office condominium located
in Warrenton, Virginia.
Loans that were 90 days past due and accruing interest
totaled $102,000, $770,000, and $1,000 at December 31,
2008, 2007, and 2006, respectively. No loss is anticipated on
any loan 90 days past due and accruing interest. Of the
loans 90 days past due and accruing at December 31,
2008, both were subsequently brought current as of
January 31, 2009. Additionally, there were four loan
relationships totaling $225,000 that were accruing interest at
December 31, 2008, but which were considered impaired and
were allocated specific loan loss reserves. There are no loans,
other than those disclosed above as either non-performing or
impaired, where information known about the borrower has caused
management to have serious doubts about the borrowers
ability to repay.
At December 31, 2008, there are no other interest-bearing
assets that would be subject to disclosure as either
non-performing or impaired.
At December 31, 2008, no concentration of loans to
commercial borrowers engaged in similar activities exceeded 10%
of total loans. The largest industry concentrations at
December 31, 2008 were approximately 5.4% of loans to the
hospitality industry (hotels, motels, inns, etc.). For more
information regarding the Banks concentration of loans
collateralized by real estate, please refer to the discussion
under Risk Factors in Item 1A of this report
entitled We have a high concentration of loans secured by
real estate and a downturn in the real estate market, for any
reason, may increase our credit losses, which would negatively
affect our financial results.
Based on recently enacted regulatory guidelines, the Bank is now
required to monitor the commercial investment real estate loan
portfolio for: (a) concentrations above 100% of Tier 1
capital and loan loss reserve for construction and land loans
and (b) 300% for permanent investor real estate loans. As
of December 31, 2008, construction and land loans are
$39.2 million or 75.3% of the concentration limit, while
permanent investor real estate loans (by NAICS code) are
$103.5 million or 198.8% of the concentration level.
Total loans on the balance sheet are comprised of the following
classifications as of December 31, 2008, 2007, 2006, 2005,
and 2004.
LOAN
PORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Loans secured by real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
38,037
|
|
|
$
|
37,204
|
|
|
$
|
33,662
|
|
|
$
|
27,302
|
|
|
$
|
29,270
|
|
Secured by farmland
|
|
|
1,293
|
|
|
|
1,365
|
|
|
|
1,365
|
|
|
|
535
|
|
|
|
965
|
|
1-4 family residential
|
|
|
175,791
|
|
|
|
170,983
|
|
|
|
168,310
|
|
|
|
153,997
|
|
|
|
136,165
|
|
Commercial real estate
|
|
|
160,443
|
|
|
|
132,918
|
|
|
|
134,955
|
|
|
|
120,416
|
|
|
|
100,757
|
|
Commercial and industrial loans (except those secured by real
estate)
|
|
|
39,985
|
|
|
|
38,203
|
|
|
|
41,508
|
|
|
|
35,497
|
|
|
|
24,036
|
|
Consumer loans to individuals (except those secured by real
estate)
|
|
|
15,695
|
|
|
|
24,133
|
|
|
|
31,952
|
|
|
|
38,677
|
|
|
|
41,088
|
|
All other loans
|
|
|
8,934
|
|
|
|
8,824
|
|
|
|
9,273
|
|
|
|
9,386
|
|
|
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
440,178
|
|
|
$
|
413,630
|
|
|
$
|
421,025
|
|
|
$
|
385,810
|
|
|
$
|
342,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $160.4 million of commercial real estate outstanding
at December 31, 2008, $96.2 million are owner-occupied
properties.
29
The following table sets forth certain information with respect
to the Banks non-accrual, restructured and past due loans,
as well as foreclosed assets, at the dates indicated:
NON-PERFORMING
ASSETS AND LOANS CONTRACTUALLY PAST DUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Non-accrual loans
|
|
$
|
1,208
|
|
|
$
|
1,906
|
|
|
$
|
1,608
|
|
|
$
|
13
|
|
|
$
|
62
|
|
Restructured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned
|
|
|
3,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other repossessed assets owned
|
|
|
33
|
|
|
|
222
|
|
|
|
140
|
|
|
|
182
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
4,275
|
|
|
$
|
2,128
|
|
|
$
|
1,748
|
|
|
$
|
195
|
|
|
$
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days accruing interest
|
|
$
|
102
|
|
|
$
|
770
|
|
|
$
|
1
|
|
|
$
|
679
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans and other real estate
period end
|
|
|
1.08
|
%
|
|
|
1.02
|
%
|
|
|
1.07
|
%
|
|
|
1.11
|
%
|
|
|
1.19
|
%
|
Non-performing assets to period end loans and other repossessed
assets owned
|
|
|
0.97
|
%
|
|
|
0.51
|
%
|
|
|
0.42
|
%
|
|
|
0.05
|
%
|
|
|
0.05
|
%
|
Potential Problem Loans: For additional information regarding
non-performing assets and potential loan problems, see
Allowance for Loan Losses in Note 5 of the
Notes to Consolidated Financial Statements contained herein.
ANALYSIS
OF LOAN LOSS EXPERIENCE
The allowance for loan losses is maintained at a level which, in
managements judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on managements evaluation of the collectibility of
the loan portfolio, credit concentration, trends in historical
loss experience, specific impaired loans, and current economic
conditions. Management periodically reviews the loan portfolio
to determine probable credit losses related to specifically
identified loans as well as credit losses inherent in the
remainder of the loan portfolio. Allowances for impaired loans
are generally determined based on net realizable values or the
present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes
in the allowances relating to impaired loans are charged or
credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process,
managements estimate of credit losses inherent in the loan
portfolio and the related allowance remains subject to change.
Additions to the allowance for loan losses, recorded as the
provision for loan losses on the Companys statements of
income, are made monthly to maintain the allowance at an
appropriate level based on managements analysis of the
inherent risk in the loan portfolio. The amount of the provision
is a function of the level of loans outstanding, the level of
non-performing loans, historical loan-loss experience, the
amount of loan losses actually charged off or recovered during a
given period and current national and local economic conditions.
At December 31, 2008, 2007, 2006, 2005, and 2004, the
allowance for loan losses was $4,780,000, $4,185,000,
$4,471,000, $4,238,000, and $4,060,000, respectively. As a
percentage of total loans and other real estate owned, the
allowance for loan losses increased from 1.02% at
December 31, 2007 to 1.08% at December 31, 2008 as the
percentage of non-performing assets to total loans and other
repossessed assets increased from 0.51% to 0.97% over the same
time period.
30
The following table summarizes the Banks loan loss
experience for each of the years ended December 31, 2008,
2007, 2006, 2005, and 2004, respectively:
ANALYSIS
OF ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for loan losses, January 1,
|
|
$
|
4,185
|
|
|
$
|
4,471
|
|
|
$
|
4,238
|
|
|
$
|
4,060
|
|
|
$
|
3,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
750
|
|
|
|
762
|
|
|
|
56
|
|
|
|
18
|
|
|
|
102
|
|
Construction
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential real estate
|
|
|
807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
530
|
|
|
|
301
|
|
|
|
200
|
|
|
|
330
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans charged-off
|
|
|
2,704
|
|
|
|
1,063
|
|
|
|
256
|
|
|
|
348
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
12
|
|
|
|
|
|
|
|
60
|
|
|
|
10
|
|
|
|
142
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 family residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
Consumer
|
|
|
60
|
|
|
|
60
|
|
|
|
69
|
|
|
|
43
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans recoveries
|
|
|
72
|
|
|
|
60
|
|
|
|
129
|
|
|
|
53
|
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-Offs
|
|
|
2,632
|
|
|
|
1,003
|
|
|
|
127
|
|
|
|
295
|
|
|
|
55
|
|
Provision for loan losses
|
|
|
3,227
|
|
|
|
717
|
|
|
|
360
|
|
|
|
473
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, December 31,
|
|
$
|
4,780
|
|
|
$
|
4,185
|
|
|
$
|
4,471
|
|
|
$
|
4,238
|
|
|
$
|
4,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average loans
|
|
|
0.62
|
%
|
|
|
0.24
|
%
|
|
|
0.03
|
%
|
|
|
0.08
|
%
|
|
|
0.02
|
%
|
31
The following table allocates the allowance for loan losses at
December 31, 2008, 2007, 2006, 2005, and 2004 to each loan
category. The allowance has been allocated according to the
amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the following
categories of loans at the dates indicated, although the entire
allowance balance is available to absorb any actual charge-offs
that may occur.
ALLOCATION
OF ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Allowance
|
|
|
Percentage
|
|
|
Allowance
|
|
|
Percentage
|
|
|
Allowance
|
|
|
Percentage
|
|
|
|
for Loan
|
|
|
of Total
|
|
|
for Loan
|
|
|
of Total
|
|
|
for Loan
|
|
|
of Total
|
|
|
|
Losses
|
|
|
Loans
|
|
|
Losses
|
|
|
Loans
|
|
|
Losses
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial & industrial
|
|
$
|
1,323
|
|
|
|
9.10
|
%
|
|
$
|
1,334
|
|
|
|
9.24
|
%
|
|
$
|
1,367
|
|
|
|
9.86
|
%
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
231
|
|
|
|
8.66
|
%
|
|
|
317
|
|
|
|
8.99
|
%
|
|
|
403
|
|
|
|
8.00
|
%
|
Secured by farmland
|
|
|
10
|
|
|
|
0.29
|
%
|
|
|
10
|
|
|
|
0.33
|
%
|
|
|
17
|
|
|
|
0.32
|
%
|
1-4 Family residential
|
|
|
1,326
|
|
|
|
40.00
|
%
|
|
|
603
|
|
|
|
41.34
|
%
|
|
|
475
|
|
|
|
39.98
|
%
|
Commercial real estate
|
|
|
1,621
|
|
|
|
36.51
|
%
|
|
|
1,560
|
|
|
|
32.13
|
%
|
|
|
1,741
|
|
|
|
32.05
|
%
|
Consumer
|
|
|
259
|
|
|
|
3.41
|
%
|
|
|
356
|
|
|
|
5.83
|
%
|
|
|
463
|
|
|
|
7.59
|
%
|
All other loans
|
|
|
10
|
|
|
|
2.03
|
%
|
|
|
6
|
|
|
|
2.13
|
%
|
|
|
5
|
|
|
|
2.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,780
|
|
|
|
100.00
|
%
|
|
$
|
4,185
|
|
|
|
100.00
|
%
|
|
$
|
4,471
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Allowance
|
|
|
Percentage
|
|
|
Allowance
|
|
|
Percentage
|
|
|
|
for Loan
|
|
|
of Total
|
|
|
for Loan
|
|
|
of Total
|
|
|
|
Losses
|
|
|
Loans
|
|
|
Losses
|
|
|
Loans
|
|
|
Commercial & industrial
|
|
$
|
1,234
|
|
|
|
9.20
|
%
|
|
$
|
1,102
|
|
|
|
7.02
|
%
|
Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
318
|
|
|
|
7.08
|
%
|
|
|
466
|
|
|
|
8.55
|
%
|
Secured by farmland
|
|
|
|
|
|
|
0.14
|
%
|
|
|
|
|
|
|
0.28
|
%
|
1-4 Family residential
|
|
|
479
|
|
|
|
39.92
|
%
|
|
|
607
|
|
|
|
39.79
|
%
|
Commercial real estate
|
|
|
1,548
|
|
|
|
31.21
|
%
|
|
|
1,136
|
|
|
|
29.44
|
%
|
Consumer
|
|
|
659
|
|
|
|
10.02
|
%
|
|
|
681
|
|
|
|
12.01
|
%
|
All other loans
|
|
|
|
|
|
|
2.43
|
%
|
|
|
68
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,238
|
|
|
|
100.00
|
%
|
|
$
|
4,060
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME
2008
COMPARED WITH 2007
Total non-interest income decreased by $162,000 from
$6.06 million in 2007 to $5.90 million in 2008.
Non-interest income is derived primarily from non-interest fee
income, which consists primarily of fiduciary and other Wealth
Management fees, service charges on deposit accounts, and other
fee income. Also included in non-interest income were an
impairment loss of $423,000 on the Freddie Mac preferred stock,
as well as gains of $122,000 from the Banks activities in
the partial ownership in finance-related limited liability
corporations, and a gain of $88,000 on the sale of investment
securities.
Wealth Management income decreased $126,000 or 8.9% from 2007 to
2008, primarily as the result of the decrease in the market
value of the assets under management. Service charges on deposit
accounts decreased $4,000 or 0.1% to $2.94 million for
2008, compared with $2.94 million for 2007. Other service
charges, commissions and fees increased $277,000 or 16.2% from
$1.71 million in 2007 to $1.98 million in 2008
primarily due to gains of $122,000 from the Banks
activities in the partial ownership in finance-related limited
liability corporations. During
32
2008, the Bank recognized the net gain of $122,000 in the value
of their partial ownership in four different entities, primarily
a $217,000 gain due to the Banks ownership interest in
Infinex, a full service broker/dealer. On April 30, 2008,
Infinex merged with Bankers Investments Group, LLC. As part of
the merger, equity was infused by new participants, which in
turn, recapitalized the Banks existing ownership position.
Also included in other service charges, commissions, and income
is BOLI income, which was $410,000 in 2008 compared with
$393,000 in 2007. Total BOLI was $10.4 million at
December 31, 2008.
The Bank had an impairment loss of $423,000 on the Freddie Mac
preferred stock during 2008. In addition, the Bank realized
gains from sales of three securities available for sale of
$88,000. The proceeds from the sale of the three securities,
including the realized gain, amounted to $9.1 million. Two
of the securities, totaling approximately $7.0 million, had
a remaining maturity of less than seven months, while the third
security, totaling $2.0 million, had a remaining maturity
of 18 months. The proceeds of the sale were redeployed into
securities with an average assumed life of approximately five
years.
Management seeks to increase the level of its future fee income
from wealth management services and deposits through the
increase of its market share within its marketplace. Wealth
management fees are projected to continue to grow at a pace
closer to the 5% growth seen in 2006, rather than the 1% growth
seen in 2007 and the decline in 2008. This assumes that the
market value of the U.S. and international stock markets
increases. Fees from deposits are projected to grow at a rate
similar to 2007 and reflect the projected growth for retail core
deposits.
2007
COMPARED WITH 2006
Total non-interest income increased by $237,000 from
$5.83 million in 2006 to $6.06 million in 2007. Wealth
Management income increased $68,000 or 5.1% from 2006 to 2007,
primarily as the result of increased assets under management.
Service charges on deposit accounts increased $162,000 or 5.8%
to $2.94 million for 2007, compared with $2.78 million
for 2006 due to the increase in the number of transaction
accounts generating fee income. Other service charges,
commissions and fees increased $174,000 or 11.4% from
$1.53 million in 2006 to $1.71 million in 2007
primarily due to increased income from VISA check card fees. The
increase in VISA check fees is primarily due to the increase in
the Banks retail deposit customer base. Included in other
service charges, commissions, and income is BOLI income, which
was $393,000 in 2007 compared with $372,000 in 2006. Total BOLI
was $10.0 million at December 31, 2007.
There were no gains or losses on the sale of securities or other
assets in 2007.
During 2006, the Bank entered into an agreement cancelling a
property usage contract. In consideration for this agreement,
the Bank received a one-time payment of $250,000, or
approximately $165,000 net of applicable income taxes. Also
during 2006, management elected to sell, for asset/liability
restructuring purposes, approximately $3.0 million of
investment securities available for sale at a loss of $83,000.
NON-INTEREST
EXPENSE
2008
COMPARED WITH 2007
Total non-interest expense decreased $141,000 or 0.8% in 2008
compared with 2007. The primary component of this was a decrease
in salaries and employees benefits of $1.02 million,
or 11.0%. The decrease in salary and benefit expense was
primarily due to the elimination of all cash-based incentive
compensation for 2008, as compared with $596,000 paid in
incentive compensation in 2007, as well as a $780,000 decrease
in defined benefit pension plan expense from 2007 to 2008 due to
the termination of the defined benefit pension plan effective
January 1, 2010. Full-time equivalent personnel totaled 148
at year-end 2008 compared with 149 at year-end 2007.
On December 20, 2007, the Board approved the termination of
the defined benefit pension plan effective on December 31,
2009, and effective January 1, 2010, replace the defined
benefit pension plan with an enhanced 401(k) plan. Defined
benefit pension plan expenses are projected to be approximately
$286,000 during 2009 and 401(k) expenses are projected to
increase approximately $625,000 in 2010. Growth in 401(k) after
2010 is projected to increase approximately at the same rate of
increase as salaries.
33
The Bank expects personnel costs, consisting primarily of salary
and benefits, to continue to be its largest non-interest
expense. As such, the most important factor with regard to
potential changes in other expenses is the expansion of staff.
The cost of any additional staff expansion, however, would be
expected to be offset by the increased revenue generated by the
additional services that the new staff would enable the Bank to
perform. During 2009, the Company projects the increase of
approximately 14 full-time equivalent people. These new
positions are planned to staff the new branches opening in
Bristow and Haymarket. Additionally, if the profitability of the
Company reaches specific goals approved by the Board during
2009, incentive compensation expenses may increase by
approximately $400,000 to $750,000 dependent upon the level of
Company profitability.
Net occupancy expense increased $238,000 or 22.8%, and furniture
and equipment expense decreased $2,000 or 0.2%, from 2007 to
2008. The increase in occupancy expenses primarily reflects the
sale and temporary rental of the View Tree branch office during
2008.
Marketing expense increased $71,000 or 13.0% from 2007 to 2008
primarily due to an increase in direct mail marketing for
commercial transaction account deposits.
Consulting expense, which includes legal and accounting
professional fees, increased $180,000 or 19.6% in 2008 compared
with 2007 primarily reflecting legal and other costs associated
with loan work-outs.
Data processing expense increased $36,000 or 2.8% in 2008
compared with 2007. The Bank outsources much of its data
processing to a third-party vendor. The increase in expense
primarily reflects increased deposit transactions and other data
processing system usage by the Bank. The Bank will be converting
its data processing to a different third-party vendor in
mid-2009. The impact of the conversion on future data processing
expenses is projected to be a minimal reduction in direct
expense, but is projected to increase productivity and reduce
the growth rate in new personnel.
Other operating expenses increased $353,000 or 12.9% in 2008
compared with 2007. The increase in other operating expense was
primarily due to the increase in the rate of FDIC insurance on
deposits, which increased from $47,000 in 2007 to $291,000 in
2008. FDIC insurance expense is projected to increase by an
approximate 100% to $580,000 for 2009. The FDIC is required by
law to establish a Restoration Plan any time the Deposit
Insurance Fund (DIF) reserve ratio falls below
1.15%. The projected increase in FDIC deposit insurance
assessment is due to recent failures of FDIC-insured
institutions which lowered the reserve ratio of the DIF from
1.19% as of March 30, 2008 to 0.76% as of
September 30, 2008. The agency also indicated that it
expects a higher rate of failures over the next several years.
2007
COMPARED WITH 2006
Total non-interest expense increased $333,000 or 2.0% in 2007
compared with 2006. The primary component of this was an
increase in salaries and employees benefits of $232,000,
or 2.6%, primarily due to customary annual salary increases,
partially offset by decreases in defined benefit pension plan
expenses and performance-based incentive plan expenses.
Full-time equivalent personnel totaled 149 at year-end 2007
compared with 139 at year-end 2006.
Net occupancy expense increased $32,000 or 3.1%, and furniture
and equipment expense decreased $182,000 or 13.4%, from 2006 to
2007. The decrease in furniture and equipment expenses primarily
reflects the decrease in computer software depreciation expense.
Consulting expense, which includes legal and accounting
professional fees, increased $98,000 or 12.0% in 2007 compared
with 2006 primarily reflecting costs associated with
Sarbanes-Oxley compliance in connection with implementing the
requirements of Section 404 regarding Managements
Report on Internal Controls.
Data processing expense increased $163,000 or 14.6% in 2007
compared with 2006. The Bank outsources much of its data
processing to a third-party vendor. The increase in expense
primarily reflects increased deposit transactions and other data
processing system usage by the Bank.
Marketing expense decreased $23,000 or 4.0%, and other operating
expenses increased $14,000 or 0.5% in 2007 compared with 2006.
34
INCOME
TAXES
Income tax expense decreased by $721,000 for the year ended
December 31, 2008 compared to the year ended
December 31, 2007. Income tax expense decreased by $377,000
for the year ended December 31, 2007 compared to the year
ended December 31, 2006. The effective tax rates were 27.2%
for 2008, 29.6% for 2007, and 30.5% for 2006. The effective tax
rate differs from the statutory federal income tax rate of 34%
due to the Banks investment in tax-exempt loans and
securities, income from the BOLI purchases, and community
development tax credits.
COMPARISON
OF FINANCIAL CONDITION AT DECEMBER 31, 2008 AND DECEMBER 31,
2007
Total assets were $514.5 million at December 31, 2008,
an increase of 5.0% or $24.6 million from
$489.9 million at December 31, 2007. Balance sheet
categories reflecting significant changes included cash and due
from banks, federal funds sold, total loans, deposits, and FHLB
advances. Each of these categories, as well as investment
securities and company-obligated mandatorily redeemable capital
securities of subsidiary trust, is discussed below.
CASH AND DUE FROM BANKS and INTEREST-BEARING DEPOSITS IN
OTHER BANKS. Non-interest-bearing cash and due
from banks was $7.7 million at December 31, 2008,
reflecting a decrease of $9.0 million from
December 31, 2007. Interest-bearing deposits in banks
increased from $823,000 at December 31, 2007 to
$3.3 million at December 31, 2008. The decrease in
non-interest-bearing cash and due from banks, and the increase
in interest-bearing deposits in other banks were primarily due
to a change in Federal Reserve Bank policy regarding the payment
of interest on some deposits at the Fed beginning in the fourth
quarter of 2008.
INVESTMENT SECURITIES. Total investment
securities were $37.8 million at December 31, 2008,
reflecting an increase of $0.4 million from
$37.4 million at December 31, 2007. At
December 31, 2008 and 2007, all investment securities were
available for sale. The valuation allowance for the available
for sale portfolio had an unrealized loss, net of tax benefit,
of $1.61 million at December 31, 2008 compared with an
unrealized loss, net of tax benefit, of $333,000 at
December 31, 2007. See Note 3 Securities
of the Notes to Consolidated Financial Statements for further
discussion on the market value loss on the Banks
investment securities.
At December 31, 2008, 2007 and 2006, the carrying values of
the major classifications of securities were as follows:
INVESTMENT
PORTFOLIO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale(1)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Obligations of U.S. Government corporations and agencies
|
|
$
|
25,772
|
|
|
$
|
22,948
|
|
|
$
|
28,932
|
|
Obligations of states and political subdivisions
|
|
|
5,458
|
|
|
|
5,372
|
|
|
|
1,012
|
|
Corporate Bonds
|
|
|
3,138
|
|
|
|
5,651
|
|
|
|
5,985
|
|
Mutual funds
|
|
|
298
|
|
|
|
286
|
|
|
|
270
|
|
Restricted investment Federal Home Loan Bank stock
|
|
|
2,906
|
|
|
|
2,514
|
|
|
|
3,437
|
|
FHLMC preferred stock
|
|
|
6
|
|
|
|
344
|
|
|
|
455
|
|
Other securities
|
|
|
261
|
|
|
|
262
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
37,839
|
|
|
$
|
37,377
|
|
|
$
|
40,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts for available-for-sale securities are based on fair
value. |
35
ESTIMATED
MATURITY OR NEXT RATE ADJUSTMENT DATE
The following is a schedule of estimated maturities or next rate
adjustment date and related weighted average yields of
securities at December 31, 2008:
ESTIMATED
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in One Year or Less
|
|
|
Due After 1 through 5 Years
|
|
|
Due After 5 through 10 Years
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government corporations and agencies
|
|
$
|
1,549
|
|
|
|
3.49
|
%
|
|
$
|
10,783
|
|
|
|
4.91
|
%
|
|
$
|
5,413
|
|
|
|
4.47
|
%
|
Corporate bonds
|
|
|
3,138
|
|
|
|
6.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total taxable
|
|
|
4,687
|
|
|
|
5.30
|
%
|
|
|
10,783
|
|
|
|
4.91
|
%
|
|
|
5,413
|
|
|
|
4.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
subdivisions, tax-exempt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
991
|
|
|
|
5.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities:
|
|
$
|
4,687
|
|
|
|
5.30
|
%
|
|
$
|
10,783
|
|
|
|
4.91
|
%
|
|
$
|
6,404
|
|
|
|
4.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after 10 Years and Equity Securities
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government corporations and agencies
|
|
$
|
8,027
|
|
|
|
5.03
|
%
|
|
$
|
25,772
|
|
|
|
4.77
|
%
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
3,138
|
|
|
|
6.19
|
%
|
Other taxable securities
|
|
|
3,471
|
|
|
|
0.54
|
%
|
|
|
3,471
|
|
|
|
0.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total taxable
|
|
|
11,498
|
|
|
|
3.51
|
%
|
|
|
32,381
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions, tax-exempt
|
|
|
4,467
|
|
|
|
4.08
|
%
|
|
|
5,458
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities:
|
|
$
|
15,965
|
|
|
|
3.67
|
%
|
|
$
|
37,839
|
|
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding obligations of U.S. Government corporations and
agencies, no Bank security investment exceeded 10% of
shareholders equity.
LOANS. Total net loan balance after allowance
for loan losses was $434.7 million at December 31,
2008, which represents an increase of $25.6 million or 6.3%
from $409.1 million at December 31, 2007. The majority
of the increase in loans was in commercial real estate loans,
which increased $27.5 million from year-end 2007 to
year-end 2008, and 1-to-4 family residential loans, which
increased $4.8 million over the same time period, partially
offset by an $8.4 million decrease in consumer loans. The
Banks loans are made primarily to customers located within
the Banks primary market area. The Bank continually
modifies its loan pricing strategies and expands its loan
product offerings in an effort to increase lending activity
without sacrificing the existing credit quality standards.
36
MATURITIES
AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST
RATES
The following is a schedule of maturities and sensitivities of
loans subject to changes in interest rates as of
December 31, 2008:
MATURITY
SCHEDULE OF SELECTED LOANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
After
|
|
|
|
|
|
|
1 Year
|
|
|
5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Commercial real estate loans
|
|
$
|
7,598
|
|
|
$
|
21,232
|
|
|
$
|
131,613
|
|
|
$
|
160,443
|
|
Commercial and industrial loans
|
|
|
26,965
|
|
|
|
7,159
|
|
|
|
5,861
|
|
|
|
39,985
|
|
Construction loans
|
|
|
22,431
|
|
|
|
13,423
|
|
|
|
2,183
|
|
|
|
38,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56,994
|
|
|
$
|
41,814
|
|
|
$
|
139,657
|
|
|
$
|
238,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For maturities over one year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floating and adjustable rate loans
|
|
|
|
|
|
$
|
14,376
|
|
|
$
|
51,042
|
|
|
$
|
65,418
|
|
Fixed rate loans
|
|
|
|
|
|
|
27,438
|
|
|
|
88,615
|
|
|
|
116,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,814
|
|
|
$
|
139,657
|
|
|
$
|
181,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPOSITS. For the year ended December 31,
2008, total deposits decreased by $4.3 million or 1.1% when
compared with total deposits one year earlier.
Non-interest-bearing deposits decreased by $7.0 million and
interest-bearing deposits increased by $2.7 million. The
decline in the Banks non-interest-bearing deposits during
2008 was the result of many factors difficult to segregate and
quantify, and equally difficult to use as factors for future
projections. The economy, local competition, retail customer
preferences, changes in business cash management practices by
Bank customers, the decline of escrow balances on residential
real estate loans, the relative pricing from wholesale funding
sources, and the Banks funding needs all contributed to
the change in deposit balances. Included in interest-bearing
deposits at December 31, 2008 were $37.4 million of
brokered deposits, or 9.3% of total deposits. This compares with
$9.3 million of brokered deposits at December 31,
2007, or 2.3% of total deposits. Of the $37.4 million in
brokered deposits at December 31, 2008, all
$37.4 million were deposits of Bank customers, exchanged
through the CD Account Registry Services
(CDARS) network. With the CDARS program, funds are
placed into certificate of deposits issued by other banks in the
network, in increments usually less than $100,000, to ensure
both principal and interest are eligible for complete FDIC
coverage. These deposits are exchanged with other member banks
on a dollar-for-dollar basis, bringing the full amount of our
customers deposits back to the bank and making these funds fully
available for lending in our community. The Bank projects to
increase its transaction account and other deposits in 2009 and
beyond through the expansion of its branch network, as well as
by offering value-added NOW and demand deposit products, and
selective rate premiums on its interest-bearing deposits.
37
The average daily amounts of deposits and rates paid on deposits
is summarized for the periods indicated in the following table:
DEPOSITS
AND RATES PAID
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Non-interest-bearing
|
|
$
|
67,541
|
|
|
|
|
|
|
$
|
75,446
|
|
|
|
|
|
|
$
|
84,988
|
|
|
|
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
84,294
|
|
|
|
0.95
|
%
|
|
|
72,403
|
|
|
|
1.28
|
%
|
|
|
67,190
|
|
|
|
0.59
|
%
|
Money market accounts
|
|
|
21,764
|
|
|
|
1.41
|
%
|
|
|
26,516
|
|
|
|
1.47
|
%
|
|
|
36,159
|
|
|
|
1.39
|
%
|
Premium money market accounts
|
|
|
68,420
|
|
|
|
2.23
|
%
|
|
|
71,385
|
|
|
|
3.99
|
%
|
|
|
50,134
|
|
|
|
3.98
|
%
|
Regular savings accounts
|
|
|
31,482
|
|
|
|
0.47
|
%
|
|
|
32,499
|
|
|
|
0.42
|
%
|
|
|
36,972
|
|
|
|
0.35
|
%
|
Time deposits:
|
|
|
123,424
|
|
|
|
3.67
|
%
|
|
|
124,850
|
|
|
|
4.44
|
%
|
|
|
119,650
|
|
|
|
4.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
329,384
|
|
|
|
|
|
|
|
327,653
|
|
|
|
3.01
|
%
|
|
|
310,105
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
396,925
|
|
|
|
|
|
|
$
|
403,099
|
|
|
|
|
|
|
$
|
395,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MATURITY
OF TIME DEPOSITS OF $100,000 OR MORE
The following is a schedule of maturities of time deposits in
amounts of $100,000 or more at December 31, 2008:
MATURITIES
OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 AND MORE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Three to
|
|
|
Six to
|
|
|
One to
|
|
|
Over
|
|
|
|
|
|
|
Three
|
|
|
Six
|
|
|
Twelve
|
|
|
Four
|
|
|
Four
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
At December 31, 2008
|
|
$
|
12,990
|
|
|
$
|
13,019
|
|
|
$
|
18,616
|
|
|
$
|
8,387
|
|
|
$
|
104
|
|
|
$
|
53,117
|
|
COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES
OF SUBSIDIARY TRUST (capital
securities). On March 26, 2002, the
Company established a subsidiary trust that issued
$4.0 million of capital securities as part of a pooled
trust preferred security offering with other financial
institutions. The Company used the offering proceeds for the
purposes of expansion and the repurchase of additional shares of
its common stock. Under applicable regulatory guidelines, the
capital securities are treated as Tier 1 capital for
purposes of the Federal Reserves capital guidelines for
bank holding companies, as long as the capital securities and
all other cumulative preferred securities of the Company
together do not exceed 25% of Tier 1 capital.
On September 21, 2006, the Companys wholly-owned
Connecticut statutory business trust privately issued
$4.0 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 $4.0 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 purpose of the September 2006 issuance
was to use the proceeds to redeem, on March 26, 2007, the
existing capital securities issued on March 26, 2002.
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
reduced the interest expense associated with the distribution on
capital securities of subsidiary trust by $76,000 annually.
38
BORROWINGS. Amounts and weighted average rates
for long and short term borrowings as of December 31, 2008,
2007 and 2006 are as follows:
BORROWED
FUNDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
FHLB Advances
|
|
$
|
45,000
|
|
|
|
3.35
|
%
|
|
$
|
35,000
|
|
|
|
4.94
|
%
|
|
$
|
55,000
|
|
|
|
5.33
|
%
|
Federal funds purchased
|
|
$
|
18,275
|
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL
RESOURCES AND LIQUIDITY
Shareholders equity totaled $41.5 million at
December 31, 2008 compared with $41.8 million at
December 31, 2007. The amount of equity reflects
managements desire to increase shareholders return
on equity while maintaining a strong capital base. The Company
initiated an open market stock buyback program in 1998, through
which it repurchased 1,900 shares at a cost of $43,000 in 2006,
37,770 shares at a cost of $723,000 in 2007, and
9,301 shares at a cost of $155,000 in 2008.
Accumulated other comprehensive income/(loss) decreased to an
unrealized loss net of tax benefit of $2.22 million at
December 31, 2008, compared with $773,000 at
December 31, 2007 and an unrealized loss net of tax benefit
of $1.22 million at December 31, 2006. The change in
the accumulated other comprehensive loss between 2008 and 2007
was primarily attributable to the increase in the market value
loss on the Banks investment in the subordinated
mezzanine tranche of pooled trust preferred
securities. See Note 3 Securities of the Notes
to Consolidated Financial Statements for further discussion on
the market value loss on the Banks investment in pooled
trust preferred securities. The change in the accumulated other
comprehensive loss between 2007 and 2006 was attributable to the
decrease of the SFAS No. 158, Employers
Accounting for Defined Benefit and Other Postretirement
Plans, (SFAS No. 158) impact
regarding the Banks defined benefit retirement and
post-retirement plans. During 2007, the impact of the
SFAS No. 158 was a loss of $408,000 net of tax
benefit compared with a loss of $848,000 net of tax benefit
during 2006.
As discussed above under Company-obligated Mandatorily
Redeemable Capital Securities of Subsidiary Trust, in 2002
and 2007, the Company established subsidiary trusts that issued
$4.0 million and $4.0 million of capital securities,
respectively, as part of two separate pooled trust preferred
security offerings with other financial institutions. During
2007, the Company repaid the $4.0 million issued in 2002.
Under applicable regulatory guidelines, the capital securities
are treated as Tier 1 capital for purposes of the Federal
Reserves capital guidelines for bank holding companies, as
long as the capital securities and all other cumulative
preferred securities of the Company together do not exceed 25%
of Tier 1 capital. As discussed above under
Government Supervision and Regulation, banking
regulations have established minimum capital requirements for
financial institutions, including risk-based capital ratios and
leverage ratios. As of December 31, 2008, the appropriate
regulatory authorities have categorized the Company and the Bank
as well capitalized.
The primary sources of funds are deposits, repayment of loans,
maturities of investments, funds provided from operations and
advances from the FHLB of Atlanta. While scheduled repayments of
loans and maturities of investment securities are predictable
sources of funds, deposit flows and loan repayments are greatly
influenced by the general level of interest rates, economic
conditions and competition. The Bank uses its sources of funds
to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to
invest in other interest-earning assets, to maintain liquidity,
and to meet operating expenses. Management monitors projected
liquidity needs and determines the desirable funding level based
in part on the Banks commitments to make loans and
managements assessment of the Banks ability to
generate funds. Management is not aware of any market or
institutional trends, events or uncertainties that are expected
to have a material effect on the liquidity, capital resources or
operations of the Company or the Bank. Nor is management aware
of any current recommendations by regulatory authorities that
would have a material effect on liquidity, capital resources or
operations. The Banks internal sources of such 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.
39
Cash and amounts due from depository institutions,
interest-bearing deposits in other banks, and federal funds sold
totaled $11.0 million at December 31, 2008 compared
with $19.6 million at December 31, 2007. These assets
provide a primary source of liquidity for the Bank. In addition,
management has designated the entire investment portfolio as
available of sale, of which approximately $8.4 million was
unpledged and readily salable at December 31, 2008.
Futhermore, the Bank has an available line of credit with the
FHLB of Atlanta with a borrowing limit of approximately
$115.2 million at December 31, 2008 to provide
additional sources of liquidity, as well as available federal
funds purchased lines of credit with various commercial banks,
including the Federal Reserve, totaling approximately
$88.2 million. At December 31, 2008,
$45.0 million of the FHLB of Atlanta line of credit and
$18.3 million of federal funds purchased lines of credit
were in use.
The following table sets forth information relating to the
Companys sources of liquidity and the outstanding
commitments for use of liquidity at December 31, 2008 and
2007. The liquidity coverage ratio is derived by dividing the
total sources of liquidity by the outstanding commitments for
use of liquidity.
LIQUIDITY
SOURCES AND USES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Total
|
|
|
In Use
|
|
|
Available
|
|
|
Total
|
|
|
In Use
|
|
|
Available
|
|
|
|
(Dollars in thousands)
|
|
|
Sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds borrowing lines of credit
|
|
$
|
88,195
|
|
|
$
|
18,275
|
|
|
$
|
69,920
|
|
|
$
|
52,036
|
|
|
$
|
|
|
|
$
|
52,036
|
|
Federal Home Loan Bank lines of credit
|
|
|
115,214
|
|
|
|
45,000
|
|
|
|
70,214
|
|
|
|
136,159
|
|
|
|
35,000
|
|
|
|
101,159
|
|
Federal funds sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,020
|
|
Securities, available for sale and unpledged at fair value
|
|
|
|
|
|
|
|
|
|
|
8,428
|
|
|
|
|
|
|
|
|
|
|
|
23,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term funding sources
|
|
|
|
|
|
|
|
|
|
$
|
148,562
|
|
|
|
|
|
|
|
|
|
|
$
|
178,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded loan commitments and lending lines of credit
|
|
|
|
|
|
|
|
|
|
$
|
74,023
|
|
|
|
|
|
|
|
|
|
|
$
|
72,503
|
|
Letters of credit
|
|
|
|
|
|
|
|
|
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
6,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential short-term funding uses
|
|
|
|
|
|
|
|
|
|
$
|
79,389
|
|
|
|
|
|
|
|
|
|
|
$
|
79,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of short-term funding sources to potential short-term
funding uses
|
|
|
|
|
|
|
|
|
|
|
187.1
|
%
|
|
|
|
|
|
|
|
|
|
|
225.7
|
%
|
In addition to the outstanding commitments for use of liquidity
displayed in the table above, the Bank will be utilizing
approximately $5.8 million over the next twelve to eighteen
months to build new branch offices in Haymarket and Bristow, as
well as move and expand its ViewTree-Warrenton branch office.
CAPITAL
The Company and the Bank are subject to various regulatory
capital requirements administered by banking agencies. Failure
to meet minimum capital requirements can trigger certain
mandatory and discretionary actions by regulators that could
have a direct material effect on the Companys financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices.
The Companys and the Banks capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of
Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of
Tier I Capital to average assets (as defined in the
regulations). Management believes, as of December 31, 2008,
that the Company and the Bank more than satisfy all capital
adequacy requirements to which they are subject.
40
At December 31, 2008 and 2007, the Company exceeded its
regulatory capital ratios, as set forth in the following table:
REGULATORY
CAPITAL RATIOS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Tier 1 Capital:
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
$
|
41,488
|
|
|
$
|
41,828
|
|
Plus: Unrealized loss on securities available for
sale/FAS 158, net
|
|
|
2,217
|
|
|
|
773
|
|
Less: Unrealized loss on equity securities, net securities, net
|
|
|
(13
|
)
|
|
|
(103
|
)
|
Plus: Company-obligated madatorily redeemable capital securities
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 Capital
|
|
|
47,692
|
|
|
|
46,498
|
|
Tier 2 Capital:
|
|
|
|
|
|
|
|
|
Allowable Allowance for Loan Losses
|
|
|
4,780
|
|
|
|
4,185
|
|
|
|
|
|
|
|
|
|
|
Total Capital:
|
|
|
52,472
|
|
|
|
50,683
|
|
|
|
|
|
|
|
|
|
|
Risk Weighted Assets:
|
|
$
|
419,265
|
|
|
$
|
390,597
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
9.37
|
%
|
|
|
9.49
|
%
|
Risk Based Capital Ratios:
|
|
|
|
|
|
|
|
|
Tier 1 to Risk Weighted Assets
|
|
|
11.38
|
%
|
|
|
11.90
|
%
|
Total Capital to Risk Weighted Assets
|
|
|
12.52
|
%
|
|
|
12.98
|
%
|
CONTRACTUAL
OBLIGATIONS
The following table sets forth information relating to the
Companys contractual obligations and scheduled payment
amounts due at various intervals over the next five years and
beyond as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than 5
|
|
|
|
Total
|
|
|
One Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations
|
|
$
|
49,124
|
|
|
$
|
20,000
|
|
|
$
|
10,000
|
|
|
$
|
15,000
|
|
|
$
|
4,124
|
*
|
Operating lease obligations
|
|
$
|
19,202
|
|
|
|
1,673
|
|
|
|
3,692
|
|
|
|
3,549
|
|
|
|
10,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,326
|
|
|
$
|
21,673
|
|
|
$
|
13,692
|
|
|
$
|
18,549
|
|
|
$
|
14,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Includes $4.1 million of capital securities with varying
put provisions beginning September 21, 2011 with a
mandatory redemption September 21, 2036.
|
OFF-BALANCE
SHEET ARRANGEMENTS
The Banks off-balance sheet arrangements consist of
commitments to extend credit and letters of credit, which were
$74.0 million and $5.4 million, respectively, at
December 31, 2008, and $72.5 million and
$6.7 million, respectively, at December 31, 2007. See
Note 15 Financial Instruments with Off-Balance-Sheet
Risk of the Notes to Consolidated Financial Statements for
further discussion on the specific arrangements and elements of
credit and interest rate risk inherent to the arrangements. The
impact on liquidity of these arrangements is illustrated in the
LIQUIDITY SOURCES AND USES table above.
Revenues for standby letters of credit were $74,000 and $91,000
for 2008 and 2007, respectively. There were 57 and 67 separate
standby letters of credit at December 31, 2008 and 2007,
respectively. During 2008 and 2007, no
41
liabilities arose from standby letters of credit arrangements.
Past history gives little indication as to future trends
regarding revenues and liabilities from standby letters of
credit.
IMPACT OF
INFLATION AND CHANGING PRICES
The consolidated financial statements and the accompanying notes
presented elsewhere in this document have been prepared in
accordance with accounting principles generally accepted in the
United States of America, which require the measurement of
financial position and operating results in terms of historical
dollars without considering the change in the relative
purchasing power of money over time and due to inflation. Unlike
most industrial companies, virtually all the assets and
liabilities of the Company and the Bank are monetary in nature.
The impact of inflation is reflected in the increased cost of
operations. As a result, interest rates have a greater impact on
our performance than inflation does. Interest rates do not
necessarily move in the same direction or to the same extent as
the prices of goods and services.
RECENT
ACCOUNTING PRONOUNCEMENTS
For information regarding recent accounting pronouncements and
their effect on the Company, see Recent Accounting
Pronouncements in Note 1 of the Notes to Consolidated
Financial Statements contained herein.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
An important component of both earnings performance and
liquidity is management of interest rate sensitivity. Interest
rate sensitivity reflects the potential effect on net interest
income and economic value of equity from a change in market
interest rates. The Bank is subject to interest rate sensitivity
to the degree that its interest-earning assets mature or reprice
at different time intervals than its interest-bearing
liabilities. However, the Bank is not subject to the other major
categories of market risk such as foreign currency exchange rate
risk or commodity price risk. The Bank uses a number of tools to
manage its interest rate risk, including simulating net interest
income under various scenarios, monitoring the present value
change in equity under the same scenarios, and monitoring the
difference or gap between rate sensitive assets and rate
sensitive liabilities over various time periods. Management
believes that rate risk is best measured by simulation modeling.
The earnings simulation model forecasts annual net income under
a variety of scenarios that incorporate changes in the absolute
level of interest rates, changes in the shape of the yield
curve, and changes in interest rate relationships. Management
evaluates the effect on net interest income and present value
equity under varying market rate assumptions. The Bank monitors
exposure to instantaneous changes in rates of up to
200 basis points up or down over a rolling
12-month
period. The Banks policy limit for the maximum negative
impact on net interest income and change in equity from
instantaneous changes in interest rates of 200 basis points
over 12 months is 15% and 20%, respectively. Management has
maintained a risk position well within these guideline levels
during 2008.
42
The following tables present the Banks anticipated market
value changes in equity under various rate scenarios as of
December 31, 2008 and 2007:
MARKET
RISK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Market Value
|
|
Minus
|
|
|
Current
|
|
|
Plus
|
|
|
Market
|
|
|
Percentage
|
|
2008
|
|
Change
|
|
|
Change
|
|
200 pts
|
|
|
Fair Value
|
|
|
200 pts
|
|
|
Value Change
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Securities
|
|
|
|
|
|
Note:
|
|
|
|
|
|
$
|
37,839
|
|
|
$
|
37,569
|
|
|
$
|
(270
|
)
|
|
|
(0.71
|
)%
|
Loans receivable
|
|
|
|
|
|
Due to the absolute level of
|
|
|
|
|
|
|
452,946
|
|
|
|
434,274
|
|
|
|
(18,672
|
)
|
|
|
(4.12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive assets
|
|
|
|
|
|
market interest rates
|
|
|
|
|
|
|
490,785
|
|
|
|
471,843
|
|
|
|
(18,942
|
)
|
|
|
(3.86
|
)%
|
Other assets
|
|
|
|
|
|
at December 31, 2008,
|
|
|
|
|
|
|
38,673
|
|
|
|
38,673
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
the calculation of a change
|
|
|
|
|
|
$
|
529,458
|
|
|
$
|
510,516
|
|
|
$
|
(18,942
|
)
|
|
|
(3.58
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in market value due to an
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
instantaneous decrease of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
|
|
|
|
200 basis points would
|
|
|
|
|
|
$
|
64,533
|
|
|
$
|
58,350
|
|
|
$
|
(6,183
|
)
|
|
|
(9.58
|
)%
|
Rate-bearing deposits
|
|
|
|
|
|
not be meaningful.
|
|
|
|
|
|
|
326,075
|
|
|
|
317,210
|
|
|
|
(8,865
|
)
|
|
|
(2.72
|
)%
|
Borrowed funds
|
|
|
|
|
|
|
|
|
|
|
|
|
67,429
|
|
|
|
66,169
|
|
|
|
(1,260
|
)
|
|
|
(1.87
|
)%
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
5,335
|
|
|
|
5,335
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
463,372
|
|
|
|
447,064
|
|
|
|
(16,308
|
)
|
|
|
(3.52
|
)%
|
Present Value Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
66,086
|
|
|
|
63,452
|
|
|
|
(2,634
|
)
|
|
|
(3.99
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
$
|
529,458
|
|
|
$
|
510,516
|
|
|
$
|
(18,942
|
)
|
|
|
(3.58
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Market
|
|
|
Minus
|
|
|
Current
|
|
|
Plus
|
|
|
Market
|
|
|
Percentage
|
|
2007
|
|
Change
|
|
|
Value Change
|
|
|
200 pts
|
|
|
Fair Value
|
|
|
200 pts
|
|
|
Value Change
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Federal funds sold
|
|
|
0.00
|
%
|
|
$
|
1
|
|
|
$
|
2,021
|
|
|
$
|
2,020
|
|
|
$
|
2,018
|
|
|
$
|
(2
|
)
|
|
|
0.00
|
%
|
Securities
|
|
|
2.63
|
%
|
|
|
1,005
|
|
|
|
39,205
|
|
|
|
38,200
|
|
|
|
36,782
|
|
|
|
(1,418
|
)
|
|
|
-3.71
|
%
|
Loans receivable
|
|
|
1.44
|
%
|
|
|
5,925
|
|
|
|
416,975
|
|
|
|
411,050
|
|
|
|
401,324
|
|
|
|
(9,726
|
)
|
|
|
(2.37
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rate sensitive assets
|
|
|
1.54
|
%
|
|
|
6,931
|
|
|
|
458,201
|
|
|
|
451,270
|
|
|
|
440,124
|
|
|
|
(11,146
|
)
|
|
|
-2.47
|
%
|
Other assets
|
|
|
0.00
|
%
|
|
|
|
|
|
|
40,569
|
|
|
|
40,569
|
|
|
|
40,569
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1.41
|
%
|
|
$
|
6,931
|
|
|
$
|
498,770
|
|
|
$
|
491,839
|
|
|
$
|
480,693
|
|
|
$
|
(11,146
|
)
|
|
|
-2.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Deposits
|
|
|
11.30
|
%
|
|
$
|
7,628
|
|
|
$
|
75,131
|
|
|
$
|
67,503
|
|
|
$
|
61,292
|
|
|
$
|
(6,211
|
)
|
|
|
-9.20
|
%
|
Rate-bearing deposits
|
|
|
1.97
|
%
|
|
|
6,102
|
|
|
|
315,520
|
|
|
|
309,418
|
|
|
|
300,822
|
|
|
|
(8,596
|
)
|
|
|
(2.78
|
)%
|
Borrowed funds
|
|
|
0.59
|
%
|
|
|
231
|
|
|
|
39,458
|
|
|
|
39,227
|
|
|
|
39,174
|
|
|
|
(53
|
)
|
|
|
-0.13
|
%
|
Other liabilities
|
|
|
0.00
|
%
|
|
|
|
|
|
|
4,385
|
|
|
|
4,385
|
|
|
|
4,385
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3.32
|
%
|
|
|
13,961
|
|
|
|
434,494
|
|
|
|
420,533
|
|
|
|
405,673
|
|
|
|
(14,860
|
)
|
|
|
-3.53
|
%
|
Present Value Equity
|
|
|
(9.86
|
)%
|
|
|
(7,030
|
)
|
|
|
64,276
|
|
|
|
71,306
|
|
|
|
75,020
|
|
|
|
3,714
|
|
|
|
5.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
1.41
|
%
|
|
$
|
6,931
|
|
|
$
|
498,770
|
|
|
$
|
491,839
|
|
|
$
|
480,693
|
|
|
$
|
(11,146
|
)
|
|
|
-2.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of
Fauquier Bankshares, Inc.
Warrenton, Virginia
We have audited the accompanying consolidated balance sheets of
Fauquier Bankshares, Inc. and its subsidiaries as of
December 31, 2008 and 2007, and the related consolidated
statements of income, consolidated statements of changes in
shareholders equity, and consolidated statements of cash
flows for each of the years in the three-year period ended
December 31, 2008. We have also audited Fauquier Bankshares
Incs internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The management of Fauquier Bankshares, Inc.
and its subsidiaries is responsible for these financial
statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control. Our
responsibility is to express an opinion on these financial
statements and an opinion on the Companys internal control
over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Fauquier Bankshares, Inc. and its subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, Fauquier Bankshares,
Inc. and its subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
As discussed in Notes 1 and 9 to the financial statements,
Fauquier Bankshares, Inc. changed its policy for accounting for
its defined benefit retirement plans in 2006 and 2008 to conform
with Statement of Financial Accounting Standards No. 158.
As discussed in Note 1 to the financial statements, the
Company changed its policy for accounting for stock-based
compensation in 2006 in accordance with Statement of Financial
Accounting Standards No. 123R. Also as discussed in
Note 1 to the financial statements, the Company changed its
method of accounting for split-dollar post retirement benefits
in 2008 as required by the provisions of
EITF 06-04.
/s/ SMITH
ELLIOTT KEARNS & COMPANY,
LLC
Chambersburg, Pennsylvania
March 13, 2009
44
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Warrenton, Virginia
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 2008
CONTENTS
|
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
45
Fauquier
Bankshares, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
Cash and due from banks
|
|
$
|
7,698,661
|
|
|
$
|
16,708,922
|
|
Interest-bearing deposits in other banks
|
|
|
3,324,501
|
|
|
|
823,252
|
|
Federal funds sold
|
|
|
|
|
|
|
2,020,000
|
|
Securities available for sale, net
|
|
|
37,839,375
|
|
|
|
37,376,725
|
|
Loans, net of allowance for loan losses of $4,779,662 in 2008
and $4,185,209 in 2007
|
|
|
434,678,433
|
|
|
|
409,107,482
|
|
Bank premises and equipment, net
|
|
|
8,621,217
|
|
|
|
7,180,369
|
|
Accrued interest receivable
|
|
|
1,549,597
|
|
|
|
1,748,546
|
|
Other real estate owned
|
|
|
3,034,470
|
|
|
|
|
|
Other assets
|
|
|
17,768,978
|
|
|
|
14,930,932
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
514,515,232
|
|
|
$
|
489,896,228
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
69,065,944
|
|
|
$
|
76,080,935
|
|
Interest-bearing:
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
74,555,901
|
|
|
|
90,169,640
|
|
Savings and money market accounts
|
|
|
102,810,758
|
|
|
|
127,472,913
|
|
Time deposits
|
|
|
153,861,028
|
|
|
|
110,835,435
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing
|
|
|
331,227,687
|
|
|
|
328,477,988
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
400,293,631
|
|
|
|
404,558,923
|
|
Federal funds purchased
|
|
|
18,275,000
|
|
|
|
|
|
Federal Home Loan Bank advances
|
|
|
45,000,000
|
|
|
|
35,000,000
|
|
Company-obligated mandatorily redeemable capital securities
|
|
|
4,124,000
|
|
|
|
4,124,000
|
|
Other liabilities
|
|
|
5,334,664
|
|
|
|
4,385,553
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
473,027,295
|
|
|
|
448,068,476
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock, par value, $3.13; authorized
8,000,000 shares: issued and outstanding, 2008:
3,564,317 shares (includes nonvested shares of 38,219);
2007: 3,537,354 shares (includes nonvested shares of 31,190)
|
|
|
11,036,687
|
|
|
|
10,974,293
|
|
Retained earnings
|
|
|
32,668,530
|
|
|
|
31,626,627
|
|
Accumulated other comprehensive income (loss), net
|
|
|
(2,217,280
|
)
|
|
|
(773,168
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
41,487,937
|
|
|
|
41,827,752
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
514,515,232
|
|
|
$
|
489,896,228
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
46
Fauquier
Bankshares, Inc. and Subsidiaries
For Each
of the Three Years in the Period Ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
26,678,053
|
|
|
$
|
28,916,500
|
|
|
$
|
28,039,607
|
|
Interest and dividends on securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable interest income
|
|
|
1,410,216
|
|
|
|
1,479,307
|
|
|
|
1,599,174
|
|
Interest income exempt from federal income taxes
|
|
|
234,791
|
|
|
|
120,097
|
|
|
|
52,580
|
|
Dividends
|
|
|
180,835
|
|
|
|
303,500
|
|
|
|
341,815
|
|
Interest on federal funds sold
|
|
|
33,303
|
|
|
|
90,724
|
|
|
|
92,221
|
|
Interest on deposits in other banks
|
|
|
35,753
|
|
|
|
33,548
|
|
|
|
26,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
28,572,951
|
|
|
|
30,943,676
|
|
|
|
30,151,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
7,301,118
|
|
|
|
9,847,705
|
|
|
|
7,878,058
|
|
Interest on federal funds purchased
|
|
|
117,719
|
|
|
|
243,250
|
|
|
|
452,301
|
|
Interest on Federal Home Loan Bank advances
|
|
|
1,768,597
|
|
|
|
1,802,174
|
|
|
|
2,135,506
|
|
Distribution on capital securities of subsidiary trusts
|
|
|
200,263
|
|
|
|
374,586
|
|
|
|
435,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
9,387,697
|
|
|
|
12,267,715
|
|
|
|
10,901,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
19,185,254
|
|
|
|
18,675,961
|
|
|
|
19,250,067
|
|
Provision for loan losses
|
|
|
3,227,269
|
|
|
|
717,000
|
|
|
|
360,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
15,957,985
|
|
|
|
17,958,961
|
|
|
|
18,890,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Wealth management income
|
|
|
1,286,571
|
|
|
|
1,412,230
|
|
|
|
1,343,963
|
|
Service charges on deposit accounts
|
|
|
2,940,218
|
|
|
|
2,944,095
|
|
|
|
2,781,884
|
|
Other service charges, commissions and income
|
|
|
1,982,997
|
|
|
|
1,706,400
|
|
|
|
1,532,081
|
|
Gain on sale of other real estate owned
|
|
|
25,718
|
|
|
|
|
|
|
|
|
|
Gain on cancellation of property rights
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
(Loss) on impairment of securities
|
|
|
(422,500
|
)
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of securities
|
|
|
87,585
|
|
|
|
|
|
|
|
(82,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
5,900,589
|
|
|
|
6,062,725
|
|
|
|
5,825,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
8,266,366
|
|
|
|
9,284,067
|
|
|
|
9,051,834
|
|
Net occupancy expense of premises
|
|
|
1,286,499
|
|
|
|
1,048,036
|
|
|
|
1,016,527
|
|
Furniture and equipment
|
|
|
1,176,410
|
|
|
|
1,178,307
|
|
|
|
1,360,063
|
|
Marketing expense
|
|
|
619,908
|
|
|
|
548,580
|
|
|
|
571,641
|
|
Consulting expense
|
|
|
1,095,359
|
|
|
|
915,784
|
|
|
|
817,920
|
|
Data processing expense
|
|
|
1,310,917
|
|
|
|
1,275,134
|
|
|
|
1,112,565
|
|
Other operating expenses
|
|
|
3,084,751
|
|
|
|
2,731,492
|
|
|
|
2,717,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
16,840,210
|
|
|
|
16,981,400
|
|
|
|
16,648,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,018,364
|
|
|
|
7,040,286
|
|
|
|
8,067,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
1,365,649
|
|
|
|
2,086,864
|
|
|
|
2,463,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
3,652,715
|
|
|
$
|
4,953,422
|
|
|
$
|
5,603,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share, basic
|
|
$
|
1.04
|
|
|
$
|
1.41
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share, assuming dilution
|
|
$
|
1.03
|
|
|
$
|
1.39
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per Share
|
|
$
|
0.80
|
|
|
$
|
0.79
|
|
|
$
|
0.745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
47
Fauquier
Bankshares, Inc. and Subsidiaries
For Each
of the Three Years in the Period Ended December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,652,715
|
|
|
$
|
4,953,422
|
|
|
$
|
5,603,542
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
909,992
|
|
|
|
1,017,874
|
|
|
|
1,205,044
|
|
Provision for loan losses
|
|
|
3,227,269
|
|
|
|
717,000
|
|
|
|
360,000
|
|
Deferred tax benefit
|
|
|
(550,655
|
)
|
|
|
(327,194
|
)
|
|
|
(4,575
|
)
|
(Gain) on sale of other real estate owned
|
|
|
(25,718
|
)
|
|
|
|
|
|
|
|
|
Loss on impairment of securities
|
|
|
422,500
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of securities
|
|
|
(87,585
|
)
|
|
|
|
|
|
|
82,564
|
|
(Gain) on sale of property rights
|
|
|
|
|
|
|
|
|
|
|
(250,000
|
)
|
Tax benefit of nonqualified options exercised
|
|
|
(21,783
|
)
|
|
|
(419,527
|
)
|
|
|
(105,358
|
)
|
Amortization (accretion) of security premiums, net
|
|
|
(5,483
|
)
|
|
|
2,004
|
|
|
|
21,456
|
|
Amortization of unearned compensation
|
|
|
263,575
|
|
|
|
256,230
|
|
|
|
220,268
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(904,535
|
)
|
|
|
15,835
|
|
|
|
(69
|
)
|
Increase (decrease) in other liabilities
|
|
|
262,836
|
|
|
|
1,003,891
|
|
|
|
(170,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,143,028
|
|
|
|
7,219,535
|
|
|
|
6,962,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of securities available for sale
|
|
|
9,078,470
|
|
|
|
|
|
|
|
3,024,745
|
|
Proceeds from maturities, calls and principal payments of
securities available for sale
|
|
|
4,843,106
|
|
|
|
7,937,961
|
|
|
|
6,060,424
|
|
Purchase of securities available for sale
|
|
|
(16,253,706
|
)
|
|
|
(5,833,829
|
)
|
|
|
|
|
Purchase of premises and equipment
|
|
|
(2,350,840
|
)
|
|
|
(614,154
|
)
|
|
|
(499,552
|
)
|
(Purchase of) proceeds from sale of other bank stock
|
|
|
(392,300
|
)
|
|
|
923,500
|
|
|
|
(715,900
|
)
|
Gain on sale of property rights
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
Net increase (decrease) in loans
|
|
|
(32,517,055
|
)
|
|
|
6,236,668
|
|
|
|
(35,371,679
|
)
|
Proceeds from sale of other real estate owned
|
|
|
710,083
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(36,882,242
|
)
|
|
|
8,650,146
|
|
|
|
(27,251,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in demand deposits, NOW accounts and
savings accounts
|
|
|
(47,290,885
|
)
|
|
|
22,157,092
|
|
|
|
(20,230,855
|
)
|
Net (decrease) increase in certificates of deposit
|
|
|
43,025,593
|
|
|
|
(33,669,587
|
)
|
|
|
44,645,104
|
|
Federal Home Loan Bank advances
|
|
|
75,000,000
|
|
|
|
57,000,000
|
|
|
|
108,000,000
|
|
Federal Home Loan Bank principal repayments
|
|
|
(65,000,000
|
)
|
|
|
(77,000,000
|
)
|
|
|
(95,000,000
|
)
|
Purchase (repayment) of federal funds
|
|
|
18,275,000
|
|
|
|
|
|
|
|
(5,000,000
|
)
|
Proceeds from (repayment of) trust preferred securities
|
|
|
|
|
|
|
(4,124,000
|
)
|
|
|
4,124,000
|
|
Cash dividends paid on common stock
|
|
|
(2,853,779
|
)
|
|
|
(2,796,892
|
)
|
|
|
(2,589,697
|
)
|
Issuance of common stock
|
|
|
209,304
|
|
|
|
1,158,997
|
|
|
|
325,484
|
|
Acquisition of common stock
|
|
|
(155,031
|
)
|
|
|
(722,767
|
)
|
|
|
(43,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
21,210,202
|
|
|
|
(37,997,157
|
)
|
|
|
34,230,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(8,529,012
|
)
|
|
|
(22,127,476
|
)
|
|
|
13,940,935
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
19,552,174
|
|
|
|
41,679,650
|
|
|
|
27,738,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
11,023,162
|
|
|
$
|
19,552,174
|
|
|
$
|
41,679,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
9,447,980
|
|
|
$
|
12,579,931
|
|
|
$
|
10,343,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,774,500
|
|
|
$
|
2,023,000
|
|
|
$
|
2,324,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Noncash Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets acquired in settlement of loans
|
|
$
|
3,718,835
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale, net of
tax effect
|
|
$
|
(1,276,886
|
)
|
|
$
|
36,400
|
|
|
$
|
(287,294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in benefit obligations and plan assets for defined
benefit and post-retirement benefit plans
|
|
$
|
(167,226
|
)
|
|
$
|
407,750
|
|
|
$
|
848,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
48
Fauquier
Bankshares, Inc. and Subsidiaries
For Each
of the Three Years Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Income
|
|
|
Total
|
|
|
Balance, December 31, 2005
|
|
$
|
10,794,700
|
|
|
$
|
25,440,838
|
|
|
$
|
(656,393
|
)
|
|
|
|
|
|
$
|
35,579,145
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
5,603,542
|
|
|
|
|
|
|
$
|
5,603,542
|
|
|
|
5,603,542
|
|
Other comprehensive income net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available for sale, net
of deferred income taxes $119,928
|
|
|
|
|
|
|
|
|
|
|
232,802
|
|
|
|
232,802
|
|
|
|
232,802
|
|
Add: Reclassification adjustment for losses (gains) realized in
income, net of tax $28,072
|
|
|
|
|
|
|
|
|
|
|
54,492
|
|
|
|
54,492
|
|
|
|
54,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,890,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.745 per share)
|
|
|
|
|
|
|
(2,589,697
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,589,697
|
)
|
Acquisition of 1,900 shares of common stock
|
|
|
(5,947
|
)
|
|
|
(37,258
|
)
|
|
|
|
|
|
|
|
|
|
|
(43,205
|
)
|
Adjustments to initially apply FAS 158, net of tax
$436,961, as restated
|
|
|
|
|
|
|
|
|
|
|
(848,219
|
)
|
|
|
|
|
|
|
(848,219
|
)
|
SFAS No. 123 (R) implementation adjustment
|
|
|
(67,238
|
)
|
|
|
67,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned compensation, restricted stock awards
|
|
|
|
|
|
|
220,268
|
|
|
|
|
|
|
|
|
|
|
|
220,268
|
|
Issuance of common stock
|
|
|
15,797
|
|
|
|
108,491
|
|
|
|
|
|
|
|
|
|
|
|
124,288
|
|
Exercise of stock options
|
|
|
52,209
|
|
|
|
148,987
|
|
|
|
|
|
|
|
|
|
|
|
201,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
10,789,521
|
|
|
$
|
28,962,409
|
|
|
$
|
(1,217,318
|
)
|
|
|
|
|
|
$
|
38,534,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
4,953,422
|
|
|
|
|
|
|
$
|
4,953,422
|
|
|
$
|
4,953,422
|
|
Other comprehensive income net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on securities available for sale, net
of deferred income taxes $18,752
|
|
|
|
|
|
|
|
|
|
|
36,400
|
|
|
|
36,400
|
|
|
|
36,400
|
|
Changes in benefit obligation and plan assets for defined
benefit and SERP plans, net of deferred income taxes of $210,053
|
|
|
|
|
|
|
|
|
|
|
407,750
|
|
|
|
407,750
|
|
|
|
407,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,397,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.79 per share)
|
|
|
|
|
|
|
(2,796,892
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,796,892
|
)
|
Acquisition of 37,770 shares of common stock
|
|
|
(105,700
|
)
|
|
|
(617,067
|
)
|
|
|
|
|
|
|
|
|
|
|
(722,767
|
)
|
Amortization of unearned compensation, restricted stock awards
|
|
|
|
|
|
|
256,230
|
|
|
|
|
|
|
|
|
|
|
|
256,230
|
|
Issuance of common stock nonvested shares
(11,437 shares)
|
|
|
35,797
|
|
|
|
(35,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
254,675
|
|
|
|
904,322
|
|
|
|
|
|
|
|
|
|
|
|
1,158,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
10,974,293
|
|
|
$
|
31,626,627
|
|
|
$
|
(773,168
|
)
|
|
|
|
|
|
$
|
41,827,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
3,652,715
|
|
|
|
|
|
|
$
|
3,652,715
|
|
|
|
3,652,715
|
|
Other comprehensive income net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on securities available for sale, net
of deferred tax benefit of $771,661
|
|
|
|
|
|
|
|
|
|
|
(1,497,930
|
)
|
|
|
(1,497,930
|
)
|
|
|
(1,497,930
|
)
|
Less: reclassification adjustments, net of tax of $113,871
|
|
|
|
|
|
|
|
|
|
|
221,044
|
|
|
|
221,044
|
|
|
|
221,044
|
|
Less: change in beneficial obligation for defined benefit and
SERP plans, net of deferred tax benefit of $86,147
|
|
|
|
|
|
|
|
|
|
|
(167,226
|
)
|
|
|
(167,226
|
)
|
|
|
(167,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income net of tax benefit of $743,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,444,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,208,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial implementation of EITF
06-4, net of
income tax benefit of $6,433
|
|
|
|
|
|
|
(12,487
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,487
|
)
|
Cash dividends ($.80 per share)
|
|
|
|
|
|
|
(2,853,779
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,853,779
|
)
|
Acquisition of 9,301 shares of common stock
|
|
|
(29,112
|
)
|
|
|
(125,919
|
)
|
|
|
|
|
|
|
|
|
|
|
(155,031
|
)
|
Amortization of unearned compensation, restricted stock awards
|
|
|
|
|
|
|
313,179
|
|
|
|
|
|
|
|
|
|
|
|
313,179
|
|
Restricted stock forfeiture
|
|
|
|
|
|
|
(49,604
|
)
|
|
|
|
|
|
|
|
|
|
|
(49,604
|
)
|
Issuance of common stock nonvested shares
(10,315 shares)
|
|
|
32,286
|
|
|
|
(32,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
59,220
|
|
|
|
150,084
|
|
|
|
|
|
|
|
|
|
|
|
209,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
11,036,687
|
|
|
$
|
32,668,530
|
|
|
$
|
(2,217,280
|
)
|
|
|
|
|
|
$
|
41,487,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
49
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
For Each
of the Three Years in the Period Ended December 31,
2008
|
|
Note 1.
|
Nature of
Banking Activities and Significant Accounting Policies
|
Fauquier Bankshares, Inc. (the Company) is the
holding company of The Fauquier Bank (the Bank),
Fauquier Statutory Trust I (Trust I) and
Fauquier Statutory Trust II (Trust II).
The Bank provides commercial, financial, agricultural, and
residential and consumer loans to customers primarily in
Virginia. The loan portfolio is well diversified and generally
is collateralized by assets of the customers. The loans are
expected to be repaid from cash flows or proceeds from the sale
of selected assets of the borrowers. The purpose of the
September 2006 (Trust II) issuance was to use the
proceeds to redeem the existing capital security
(Trust I) issued on March 26, 2002.
The accounting and reporting policies of the Company conform to
U.S. generally accepted accounting principles and to the
reporting guidelines prescribed by regulatory authorities. The
following is a description of the more significant of those
policies and practices.
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company, and its three wholly-owned subsidiaries,
Trust I, Trust II and the Bank, of which Fauquier Bank
Services, Inc. is its sole subsidiary. In consolidation,
significant intercompany accounts and transactions between the
Bank and the Company have been eliminated.
In January 2003 the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
46 (FIN 46), Consolidation of Variable
Interest Entities. FIN 46 clarifies the application
of Accounting Research Bulletin 51, Consolidated Financial
Statements, to certain entities in which voting rights are not
effective in identifying the investor with the controlling
financial interest. An entity is subject to deconsolidation
under FIN 46 if the investors do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support, are unable to direct
the entitys activities, or are not exposed to the
entitys losses or entitled to its residual returns
(variable interest entities). Variable interest
entities within the scope of FIN 46 will be required to be
consolidated with their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be
the party that absorbs a majority of the entitys losses,
receives a majority of its expected returns, or both.
Management has determined that the Fauquier Statutory Trusts
(Trust I and Trust II) qualify as variable
interest entities under FIN 46. Trust I issued
mandatory redeemable capital securities to investors and loaned
the proceeds to the Company. Trust I held, as its sole
asset, subordinated debentures issued by the Company in 2002.
Subsequent to the issuance of FIN 46 in January 2003, the
FASB issued a revised interpretation, FIN 46(R)
Consolidation of Variable Interest Entities, the
provisions of which were required to be applied to certain
variable interest entities by March 31, 2004. The Company
adopted the provisions under the revised interpretation in the
first quarter of 2004. The deconsolidation results in the
Companys investment in the common securities of
Trust I being included in other assets as of
December 31, 2006 and a corresponding increase in
outstanding debt of $124,000. The adoption of FIN 46(R) did
not have a material impact on the Companys financial
position or results of operations. Because the Company redeemed
all the existing capital securities issued by Trust I on
March 26, 2007, there were no assets in Trust I on
December 31, 2007.
The Federal Reserve has issued guidance on the regulatory
capital treatment for the trust-preferred securities issued by
the Company as a result of the adoption of FIN 46(R). The
rule retains the current maximum percentage of total capital
permitted for trust preferred securities at 25%, but enacts
other changes to the rules governing trust preferred securities
that affect their use as part of the collection of entities
known as restricted core capital elements. The rule
took effect March 31, 2007. Management evaluated the
effects of the rule, and determined that it did not have a
material impact on its capital ratios.
50
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Securities
Debt securities that management has the positive intent and
ability to hold to maturity are classified as held to
maturity and recorded at amortized cost. The Company has
no securities in this category. Securities not classified as
held to maturity, including equity securities with readily
determinable fair values, are classified as available for
sale and recorded at fair value, with unrealized gains and
losses excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent
to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and
(3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to
allow for any anticipated recovery in fair value. Gains and
losses on the sale of securities are recorded on the trade date
and are determined using the specific identification method.
The Bank is required to maintain an investment in the capital
stock of certain correspondent banks. No readily available
market exists for this stock and it has no quoted market value.
The investment in these securities is recorded at cost.
Loans
The Company grants mortgage, commercial and consumer loans to
customers. A substantial portion of the loan portfolio is
represented by commercial and residential mortgage loans. The
ability of the Companys debtors to honor their contracts
is dependent upon the real estate and general economic
conditions in the Companys market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are
reported at their outstanding unpaid principal balances adjusted
for the allowance for loan losses, and any deferred fees or
costs on originated loans. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of collection.
Installment loans are typically charged off no later than
180 days past due. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed
on nonaccrual or charged-off is reversed against interest
income. The interest on these loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return
to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Allowance
for Loan Losses
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon managements periodic review
of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrowers ability to repay,
estimated value of any underlying
51
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
collateral and prevailing economic conditions. This evaluation
is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
The allowance consists of specific and general components. The
specific component relates to loans that are classified as
either doubtful, substandard or special mention. For such loans
that are also classified as impaired, an allowance is
established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience
adjusted for qualitative factors and is also maintained to cover
uncertainties that could affect managements estimate of
probable losses. This component of the allowance reflects the
margin of imprecision inherent in the underlying assumptions
used in the methodologies for estimating specific and general
losses in the portfolio.
A loan is considered impaired when, based on current information
and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment
include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment
shortfalls on a
case-by-case
basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrowers prior
payment record, and the amount of the shortfall in relation to
the principal and interest owed. Impairment is measured on a
loan-by-loan
basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable
market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Company
does not separately identify individual consumer and residential
loans for impairment disclosures.
Bank
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at
cost less accumulated depreciation and amortization. Premises
and equipment are depreciated over their estimated useful lives
ranging from 3 39 years; leasehold improvements
are amortized over the lives of the respective leases or the
estimated useful life of the leasehold improvement, whichever is
less. Software is amortized over its estimated useful life
ranging from 3 5 years. Depreciation and
amortization are recorded on the accelerated and straight-line
methods.
Costs of maintenance and repairs are charged to expense as
incurred. Costs of replacing structural parts of major units are
considered individually and are expensed or capitalized as the
facts dictate.
Income
Taxes
Deferred income tax assets and liabilities are determined using
the balance sheet method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of
the temporary differences between the book and tax bases of the
various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.
When tax returns are filed, it is highly certain that some
positions taken would be sustained upon examination by the
taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a
tax position is recognized in the financial statements in the
period during which, based on all available evidence, management
believes it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not
offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with
the applicable taxing authority. The portion of the benefits
associated with
52
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax
benefits in the accompanying balance sheet along with any
associated interest and penalties that would be payable to the
taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits
are classified as additional income taxes in the statement of
income.
Defined
Benefit Plan
The Company has a pension plan for its employees. Benefits are
generally based upon years of service and the employees
compensation. The Company funds pension costs in accordance with
the funding provisions of the Employee Retirement Income
Security Act.
Earnings
Per Share
Basic earnings per share represent income available to common
shareholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share
reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued,
as well as any adjustment to income that would result from the
assumed issuance. Potential common shares that may be issued by
the Company relate solely to outstanding stock options, and are
determined using the treasury method.
Stock
Compensation Plans
In December 2004, FASB issued Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R)).
SFAS No. 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in
the financial statements. That cost will be measured based on
the fair value of the equity or liability instruments issued.
SFAS No. 123(R) covers a wide range of share-based
compensation arrangements, including stock options, restricted
share plans, performance-based awards, share appreciation
rights, and employee share purchase plans. SFAS No. 123(R)
is a replacement of SFAS No. 123, Accounting for
Stock-Based Compensation, and supersedes Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and its related
interpretive guidance. The effect of the Statement will be to
require entities to measure the cost of employee services
received in exchange for stock options based on the grant date
fair value of the award, and to recognize the cost over the
period the employee is required to provide services for the
award. SFAS No. 123(R) permits entities to use any
option-pricing model that meets the fair value objective in the
Statement.
The Company elected to adopt SFAS No. 123(R) on
January 1, 2006 under the modified prospective method.
Compensation cost has been measured using fair value of an award
on the grant dates and is recognized over the service period,
which is usually the vesting period. Compensation cost related
to the nonvested portion of awards outstanding as of that date
was based on the grant-date fair value of those awards as
calculated under the original provisions of
SFAS No. 123; that is, the Company was not required to
re-measure the grant date of SFAS No. 123(R). All
stock options outstanding were vested as of December 31,
2006; therefore no compensation expense related to stock options
was recorded in 2007 or 2008. There were no options granted in
2008, 2007, or 2006.
Wealth
Management Services Division
Securities and other property held by the Wealth Management
Services division in a fiduciary or agency capacity are not
assets of the Company and are not included in the accompanying
consolidated financial statements.
Cash
and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from
banks, interest bearing deposits in banks and federal funds
sold. Generally, federal funds are purchased and sold for one
day periods.
53
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Other
Real Estate
Assets acquired through, or in lieu of, loan foreclosure are
held for sale and are initially recorded at the lower of the
loan balance or fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in other
operating expenses.
Use of
Estimates
In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United
States of America, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant
change in the near term relate to the determination of the
allowance for loan losses, and the valuation of foreclosed real
estate and deferred tax assets.
Marketing
The Company follows the policy of charging the costs of
marketing, including advertising, to expense as incurred.
Marketing expenses of $619,908, $548,580 and $571,641 were
incurred in 2008, 2007 and 2006, respectively.
Reclassifications
Certain reclassifications have been made to prior period
balances to conform to the current year presentation.
Recent
Accounting Pronouncements
In September 2006, the FASB reached a consensus on Emerging
Issues Task Force (EITF) Issue
06-4,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements, (EITF Issue
06-4).
In March 2007, the FASB reached a consensus on EITF Issue
06-10,
Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements, (EITF Issue
06-10).
Both of these standards require a company to recognize an
obligation over an employees service period based upon the
substantive agreement with the employee such as the promise to
maintain a life insurance policy or provide a death benefit
postretirement. The Company adopted the provisions of these
standards effective January 1, 2008. The adoption of these
standards was not material to the consolidated financial
statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) 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 rather, provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to
be measured at fair value. This Statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those years.
The FASB has approved a one-year deferral for the implementation
of the Statement for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in
the financial statements on a nonrecurring basis. The Company
adopted SFAS 157 effective January 1, 2008. The
adoption of SFAS 157 was not material to the consolidated
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). This Statement
requires that employers measure plan assets and obligations as
of the balance sheet date. This requirement is effective for
fiscal years ending after December 15, 2008. The other
provisions of SFAS 158 were implemented by the Company as of
December 31,2006. The Company has
54
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
implemented the measurement date provisions of SFAS 158,which
did not have a material impact on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). This Statement permits
entities to choose to measure many financial instruments and
certain other items at fair value. The objective of this
Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity shall
report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as
of the beginning of an entitys first fiscal year that
begins after November 15, 2007, with early adoption
available in certain circumstances. The Company adopted
SFAS 159 effective January 1, 2008. The Company
decided not to report any existing financial assets or
liabilities at fair value that are not already reported, thus
the adoption of this statement did not have a material impact on
the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)). The Standard will significantly
change the financial accounting and reporting of business
combination transactions. SFAS 141(R) establishes
principles for how an acquirer recognizes and measures the
identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree; recognizes and measures
the goodwill acquired in the business combination or a gain from
a bargain purchase; and determines what information to disclose
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination.
SFAS 141(R) is effective for acquisition dates on or after
the beginning of an entitys first year that begins after
December 15, 2008. The Company does not expect the
implementation of SFAS 141(R) to have a material impact on
its consolidated financial statements, at this time.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an Amendment of ARB No. 51
(SFAS 160). The Standard will significantly
change the financial accounting and reporting of noncontrolling
(or minority) interests in consolidated financial statements.
SFAS 160 is effective as of the beginning of an
entitys first fiscal year that begins after
December 15, 2008, with early adoption prohibited. The
Company does not expect the implementation of SFAS 160 to
have a material impact on its consolidated financial statements,
at this time.
In November 2007, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 109, Written Loan Commitments
Recorded at Fair Value Through Earnings (SAB
109). SAB 109 expresses the current view of the staff
that the expected net future cash flows related to the
associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted
for at fair value through earnings. SEC registrants are expected
to apply the views in Question 1 of SAB 109 on a
prospective basis to derivative loan commitments issued or
modified in fiscal quarters beginning after December 15,
2007. Implementation of SAB 109 did not have a material
impact on its consolidated financial statements.
In December 2007, the SEC issued Staff Accounting
Bulletin No. 110, Use of a Simplified Method in
Developing Expected Term of Share Options
(SAB 110). SAB 110 expresses the current
view of the staff that it will accept a companys election
to use the simplified method discussed in SAB 107 for
estimating the expected term of plain vanilla share
options regardless of whether the company has sufficient
information to make more refined estimates. The staff noted that
it understands that detailed information about employee exercise
patterns may not be widely available by December 31, 2007.
Accordingly, the staff will continue to accept, under certain
circumstances, the use of the simplified method beyond
December 31, 2007. Implementation of SAB 110 did not
have a material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities an amendment of
SFAS No. 133,
(SFAS No. 161). SFAS No. 161
requires that an entity provide
55
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
enhanced disclosures related to derivative and hedging
activities. SFAS No. 161 is effective for the Company
on January 1, 2009. The Company does not expect the
implementation of SFAS 161 to have a material impact on its
consolidated financial statements, at this time.
In April 2008, the FASB issued FASB Staff Position
(FSP) No.
142-3,
Determination of the Useful Life of Intangible
Assets (FSP
No. 142-3).
FSP
No. 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions used in determining the useful
life of recognized intangible assets under
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). The intent of FSP
No. 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of
the assets under SFAS No. 141(R). FSP
No. 142-3
is effective for the Company on January 1, 2009, and
applies prospectively to intangible assets that are acquired
individually or with a group of other assets in business
combinations and asset acquisitions. The adoption of FSP No.
142-3 is not
expected to have a material impact on the Companys
consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles,
(SFAS No. 162). SFAS No. 162
identifies the sources of accounting principles and the
framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted
accounting principles. SFAS No. 162 is effective
60 days following the SECs approval of the Public
Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
Management does not expect the adoption of the provision of
SFAS No. 162 to have any impact on the consolidated
financial statements.
In September 2008, the FASB issued FSP
No. 133-1
and
FIN 45-4,
Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date
of FASB Statement No. 161,
(FSP 133-1
and
FIN 45-4).
FSP 133-1
and
FIN 45-4
require a seller of credit derivatives to disclose information
about its credit derivatives and hybrid instruments that have
embedded credit derivatives to enable users of financial
statements to assess their potential effect on its financial
position, financial performance and cash flows. The disclosures
required by
FSP 133-1
and
FIN 45-4
were be effective for the Company on December 31, 2008 and
did not have a material impact on the consolidated financial
statements.
In October 2008, the FASB issued FSP NO.
157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active,
(FSP 157-3).
FSP 157-3
clarifies the application of SFAS No. 157 in
determining the fair value of a financial asset during periods
of inactive markets.
FSP 157-3
was effective as of September 30, 2008 and did not have
material impact on the Companys consolidated financial
statements.
In December 2008, the FASB issued FSP
No. FAS 140-4
and FIN 46(R)-8, Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities. FSP
No. FAS 140-4
and FIN 46(R)-8 requires enhanced disclosures about
transfers of financial assets and interests in variable interest
entities. The FSP is effective for interim and annual periods
ending after December 15, 2008. Since the FSP requires only
additional disclosures concerning transfers of financial assets
and interest in variable interest entities, adoption of the FSP
will not affect the Companys financial condition, results
of operations or cash flows.
In January 2009, the FASB reached a consensus on EITF Issue
99-20-1.
This FSP amends the impairment guidance in EITF Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
Beneficial Interests and Beneficial Interests That Continue to
Be Held by a Transfer or in Securitized Financial Assets,
to achieve more consistent determination of whether an
other-than-temporary impairment (OTTI) has occurred.
The FSP also retains and emphasizes the objective of OTTI
assessment and the related disclosure requirements in FASB
Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and other related guidance.
The FSP is effective for interim and annual reporting periods
ending after December 15, 2008 and shall be applied
prospectively. The FSP was effective as of December 31,
2008 and did not have a material impact on the consolidated
financial statements.
56
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Note 2. Restatement
The 2006 financial statements have been restated to reflect the
application of SFAS 158 Employers Accounting
for Defined Benefit Pension and other Postretirement Plans
for the Companys supplemental executive retirement plan
(SERP.) The restatement has no impact on the
Consolidated Statements of Income or Cash Flows for 2007. The
effects of the restatement to assets, liabilities and
shareholders equity at December 31, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Restatement(1)
|
|
|
As Restated
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets (deferred taxes)
|
|
$
|
2,015,678
|
|
|
$
|
91,355
|
|
|
$
|
2,017,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
521,762,145
|
|
|
$
|
91,355
|
|
|
$
|
521,853,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (Accrued SERP costs)
|
|
$
|
348,840
|
|
|
$
|
268,692
|
|
|
$
|
617,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
483,050,196
|
|
|
|
268,692
|
|
|
|
483,318,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(1,039,981
|
)
|
|
|
(177,337
|
)
|
|
|
(1,217,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
38,711,949
|
|
|
|
(177,337
|
)
|
|
|
38,534,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
521,762,145
|
|
|
$
|
91,355
|
|
|
$
|
521,853,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the cumulative effect of adopting SFAS 158 for the
Companys SERP. See Note 9 for additional disclosures. |
The amortized cost and fair value of securities available for
sale, with unrealized gains and losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Obligations of U.S. Government corporations and agencies
|
|
$
|
25,212,561
|
|
|
$
|
561,884
|
|
|
$
|
(2,030
|
)
|
|
|
25,772,415
|
|
Obligations of states and political subdivisions
|
|
|
5,574,709
|
|
|
|
29,033
|
|
|
|
(146,019
|
)
|
|
|
5,457,723
|
|
Corporate Bonds
|
|
|
6,000,000
|
|
|
|
|
|
|
|
(2,861,903
|
)
|
|
|
3,138,097
|
|
Mutual Funds
|
|
|
303,889
|
|
|
|
|
|
|
|
(5,969
|
)
|
|
|
297,920
|
|
FHLMC Preferred Bank Stock
|
|
|
18,500
|
|
|
|
|
|
|
|
(13,000
|
)
|
|
|
5,500
|
|
Restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock
|
|
|
2,905,800
|
|
|
|
|
|
|
|
|
|
|
|
2,905,800
|
|
Federal Reserve Bank Stock
|
|
|
99,000
|
|
|
|
|
|
|
|
|
|
|
|
99,000
|
|
Community Bankers Bank Stock
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Silverton Bank Stock
|
|
|
112,920
|
|
|
|
|
|
|
|
|
|
|
|
112,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,277,379
|
|
|
$
|
590,917
|
|
|
$
|
(3,028,921
|
)
|
|
$
|
37,839,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Value
|
|
|
Obligations of U.S. Government corporations and agencies
|
|
$
|
23,080,415
|
|
|
$
|
30,014
|
|
|
$
|
(162,347
|
)
|
|
$
|
22,948,082
|
|
Obligations of states and political subdivisions
|
|
|
5,293,965
|
|
|
|
82,166
|
|
|
|
(3,948
|
)
|
|
|
5,372,183
|
|
Corporate Bonds
|
|
|
6,000,000
|
|
|
|
|
|
|
|
(348,750
|
)
|
|
|
5,651,250
|
|
Mutual Funds
|
|
|
291,581
|
|
|
|
|
|
|
|
(5,791
|
)
|
|
|
285,790
|
|
FHLMC Preferred Bank Stock
|
|
|
441,000
|
|
|
|
|
|
|
|
(97,000
|
)
|
|
|
344,000
|
|
Restricted investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Stock
|
|
|
2,513,500
|
|
|
|
|
|
|
|
|
|
|
|
2,513,500
|
|
Federal Reserve Bank Stock
|
|
|
99,000
|
|
|
|
|
|
|
|
|
|
|
|
99,000
|
|
Community Bankers Bank Stock
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
The Bankers Bank Stock
|
|
|
112,920
|
|
|
|
|
|
|
|
|
|
|
|
112,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,882,381
|
|
|
$
|
112,180
|
|
|
$
|
(617,836
|
)
|
|
$
|
37,376,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Due in one year or less
|
|
$
|
|
|
|
$
|
|
|
Due after one year through five years
|
|
|
1,029,790
|
|
|
|
1,033,679
|
|
Due after five years through ten years
|
|
|
8,936,993
|
|
|
|
9,146,362
|
|
Due after ten years
|
|
|
26,820,487
|
|
|
|
24,188,194
|
|
Equity securities
|
|
|
3,490,109
|
|
|
|
3,471,140
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,277,379
|
|
|
$
|
37,839,375
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, proceeds from sales
of securities available for sale amounted to $9,078,470. Gross
realized gains amounted to $87,585 in 2008. The tax expense
applicable to this net realized gain amounted to $29,779. In
addition, the Company recognized an OTTI on its Freddie Mac
Preferred Stock of $422,500. The tax benefit applicable to this
OTTI loss amounted to $143,650.
There were no securities sold in 2007. For the year ended
December 31, 2006, proceeds from sales of securities
available for sale amounted to $3,024,745. Gross realized losses
amounted to $82,564 in 2006. The tax benefit applicable to this
net realized loss amounted to $28,072.
58
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table shows the Company securities with gross
unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position, at December 31,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
Description of Securities
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Obligations of U.S. Government, corporations and agencies
|
|
$
|
785,744
|
|
|
$
|
(2,030
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
785,744
|
|
|
$
|
(2,030
|
)
|
Obligations of states and political subdivisions
|
|
|
4,181,657
|
|
|
|
(146,019
|
)
|
|
|
|
|
|
|
|
|
|
|
4,181,657
|
|
|
|
(146,019
|
)
|
Corporate Bonds
|
|
|
|
|
|
|
|
|
|
|
3,138,097
|
|
|
|
(2,861,903
|
)
|
|
|
3,138,097
|
|
|
|
(2,861,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, debt securities
|
|
|
4,967,401
|
|
|
|
(148,049
|
)
|
|
|
3,138,097
|
|
|
|
(2,861,903
|
)
|
|
|
8,105,498
|
|
|
|
(3,009,952
|
)
|
Mutual Funds
|
|
|
|
|
|
|
|
|
|
|
297,920
|
|
|
|
(5,969
|
)
|
|
|
297,920
|
|
|
|
(5,969
|
)
|
FHLMC Preferred Bank Stock
|
|
|
5,500
|
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$
|
4,972,901
|
|
|
$
|
(161,049
|
)
|
|
$
|
3,436,017
|
|
|
$
|
(2,867,872
|
)
|
|
$
|
8,408,918
|
|
|
$
|
(3,028,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
Description of Securities
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
(Losses)
|
|
|
Obligations of U.S. Government, corporations and agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,798,157
|
|
|
$
|
(162,347
|
)
|
|
$
|
17,798,157
|
|
|
$
|
(162,347
|
)
|
Obligations of states and political subdivisions
|
|
|
899,333
|
|
|
|
(3,948
|
)
|
|
|
|
|
|
|
|
|
|
|
899,333
|
|
|
|
(3,948
|
)
|
Corporate Bonds
|
|
|
3,770,000
|
|
|
|
(230,000
|
)
|
|
|
1,881,250
|
|
|
|
(118,750
|
)
|
|
|
5,651,250
|
|
|
|
(348,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal, debt securities
|
|
|
4,669,333
|
|
|
|
(233,948
|
)
|
|
|
19,679,407
|
|
|
|
(281,097
|
)
|
|
|
24,348,740
|
|
|
|
(515,045
|
)
|
Mutual Funds
|
|
|
|
|
|
|
|
|
|
|
291,581
|
|
|
|
(5,791
|
)
|
|
|
291,581
|
|
|
|
(5,791
|
)
|
FHLMC Preferred Bank Stock
|
|
|
441,000
|
|
|
|
(97,000
|
)
|
|
|
|
|
|
|
|
|
|
|
441,000
|
|
|
|
(97,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$
|
5,110,333
|
|
|
$
|
(330,948
|
)
|
|
$
|
19,970,988
|
|
|
$
|
(286,888
|
)
|
|
$
|
25,081,321
|
|
|
$
|
(617,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The nature of securities which are temporarily impaired for a
continuous 12 month period or more can be segregated into
two groups.
The first group consists of four corporate bonds with a cost
basis totaling $6.0 million and a temporary loss of
approximately $2.86 million. The method for valuing these
four corporate bonds came from Moodys Analytics.
Moodys Analytics employs a two step discounted cashflow
valuation process. The first step is to use Monte Carlo
simulations to evaluate the credit quality of the collateral
pool and the structural supports. Step two is to apply a
discount rate to the cash flows to calculate a value. These four
corporate bonds are the Class B or subordinated
mezzanine tranche of pooled trust preferred
securities. The trust preferred securities are collateralized by
the interest and principal payments made on trust preferred
capital offerings by a geographically diversified pool of
approximately 50 different financial institutions. They have an
estimated maturity of 26 years, but can be called at par on
the five year anniversary, which already passed in 2008 for two
bonds, and will occur in 2009 for the other two bonds. If not
called, the bonds reprice every three months at a fixed rate
index above the three-month London Interbank Offered Rate
(LIBOR). These bonds are current, they have
sufficient collateralization and cash flow projections to
satisfy the cash flow portion of the Other Than Temporary
Impairment test under
EITF 99-20-1
as of
59
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
December 31, 2008, and the Company has the ability to hold
these bonds to maturity. Additional information regarding each
of the pooled trust preferred securities as of December 31,
2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
Percent of
|
|
|
Percent of
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
Collateral
|
|
|
Collateral in
|
|
|
Collateral in
|
|
|
Current Moodys
|
|
Cost
|
|
Fair Value
|
|
|
Performing
|
|
|
Deferral
|
|
|
Default
|
|
|
Rating
|
|
|
$1,000,000
|
|
$
|
450,418
|
|
|
|
87.88
|
%
|
|
|
11.14
|
%
|
|
|
0.98
|
%
|
|
|
B3
|
|
2,000,000
|
|
|
1,069,989
|
|
|
|
90.57
|
%
|
|
|
9.43
|
%
|
|
|
0.00
|
%
|
|
|
B2
|
|
2,000,000
|
|
|
1,147,231
|
|
|
|
95.81
|
%
|
|
|
4.19
|
%
|
|
|
0.00
|
%
|
|
|
Ba3
|
|
1,000,000
|
|
|
470,459
|
|
|
|
91.82
|
%
|
|
|
6.51
|
%
|
|
|
1.67
|
%
|
|
|
A2
|
|
The second group consists of a Community Reinvestment Act
qualified investment bond fund with a temporary loss of
approximately $6,000. The fund is a relatively small balance of
the portfolio and the Company plans to hold it indefinitely.
The carrying value of securities pledged to secure deposits and
for other purposes amounted to $25,940,337 and $13,565,758 at
December 31, 2008 and 2007, respectively.
Market
Risks
Investments of the Company are exposed to various risks, such as
interest rate, market, currency and credit risks. Due to the
level of risk associated with certain investments and the level
of uncertainty related to changes in the value of investments,
it is at least reasonably possible that changes in risk in the
near term would materially affect investment assets reported in
the financial statements.
In addition, recent economic uncertainty and market events have
led to unprecedented volatility in currency, commodity, credit
and equity markets culminating in failures of some banking and
financial services firms and Government intervention to solidify
others. These recent events underscore the level of investment
risk associated with the current economic environment, and
accordingly the level of risk in the Companys investments.
Note 4. Loans
A summary of the balances of loans follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
38,037
|
|
|
$
|
37,204
|
|
Secured by farmland
|
|
|
1,293
|
|
|
|
1,365
|
|
Secured by 1 - to - 4 family residential
|
|
|
175,791
|
|
|
|
170,983
|
|
Other real estate loans
|
|
|
160,443
|
|
|
|
132,918
|
|
Commercial and industrial loans (not secured by real estate)
|
|
|
39,985
|
|
|
|
38,203
|
|
Consumer installment loans
|
|
|
15,695
|
|
|
|
24,133
|
|
All other loans
|
|
|
8,934
|
|
|
|
8,824
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
440,178
|
|
|
$
|
413,630
|
|
Unearned income
|
|
|
(720
|
)
|
|
|
(338
|
)
|
Allowance for loan losses
|
|
|
(4,780
|
)
|
|
|
(4,185
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
434,678
|
|
|
$
|
409,107
|
|
|
|
|
|
|
|
|
|
|
60
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Note 5. Allowance
for Loan Losses
Analysis of the allowance for loan losses follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Balance at beginning of year
|
|
$
|
4,185,209
|
|
|
$
|
4,470,533
|
|
|
$
|
4,238,143
|
|
Provision for loan losses
|
|
|
3,227,269
|
|
|
|
717,000
|
|
|
|
360,000
|
|
Recoveries of loans previously charged-off
|
|
|
72,298
|
|
|
|
60,616
|
|
|
|
128,463
|
|
Loan losses charged-off
|
|
|
(2,705,114
|
)
|
|
|
(1,062,940
|
)
|
|
|
(256,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
4,779,662
|
|
|
$
|
4,185,209
|
|
|
$
|
4,470,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about impaired loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Impaired loans for which an allowance has been provided
|
|
$
|
809,221
|
|
|
$
|
2,688,501
|
|
|
$
|
4,359,124
|
|
Impaired loans for which no allowance has been provided
|
|
|
81,604
|
|
|
|
1,247,461
|
|
|
|
2,647,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
890,825
|
|
|
$
|
3,935,962
|
|
|
$
|
7,006,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance provided for impaired loans, included in the allowance
for loan losses
|
|
$
|
720,395
|
|
|
$
|
1,392,236
|
|
|
$
|
1,437,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Average balance in impaired loans
|
|
$
|
1,308,909
|
|
|
$
|
4,359,817
|
|
|
$
|
7,313,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
35,940
|
|
|
$
|
261,257
|
|
|
$
|
793,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No additional funds are committed to be advanced in connection
with impaired loans. The reduction in impaired loans of
$2.4 million from 2007 to 2008 primarily reflects the
transfer to other real estate owned of one property totaling
approximately $2.0 million at December 31, 2008, and
the sale of a second property totaling 425,000.
No non-accrual loans were excluded from the above impaired loan
disclosure under SFAS 114 at December 31, 2008 and
2007. Non-accrual loans excluded from the above impaired loan
disclosure under FASB 114 were $62,000, at December 31,
2006. If interest on these loans had been accrued, such income
would have approximated $7,974, for 2006. Loans past due
90 days or more and still accruing interest totaled
$102,000, $770,000, and $1,000 for 2008, 2007 and 2006,
respectively.
|
|
Note 6.
|
Related
Party Transactions
|
In the ordinary course of business, the Company has granted
loans to executive officers, directors, their immediate families
and affiliated companies in which they are principal
shareholders, which totaled $4,027,673 at December 31, 2008
and $4,129,875 at December 31, 2007. During 2008, total
principal additions were $310,509 and total principal payments
were $412,711. During 2007, total principal additions were
$11,106 and total principal payments were $525,861. Also during
2007, principal was reduced by an additional $22,812 to adjust
for individuals who were affiliates in 2006, but not in 2007 and
2008.
61
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 7.
|
Bank
Premises and Equipment, Net
|
A summary of the cost and accumulated depreciation of premises
and equipment at December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
2,541,282
|
|
|
$
|
2,625,882
|
|
Buildings and improvements
|
|
|
7,011,719
|
|
|
|
7,672,331
|
|
Furniture and equipment
|
|
|
7,072,334
|
|
|
|
10,603,745
|
|
Leasehold improvements
|
|
|
300,618
|
|
|
|
300,618
|
|
Construction in process
|
|
|
2,532,392
|
|
|
|
349,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,458,345
|
|
|
|
21,552,373
|
|
Accumulated depreciation and amortization
|
|
|
(10,837,128
|
)
|
|
|
(14,372,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,621,217
|
|
|
$
|
7,180,369
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expensed for years ended
December 31, 2008, 2007 and 2006, totaled $909,922,
$1,017,874 and $1,205,044 respectively.
The aggregate amount of time deposits in denominations of
$100,000 or more at December 31, 2008 and 2007 were
$53,117,000 and $37,179,000, respectively. Brokered deposits
include balances of Bank customers who qualify to participate in
the CD Account Registry Services (CDARS). As of
December 31, 2008 and 2007 these balances totaled
$37,385,000 and $9,264,000, respectively.
At December 31, 2008, the scheduled maturities of time
deposits are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
|
129,593
|
|
2010
|
|
|
19,293
|
|
2011
|
|
|
1,596
|
|
2012
|
|
|
2,839
|
|
2013 and there after
|
|
|
540
|
|
|
|
|
|
|
|
|
$
|
153,861
|
|
|
|
|
|
|
Overdraft demand deposits totaling $267,601 and $1,529,985 were
reclassified to loans at December 31, 2008 and 2007,
respectively.
The Bank accepts deposits for executive officers and directors
of the Bank on the same terms, including interest rates, as
those prevailing at the time of comparable transactions with
unrelated persons. The aggregate dollar amount of deposits of
executive officers and directors totaled $1,261,000 and
$3,774,000 at December 31, 2008 and 2007, respectively.
62
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 9.
|
Employee
Benefit Plans
|
Defined
Benefit Plan
The following tables provide a reconciliation of the changes in
the defined benefit plans obligations and fair value of
assets over the three-year period ending December 31, 2008,
computed as of October 1 for 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change in Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning
|
|
$
|
6,962,121
|
|
|
$
|
6,729,403
|
|
|
$
|
6,572,275
|
|
Service cost
|
|
|
555,404
|
|
|
|
670,720
|
|
|
|
692,509
|
|
Interest cost
|
|
|
386,758
|
|
|
|
401,371
|
|
|
|
375,987
|
|
Actuarial gain (loss)
|
|
|
1,170,367
|
|
|
|
(529,943
|
)
|
|
|
(634,340
|
)
|
Benefits paid
|
|
|
(191,301
|
)
|
|
|
(309,430
|
)
|
|
|
(277,028
|
)
|
Decrease in obligation due to curtailment
|
|
|
(2,631,454
|
)
|
|
|
|
|
|
|
|
|
Prior service cost due to amendment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, ending
|
|
$
|
6,251,895
|
|
|
$
|
6,962,121
|
|
|
$
|
6,729,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning
|
|
$
|
7,051,968
|
|
|
$
|
6,490,958
|
|
|
$
|
4,690,102
|
|
Actual return on plan assets
|
|
|
(322,754
|
)
|
|
|
870,440
|
|
|
|
443,416
|
|
Employer contributions
|
|
|
|
|
|
|
|
|
|
|
1,634,468
|
|
Benefits paid
|
|
|
(191,301
|
)
|
|
|
(309,430
|
)
|
|
|
(277,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, ending
|
|
$
|
6,537,913
|
|
|
$
|
7,051,968
|
|
|
$
|
6,490,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status, ending
|
|
$
|
286,018
|
|
|
$
|
89,847
|
|
|
$
|
(238,445
|
)
|
63
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount recognized on the Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
286,018
|
|
|
$
|
107,459
|
|
|
$
|
345,606
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
238,445
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
(34,188
|
)
|
|
|
(670,882
|
)
|
Amounts Recognized in accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
|
|
|
$
|
96,632
|
|
|
$
|
1,072,536
|
|
Prior service cost
|
|
|
|
|
|
|
31,076
|
|
|
|
38,839
|
|
Net obligation at transition
|
|
|
|
|
|
|
(75,908
|
)
|
|
|
(94,887
|
)
|
Deferred tax benefit
|
|
|
|
|
|
|
(17,612
|
)
|
|
|
(345,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized
|
|
$
|
|
|
|
$
|
34,188
|
|
|
$
|
670,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
$
|
(6,251,895
|
)
|
|
$
|
(6,962,121
|
)
|
|
$
|
(6,729,403
|
)
|
Fair value of assets
|
|
|
6,537,913
|
|
|
|
7,051,968
|
|
|
|
6,490,958
|
|
Unrecognized net actuarial (gain)/loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net obligation at transition
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) benefit cost included in other assets
(liabilities)
|
|
$
|
286,018
|
|
|
$
|
89,847
|
|
|
$
|
(238,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
444,323
|
|
|
$
|
670,720
|
|
|
$
|
692,509
|
|
Interest cost
|
|
|
309,406
|
|
|
|
401,371
|
|
|
|
375,987
|
|
Expected return on plan assets
|
|
|
(596,201
|
)
|
|
|
(445,510
|
)
|
|
|
(395,840
|
)
|
Amortization of prior service cost
|
|
|
7,766
|
|
|
|
7,763
|
|
|
|
7,766
|
|
Amortization of net obligation at transition
|
|
|
(18,979
|
)
|
|
|
(18,979
|
)
|
|
|
(18,979
|
)
|
Recognized net (gain) due to curtailment
|
|
|
(327,269
|
)
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
|
|
|
|
21,031
|
|
|
|
60,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(180,954
|
)
|
|
$
|
636,396
|
|
|
$
|
722,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Other
Changes in Plan Assets and Benefit Obligations Recognized in
Other Comprehensive Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net (gain)/loss
|
|
$
|
(96,632
|
)
|
|
$
|
(975,904
|
)
|
|
$
|
1,072,536
|
|
Prior service cost
|
|
|
(21,368
|
)
|
|
|
|
|
|
|
38,839
|
|
Amortization of prior service cost
|
|
|
(9,708
|
)
|
|
|
(7,766
|
)
|
|
|
|
|
Net obligation at transition
|
|
|
52,184
|
|
|
|
|
|
|
|
(94,887
|
)
|
Amortization of Net Obligation at Transition
|
|
|
23,724
|
|
|
|
18,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized
|
|
|
(51,800
|
)
|
|
|
(964,691
|
)
|
|
|
1,016,488
|
|
Less: Income Tax Effect
|
|
|
17,612
|
|
|
|
327,995
|
|
|
|
345,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in other comprehensive (income) loss
|
|
$
|
(34,188
|
)
|
|
$
|
(636,696
|
)
|
|
$
|
670,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Net Periodic Benefit Costs and Other
Comprehensive (Income) Loss:
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
$(196,174)
|
|
$(328,295)
|
|
$1,738,888
|
The accumulated benefit obligation for the deferred benefit
pension plan was $5,977,222, $3,962,497, and $3,762,292, at
December 31, 2008, 2007, and 2006, respectively.
The assumptions used in the measurement of the Companys
benefit obligations are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-Average Assumptions used in computing ending
obligations as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
The assumptions used in the measurement of the Companys
Net Periodic Benefit Cost are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-Average Assumptions used in computing ending
obligations as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
4.75
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
The plan sponsor selects the expected long-term rate of return
on assets assumption in consultation with their advisors and
actuary. This rate is intended to reflect the average rate of
earnings expected to be earned on the funds invested or to be
invested to provide plan benefits. Historical performance is
reviewed especially with respect to real rates of return (net of
inflation), for the major asset classes held or anticipated to
be held by the trust, and for the trust itself. Undue weight is
not given to recent experience that may not continue
over the measurement period with higher significance
placed on current forecasts of future long-term economic
conditions.
Because assets are held in a qualified trust, anticipated
returns are not reduced for taxes. Further, solely for this
purpose, the plan is assumed to continue in force and not
terminate during the period during which assets are invested.
However, consideration is given to the potential impact of
current and future investment policy, cash flow
65
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
into and out of the trust, and expenses (both investment and
non-investment), typically paid from the plan assets (to the
extent such expenses are not explicitly estimated within
periodic costs).
The Company pension plans weighted-average asset
allocation at December 31, 2008 and September 30, 2007
and 2006, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Asset Category as of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds Fixed Income
|
|
|
0
|
%
|
|
|
22
|
%
|
|
|
21
|
%
|
Mutual Funds Equity
|
|
|
0
|
%
|
|
|
74
|
%
|
|
|
71
|
%
|
Cash and Cash Equivalents
|
|
|
100
|
%
|
|
|
4
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning in January 2008, 100% of the Companys pension
plan assets were invested in cash and cash equivalents. This
decision was based on recognizing the need to preserve asset
value until December 31, 2009, the effective date of the
termination of the defined benefit pension plan. For 2006 and
2007, the trust fund was sufficiently diversified to maintain a
reasonable level of risk without imprudently sacrificing return,
with a targeted asset allocation of 25% fixed income and 75%
equities. The Investment Manager selected investment fund
managers with demonstrated experience and expertise, and the
funds with demonstrated historical performance, for the
implementation of the plans investment strategy. The
Investment Manager both actively and passively managed
investment strategies and allocated funds across the asset
classes to develop an efficient investment structure.
It is the responsibility of the Trustee to administer the
investments of the trust within reasonable costs, being careful
to avoid sacrificing quality. These costs include, but are not
limited to, management and custodial fees, consulting fees,
transaction costs and other administrative costs chargeable to
the trust.
The Company contributed $1,634,468 to its pension plan in 2006.
No contribution was made in 2008 and 2007.
On December 20, 2007, the Companys Board of Directors
approved the termination of the defined benefit pension plan
effective on December 31, 2009, and effective
January 1, 2010 replace the defined benefit pension plan
with an enhanced 401(k) plan. Defined benefit pension plan
expenses are projected to be approximately $286,000 in 2009 and
nothing going forward. Expenses for the 401(k) plan are
projected to increase from $134,000 and $142,000 in 2007 and
2008, respectively, to approximately $145,000 in 2009, and
approximately $625,000 in 2010. Growth in 401(k) after 2010 is
projected to increase approximately at the same rate of increase
as salaries.
Estimated future benefit payments which reflect expected future
service, as appropriate, are as follows:
|
|
|
|
|
|
|
|
|
Payment Dates
|
|
Amount
|
|
|
|
|
|
For the period:
|
|
|
|
|
|
|
|
|
January 1, 2009 through December 31, 2009
|
|
$
|
70,645
|
|
|
|
|
|
January 1, 2010 through December 31, 2018
|
|
$
|
6,727,385
|
|
|
|
|
|
66
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Supplemental
Executive Retirement Plan
The following tables provide a reconciliation of the changes in
the supplemental executive retirement plans obligations
over the three-year period ending December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change in Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning
|
|
$
|
1,170,236
|
|
|
$
|
617,532
|
|
|
$
|
164,547
|
|
Service cost
|
|
|
148,093
|
|
|
|
136,800
|
|
|
|
92,926
|
|
Interest cost
|
|
|
70,203
|
|
|
|
37,061
|
|
|
|
44,482
|
|
Actuarial gain (loss)
|
|
|
352,058
|
|
|
|
378,843
|
|
|
|
(458,026
|
)
|
Benefits paid
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost due to amendment
|
|
|
|
|
|
|
|
|
|
|
773,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, ending
|
|
$
|
1,740,590
|
|
|
$
|
1,170,236
|
|
|
$
|
617,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, ending
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31, 2007
|
|
$
|
(1,740,590
|
)
|
|
$
|
(1,170,236
|
)
|
|
$
|
(617,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amount recognized on the Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets, deferred income tax benefit
|
|
$
|
313,055
|
|
|
$
|
209,296
|
|
|
$
|
91,355
|
|
Other liabilities
|
|
|
1,740,590
|
|
|
|
1,170,236
|
|
|
|
617,532
|
|
Other comprehensive income (loss)
|
|
|
(607,695
|
)
|
|
|
(406,281
|
)
|
|
|
(177,337
|
)
|
Amounts Recognized in accumulated other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss)
|
|
|
287,802
|
|
|
|
(64,256
|
)
|
|
|
(458,026
|
)
|
Prior service cost
|
|
|
632,948
|
|
|
|
679,833
|
|
|
|
726,718
|
|
Net obligation at transition
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit
|
|
|
(313,055
|
)
|
|
|
(209,296
|
)
|
|
|
(91,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized
|
|
$
|
607,695
|
|
|
$
|
406,281
|
|
|
$
|
177,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Obligation
|
|
$
|
(1,740,590
|
)
|
|
$
|
(1,170,236
|
)
|
|
$
|
(617,532
|
)
|
Fair value of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net actuarial (gain)/loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net obligation at transition
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accrued)/prepaid benefit cost included in other liabilities
|
|
$
|
(1,740,590
|
)
|
|
$
|
(1,170,236
|
)
|
|
$
|
(617,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
148,093
|
|
|
$
|
136,800
|
|
|
$
|
92,926
|
|
Interest cost
|
|
|
70,203
|
|
|
|
37,061
|
|
|
|
44,482
|
|
Expected return on plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
46,885
|
|
|
|
46,885
|
|
|
|
46,885
|
|
Amortization of net obligation at transition
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss
|
|
|
|
|
|
|
(14,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
265,181
|
|
|
$
|
205,819
|
|
|
$
|
184,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized
in Other Comprehensive Income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net (gain)/loss
|
|
$
|
352,058
|
|
|
$
|
393,770
|
|
|
$
|
(458,026
|
)
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
|
773,603
|
|
Amortization of prior service cost
|
|
|
(46,885
|
)
|
|
|
(46,885
|
)
|
|
|
(46,885
|
)
|
Net obligation at transition
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Net Obligation at Transition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized
|
|
|
305,173
|
|
|
|
346,885
|
|
|
|
268,692
|
|
Less: Income Tax Effect
|
|
|
103,759
|
|
|
|
117,941
|
|
|
|
91,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in other comprehensive (income) loss
|
|
$
|
201,414
|
|
|
$
|
228,944
|
|
|
$
|
177,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recognized in Net Periodic Benefit Costs and Other
Comprehensive Income.
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
$570,354
|
|
$552,704
|
|
$452,985
|
The assumptions used in the measurement of the Companys
benefit obligations are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-Average Assumptions used in computing ending
obligations as of December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate used for net periodic pension cost
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
Discount rate used for disclosures
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Expected return on plan assets
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
4.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Estimated future benefit payments which reflect expected future
service, as appropriate, are as follows.
68
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
Payment Dates
|
|
Amount
|
|
|
For the 12 months ended:
|
|
|
|
|
December 31, 2009
|
|
$
|
874
|
|
December 31, 2010
|
|
|
1,943
|
|
December 31, 2011
|
|
|
3,236
|
|
December 31, 2012
|
|
|
4,791
|
|
December 31, 2013
|
|
|
6,652
|
|
Thereafter
|
|
|
492,933
|
|
401(k)
Plan
The Company has a defined contribution retirement plan under
Code Section 401(k) of the Internal Revenue Service
covering employees who have completed 3 months of service
and who are at least 18 years of age. Under the plan, a
participant may contribute an amount up to 100% of their covered
compensation for the year, not to exceed the dollar limit set by
law (Code Section 402(g)). The Company may also make, but
is not required to make, a discretionary matching contribution.
The amount of this matching contribution, if any, is determined
on an annual basis by the Board of Directors. The Companys
401(k) expenses for the years ended December 31, 2008, 2007
and 2006 were $141,576, $133,708, and $131,212, respectively.
Deferred
Compensation Plan
The Company has a nonqualified deferred compensation program for
a former key employees retirement, in which the
contribution expense is solely funded by the Company. The
retirement benefit to be provided is variable based upon the
performance of underlying life insurance policy assets. Deferred
compensation expense amounted to $5,220, $19,921, and $24,362
for the years ended December 31, 2008, 2007 and 2006,
respectively.
Concurrent with the establishment of the deferred compensation
plan, the Company purchased life insurance policies on this
employee with the Company named as owner and beneficiary. These
life insurance policies are intended to be utilized as a source
of funding the deferred compensation plan. The Company has
recorded in other assets $1,043,069 and $1,008,667 representing
cash surrender value of these policies for the years ended
December 31, 2008 and 2007, respectively.
Note 10. Dividend
Reinvestment and Stock Purchase Plan
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 either the actual purchase
price of the shares if obtained on the open market, or the
average of the closing bid and asked quotations for a share of
common stock on the day before the purchase date for shares if
acquired directly from the Company as newly issued shares under
the DRSPP. No new shares were issued during 2008 or 2007. The
Company issued 5,047 new shares in 2006 at a weighted average
price of $24.63. The Company has 236,529 shares available
for issuance under the DRSPP at December 31, 2008.
Note 11. Commitments
and Contingent Liabilities
The Bank has entered into six banking facility leases of greater
than one year. The first lease was entered into on
January 31, 1999. The lease provides for an original
five-year term with a renewal option for additional periods of
five years on the Banks Sudley Road, Manassas branch. The
Bank renewed the lease January 31, 2004. Rent for 2009 is
expected to be $54,135.
69
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The second lease for a branch office in Old Town Manassas was
entered into on April 10, 2001. The lease provides for an
original ten-year term with the right to renew for two
additional ten-year periods beginning on June 1, 2001.
Annual rent is $39,325 for the first five years and $40,700
annually commencing with the sixth year. Rent for 2009 is
expected to be $40,700.
The third lease is for the accounting and finance department
facility and was entered into on April 4, 2007. The lease
has a term of three years beginning on August 1, 2007. The
annual rent for the term of the lease, including 2009, is
$36,648.
The fourth lease is for the property in Haymarket, Virginia
where the bank plans to build its ninth full-service branch
office scheduled to open during 2010. The initial
12 months rental expense is projected to be $150,000
with increases of 3% annually. The term of the lease is
20 years after the branch opening with two additional
options for five years each.
The fifth lease is for the property in Bristow, Virginia where
the Bank plans to build its tenth full-service branch office
scheduled to open during 2009. The rental expense for its
initial 12 months is projected to be $150,000 with
increases of 3% annually for the first ten years. The lease will
expire ten years after the branch opening with two additional
options for five years each.
The sixth lease is for the temporary rental of the View Tree
branch office at 216 Broadview Avenue. The lease has a term of
two years beginning on March 19, 2008. The Bank has the
right to early termination of the lease after eighteen months.
Rent for the first two years was $180,000 annually. The Bank
will be moving this branch office to 87 Lee Highway, a property
owned by the Bank, during 2009.
Total rent expense was $300,438, $139,523, and $133,913 for
2008, 2007 and 2006, respectively, and was included in occupancy
expense.
The Bank has two data processing contractual obligations of
greater than one year. The contractual expense for the
Banks largest primary contractual obligation is for data
processing, and totaled $1,037,587, $1,027,783, and $903,879 for
2008, 2007 and 2006, respectively. The term of this obligation
ends in July 2009.
The following is a schedule by year of future minimum lease
requirements and contractual obligations required under the
long-term noncancellable lease agreements:
|
|
|
|
|
2009
|
|
$
|
1,673,183
|
|
2010
|
|
|
1,825,512
|
|
2011
|
|
|
1,866,828
|
|
2012
|
|
|
1,769,418
|
|
2013
|
|
|
1,779,252
|
|
Thereafter
|
|
|
10,287,572
|
|
|
|
|
|
|
Total
|
|
$
|
19,201,765
|
|
|
|
|
|
|
As a member of the Federal Reserve System, the Companys
subsidiary bank is required to maintain certain average reserve
balances. For the final weekly reporting period in the years
ended December 31, 2008 and 2007, the aggregate amounts of
daily average required balances were approximately $3,484,000
and $7,799,000, respectively.
In the normal course of business, there are various outstanding
commitments and contingent liabilities, such as guarantees,
commitments to extend credit, etc., which are not reflected in
the accompanying consolidated financial statements. The Company
does not anticipate a material impact on its financial
statements.
See Note 17 with respect to financial instruments with
off-balance-sheet risk.
70
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The Company files income tax returns in the U.S. federal
jurisdiction and the state of Virginia. With few exceptions, the
Company is no longer subject to U.S. federal, state and
local income tax examinations by tax authorities for years prior
to 2004.
The Company adopted the provisions of FIN 48,
Accounting for Uncertainty in Income Taxes, on
January 1, 2007 with no impact on the financial statements.
The components of the net deferred tax assets included in other
assets at December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
1,571,554
|
|
|
$
|
1,329,293
|
|
Securities available for sale
|
|
|
828,921
|
|
|
|
172,956
|
|
Impairment on securities
|
|
|
101,150
|
|
|
|
|
|
Interest on nonaccrual loans
|
|
|
15,220
|
|
|
|
15,263
|
|
Accrued vacation
|
|
|
107,306
|
|
|
|
93,375
|
|
SERP obligation
|
|
|
655,597
|
|
|
|
468,999
|
|
Accumulated depreciation
|
|
|
97,496
|
|
|
|
|
|
Restricted Stock
|
|
|
170,115
|
|
|
|
162,514
|
|
Other
|
|
|
59,299
|
|
|
|
29,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,606,658
|
|
|
|
2,272,102
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,964
|
|
|
|
1,986
|
|
Prepaid pension obligation
|
|
|
97,247
|
|
|
|
30,548
|
|
Accumulated depreciation
|
|
|
|
|
|
|
32,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,211
|
|
|
|
65,114
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,506,447
|
|
|
$
|
2,206,988
|
|
|
|
|
|
|
|
|
|
|
The Company has not recorded a valuation allowance for deferred
tax assets as they feel it is more likely than not, that they
will be ultimately realized.
Allocation of federal income taxes between current and deferred
portions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current tax expense
|
|
$
|
1,916,305
|
|
|
$
|
2,414,058
|
|
|
$
|
2,468,320
|
|
Deferred tax (benefit)
|
|
|
(550,655
|
)
|
|
|
(327,194
|
)
|
|
|
(4,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,365,649
|
|
|
$
|
2,086,864
|
|
|
$
|
2,463,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The reasons for the difference between the statutory federal
income tax rate and the effective tax rates for the three years
ended December 31, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Computed expected tax expense
|
|
$
|
1,706,244
|
|
|
$
|
2,393,697
|
|
|
$
|
2,742,878
|
|
Decrease in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income
|
|
|
(337,946
|
)
|
|
|
(281,208
|
)
|
|
|
(253,038
|
)
|
Other
|
|
|
(2,649
|
)
|
|
|
(25,625
|
)
|
|
|
(26,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,365,649
|
|
|
$
|
2,086,864
|
|
|
$
|
2,463,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Earnings
Per Share
|
The following shows the weighted average number of shares used
in computing earnings per share and the effect on the weighted
average number of shares of diluted potential common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
Per Share
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Basic earnings per share
|
|
|
3,525,821
|
|
|
$
|
1.04
|
|
|
|
3,504,761
|
|
|
$
|
1.41
|
|
|
|
3,472,217
|
|
|
$
|
1.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities, stock-based awards
|
|
|
31,856
|
|
|
|
|
|
|
|
58,582
|
|
|
|
|
|
|
|
110,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
3,557,677
|
|
|
$
|
1.03
|
|
|
|
3,563,343
|
|
|
$
|
1.39
|
|
|
|
3,582,241
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 23,732 options with a strike price above the
Companys closing stock on December 31, 2008 of $12.75
that were excluded from the earnings per share calculation.
|
|
Note 14.
|
Stock
Option Plans
|
Omnibus
Stock Ownership and Long-Term Incentive Plan
In 1998, the Company adopted the Omnibus Stock Ownership and
Long Term Incentive Plan under which stock options, stock
appreciation rights, nonvested shares, and long-term performance
unit awards may be granted to certain key employees for purchase
of the Companys stock. The effective date of the plan was
April 21, 1998 with a ten-year term. The plan authorized
for issuance 400,000 shares of the Companys common
stock. The plan requires that options be granted at an exercise
price equal to at least 100% of the fair market value of the
common stock on the date of the grant; however, for those
individuals who own more than 10% of the stock of the Company
and are awarded an incentive stock option, the option price must
be at least 110% of the fair market value on the date of grant.
Such options are generally not exercisable until three years
from the date of issuance and generally require continuous
employment during the period prior to exercise. The options will
expire in no more than ten years after the date of grant. The
plan was amended and restated effective January 1, 2000
with a ten-year term, to include non-employee directors and
authorized an additional 180,000 shares to be available for
awards to directors. The plan provides for awards to
non-employee directors at the discretion of the Compensation and
Benefits Committee. Options that are not exercisable at the time
a directors service on the Board terminates for reason
other than death, disability or retirement in accordance with
the Companys policy will be forfeited.
Non-employee
Director Stock Option Plan
The Company previously has issued stock options to non-employee
directors under its Non-employee Director Stock Option Plan,
which expired in 1999. Under that plan, each non-employee
director of the Company or its subsidiary received an option
grant covering 2,240 shares of Company common stock on
April 1 of each year during
72
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
the five-year term of the plan. The first grant under the plan
was made on May 1, 1995. The exercise price of awards was
fixed at the fair market value of the shares on the date the
option was granted. During the term of the plan, a total of
120,960 options for shares of common stock were granted.
Effective January 1, 2000, the Omnibus Stock Ownership and
Long-Term Incentive Plan for employees was amended and restated
to include non-employee directors. The Company did not grant
options in 2008, 2007 and 2006.
During 2008, 2007, and 2006, the Company granted awards of
non-vested shares to executive officers and non-employee
directors under the Omnibus Stock Ownership and Long-Term
Incentive Plan: 14,067; 7,711 and 7,587, of restricted stock to
executive officers and 5,625; 3,087 and 2,760 of restricted
stock to directors on February 17, 2008; February 14,
2007 and February 17, 2006, respectively.
The restricted shares are accounted for using the fair market
value of the Companys common stock on the date the
restricted shares were awarded. The restricted shares issued to
executive officers and directors are subject to a vesting
period, whereby, the restrictions on the shares lapse on the
third year anniversary of the date the restricted shares were
awarded. Compensation expense for nonvested shares, net of
forfeiture, amounted to $263,575, $256,230 and $220,268 in 2008,
2007 and 2006, respectively.
A summary of the status of the Omnibus Stock Ownership and
Long-Term Incentive Plan and Non-employee Director Stock Option
Plan is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value(1)
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at January 1
|
|
|
96,100
|
|
|
$
|
9.85
|
|
|
|
|
|
|
|
177,466
|
|
|
$
|
9.50
|
|
|
|
194,146
|
|
|
$
|
9.18
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(18,920
|
)
|
|
|
9.91
|
|
|
|
|
|
|
|
(81,366
|
)
|
|
|
9.09
|
|
|
|
(16,680
|
)
|
|
|
5.75
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
|
|
|
77,180
|
|
|
$
|
9.84
|
|
|
$
|
224,594
|
|
|
|
96,100
|
|
|
$
|
9.85
|
|
|
|
177,466
|
|
|
$
|
9.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value per option of options granted during
the year
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value of stock option in the table above
reflects the pre-tax intrinsic value (the amount by which the
December 31, 2008 market value of the underlying stock
option exceeded the exercise price of the option) that would
have been received by the option holders had all option holders
exercised their options on December 31, 2008. This amount
changes based on the changes in the market value of the
companys stock. |
The total intrinsic value of options exercised during the years
ended December 31, 2008, 2007 and 2006 was $132,774,
$1,225,608 and $309,875, respectively.
73
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The status of the options outstanding as of December 31,
2008 for the Omnibus Stock Ownership and Long-Term Incentive and
Non-employee Director Stock Option Plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Remaining Contractual Life
|
|
Outstanding
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
0.25 years
|
|
|
10,700
|
|
|
$
|
9.75
|
|
|
|
10,700
|
|
|
$
|
9.75
|
|
1.42 years
|
|
|
21,214
|
|
|
$
|
8.13
|
|
|
|
21,214
|
|
|
$
|
8.13
|
|
2.13 years
|
|
|
21,534
|
|
|
$
|
8.07
|
|
|
|
21,534
|
|
|
$
|
8.07
|
|
3.08 years
|
|
|
23,732
|
|
|
$
|
13.00
|
|
|
|
23,732
|
|
|
$
|
13.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,180
|
|
|
|
|
|
|
|
77,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested shares
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1,
|
|
|
31,190
|
|
|
|
|
|
|
|
31,829
|
|
|
|
|
|
|
|
21,482
|
|
|
|
|
|
Granted
|
|
|
19,692
|
|
|
$
|
17.70
|
|
|
|
10,798
|
|
|
$
|
25.40
|
|
|
|
10,347
|
|
|
$
|
25.24
|
|
Vested
|
|
|
(10,315
|
)
|
|
|
|
|
|
|
(11,437
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,348
|
)
|
|
$
|
21.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31,
|
|
|
38,219
|
|
|
|
|
|
|
|
31,190
|
|
|
|
|
|
|
|
31,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $334,035 of total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the plans. That cost is
expected to be recognized over a period of three years.
Cash received from option exercise exclusive of tax benefit
under all share based payment arrangements for the years ended
December 31, 2008, 2007, and 2006, was $187,521, $739,469;
and $95,838, respectively. The actual tax benefit realized for
the tax deductions from option exercise of the share-based
payment arrangements totaled $21,783, $419,528; and $105,358,
respectively, for the years ended December 31, 2008, 2007
and 2006.
The Company also maintains a Director Deferred Compensation Plan
(the Deferred Compensation Plan). This plan provides
that any non-employee director of the Company or the Bank may
elect to defer receipt of all or any portion of his or her
compensation as a director. A participating director may elect
to have amounts deferred under the Deferred Compensation Plan
held in a deferred cash account, which is credited on a
quarterly basis with interest equal to the highest rate offered
by the Bank at the end of the preceding quarter. Alternatively,
a participant may elect to have a deferred stock account in
which deferred amounts are treated as if invested in the
Companys common stock at the fair market value on the date
of deferral. The value of a stock account will increase and
decrease based upon the fair market value of an equivalent
number of shares of common stock. In addition, the deferred
amounts deemed invested in common stock will be credited with
dividends on an equivalent number of shares. Amounts considered
invested in the Companys common stock are paid, at the
election of the director, either in cash or in whole shares of
the common stock and cash in lieu of fractional shares.
Directors may elect to receive amounts contributed to their
respective accounts in one or up to five installments.
74
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 15.
|
Federal
Home Loan Bank Advances and Other Borrowings
|
The Companys borrowings from the Federal Home Loan Bank of
Atlanta (FHLB) was $45.0 million at
December 31, 2008 and $35.0 million at
December 31, 2007. At December 31, 2008 and 2007, the
interest rates on FHLB advances ranged from 4.46% to 0.61% and
from 4.55% to 5.31%, respectively. At December 31, 2008 and
2007, the weighted average interest rates were 3.35% and 4.94%,
respectively. On December 31, 2008, $20,000,000 were
adjustable rate based on the three month LIBOR, and $25,000,000
were at various fixed rates.
At December 31, 2008, the Bank had an available line of
credit with the FHLB with a borrowing limit of approximately
$115 million at December 31, 2008. FHLB advances and
available line of credit were secured by certain first and
second lien loans on one-to-four unit single-family dwellings
and eligible commercial real estate loans of the Bank. As of
December 31, 2008, the book value of eligible loans totaled
approximately $215.3 million. At December 31, 2007,
the advances were secured by similar loans totaling
$210.0 million. The amount of available credit is limited
to 75% of qualifying collateral for one-to-four unit
single-family residential loans, and 50% for commercial and home
equity loans. Any borrowing in excess of the qualifying
collateral requires pledging of additional assets. The
contractual maturities of FHLB advances are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Due in 2008
|
|
|
|
|
|
$
|
25,000,000
|
|
Due in 2009
|
|
$
|
20,000,000
|
|
|
|
|
|
Due in 2011
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
Due in 2013
|
|
|
15,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,000,000
|
|
|
$
|
35,000,000
|
|
|
|
|
|
|
|
|
|
|
As additional sources of liquidity, the Bank has available
federal funds purchased lines of credit with ten different
commercial banks, including the Federal Reserve Bank, totaling
$88.2 million. At December 31, 2008,
$18.3 million of the available federal funds purchased
lines of credit with various commercial banks were in use at a
weighted average rate of 1.05%.
|
|
Note 16.
|
Dividend
Limitations on Affiliate Bank
|
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends
are restricted by federal and state regulatory authorities. As
of December 31, 2008, the aggregate amount of unrestricted
funds, which could be transferred from the banking subsidiary to
the parent corporation, without prior regulatory approval,
totaled $7,657,627.
|
|
Note 17.
|
Financial
Instruments With Off-Balance-Sheet Risk
|
The Company is party to credit-related financial instruments
with off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby
letters of credit. Such commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Companys exposure to credit loss is represented by the
contractual amount of these commitments. The Company follows the
same credit policies in making commitments as it does for
on-balance-sheet instruments.
75
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
At December 31, 2008 and 2007, the following financial
instruments were outstanding whose contract amounts represent
credit risk:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Financial instruments whose contract amounts represent credit
risk:
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
74,023
|
|
|
$
|
72,503
|
|
Standby letters of credit
|
|
|
5,366
|
|
|
|
6,749
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,389
|
|
|
$
|
79,252
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company
evaluates each customers credit worthiness on a
case-by-case
basis. The amount of collateral obtained, if deemed necessary by
the Company, is based on managements credit evaluation of
the customer.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments
for possible future extensions of credit to existing customers.
These lines of credit usually do not contain a specified
maturity date and may not be drawn upon to the total extent to
which the Company is committed.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a
third party. Those letters of credit are primarily issued to
support public and private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
The Company generally holds collateral supporting those
commitments if deemed necessary.
|
|
Note 18.
|
Fair
Value Measurement
|
The Company adopted SFAS No. 157, Fair Value
Measurements (SFAS 157), on January 1,
2008 to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures. SFAS 157
clarifies that fair value of certain assets and liabilities is
an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants.
In February of 2008, the FASB issued Staff Position
No. 157-2
(FSP 157-2)
which delayed the effective date of SFAS 157 for certain
nonfinancial assets and nonfinancial liabilities except for
those items that are recognized or disclosed at fair value in
the financial statements on a recurring basis.
FSP 157-2
defers the effective date of SFAS 157 for such nonfinancial
assets and nonfinancial liabilities to fiscal years beginning
after November 15, 2008, and interim periods within those
fiscal years. Thus, the Company has only partially applied
SFAS 157. Those items affected by
FSP 157-2
include other real estate owned (OREO), goodwill and
core deposit intangibles.
In October of 2008, the FASB issued Staff Position
No. 157-3
(FSP 157-3)
to clarify the application of SFAS 157 in a market that is
not active and to provide key considerations in determining the
fair value of a financial asset when the market for that
financial asset is not active.
FSP 157-3
was effective upon issuance, including prior periods for which
financial statements were not issued.
SFAS 157 specifies a hierarchy of valuation techniques
based on whether the inputs to those valuation techniques are
observable or unobservable. Observable inputs reflect market
data obtained from independent
76
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
sources, while unobservable inputs reflect the Companys
market assumptions. The three levels of the fair value hierarchy
under SFAS 157 based on these two types of inputs are as
follows:
|
|
|
Level 1
|
|
Valuation is based on quoted prices in active markets for
identical assets and liabilities.
|
|
|
|
Level 2
|
|
Valuation is based on observable inputs including quoted prices
in active markets for similar assets and liabilities, quoted
prices for identical or similar assets and liabilities in less
active markets, and model-based valuation techniques for which
significant assumptions can be derived primarily from or
corroborated by observable data in the market.
|
|
|
|
Level 3
|
|
Valuation is based on model-based techniques that use one or
more significant inputs or assumptions that are unobservable in
the market.
|
The following describes the valuation techniques used by the
Company to measure certain financial assets and liabilities
recorded at fair value on a recurring basis in the financial
statements:
Securities available for sale: Securities
available for sale are recorded at fair value on a recurring
basis. Fair value measurement is based upon quoted market
prices, when available (Level 1). If quoted market prices
are not available, fair values are measured utilizing
independent valuation techniques of identical or similar
securities for which significant assumptions are derived
primarily from or corroborated by observable market data. Third
party vendors compile prices from various sources and may
determine the fair value of identical or similar securities by
using pricing models that considers observable market data
(Level 2).
The following table presents the balances of financial assets
and liabilities measured at fair value on a recurring basis as
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2008 Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance as of
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
37,839
|
|
|
$
|
34,701
|
|
|
$
|
3,138
|
|
|
$
|
|
|
Certain financial assets are measured at fair value on a
nonrecurring basis in accordance with GAAP. Adjustments to the
fair value of these assets usually result from the application
of lower-of-cost-or-market accounting or write-downs of
individual assets.
The following describes the valuation techniques used by the
Company to measure certain financial assets recorded at fair
value on a nonrecurring basis in the financial statements:
Loans held for sale: Loans held for sale are
carried at the lower of cost or market value. These loans
currently consist of one-to-four family residential loans
originated for sale in the secondary market. Fair value is based
on the price secondary markets are currently offering for
similar loans using observable market data which is not
materially different than cost due to the short duration between
origination and sale (Level 2). As such, the Company
records any fair value adjustments on a nonrecurring basis. No
nonrecurring fair value adjustments were recorded on loans held
for sale during the year ended December 31, 2008. Gains and
losses on the sale of loans are recorded within income from
mortgage banking on the Consolidated Statements of Income.
Impaired Loans: Loans are designated as
impaired when, in the judgment of management based on current
information and events, it is probable that all amounts due
according to the contractual terms of the loan agreement will
not be collected. The measurement of loss associated with
impaired loans can be based on either the observable market
price of the loan or the fair value of the collateral. Fair
value is measured based on the value of the collateral
77
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
securing the loans. Collateral may be in the form of real estate
or business assets including equipment, inventory, and accounts
receivable. The value of real estate collateral is determined
utilizing an income or market valuation approach based on an
appraisal conducted by an independent, licensed appraiser
outside of the Company using observable market data
(Level 2). However, if the collateral is a house or
building in the process of construction or if an appraisal of
the real estate property is over two years old, then the fair
value is considered Level 3. The value of business
equipment is based upon an outside appraisal if deemed
significant, or the net book value on the applicable
business financial statements if not considered
significant using observable market data. Likewise, values for
inventory and accounts receivables collateral are based on
financial statement balances or aging reports (Level 3).
Impaired loans allocated to the Allowance for Loan Losses are
measured at fair value on a nonrecurring basis. Any fair value
adjustments are recorded in the period incurred as provision for
loan losses on the Consolidated Statements of Income.
The following table summarizes the Companys financial
assets that were measured at fair value on a nonrecurring basis
during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at December 31, 2008
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance as of
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
1,561
|
|
|
|
|
|
|
$
|
460
|
|
|
$
|
1,101
|
|
The fair value of a financial instrument is the current amount
that would be exchanged between willing parties, other than in a
forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no
quoted market prices for the Companys various financial
instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly,
the fair value estimates may not be realized in an immediate
settlement of the instruments. SFAS No. 107
Disclosures about Fair Value of Financial
Instruments, excludes certain financial instruments and
all non-financial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not
necessarily represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate that value:
Cash
and cash equivalents
The carrying amounts of cash and short-term instruments
approximate fair value.
Securities
For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market
prices or dealer quotes. For other securities held as
investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair
values are based on quoted market prices for similar securities.
See Note 3 Securities of the Notes to
Consolidated Financial Statements for further discussion on
determining fair value for pooled trust preferred securities.
Loan
Receivables
For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (e.g.,
one-to-four family residential), credit card
78
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
loans, and other consumer loans are based on quoted market
prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics.
Fair values for other loans (i.e., commercial real estate and
investment property mortgage loans, commercial and industrial
loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for
nonperforming loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Accrued
Interest
The carrying amounts of accrued interest approximate fair value.
Deposit
Liabilities
The fair values disclosed for demand deposits (i.e., interest
and non-interest bearing checking, statement savings and money
market accounts) are, by definition, equal to the amount payable
at the reporting date (that is, their carrying amounts). Fair
values of fixed rate certificates of deposit are estimated using
a discounted cash flow calculation that applies interest rates
currently being offered to a schedule of aggregated expected
monthly maturities on time deposits.
Federal
Funds Purchased
The carrying amounts of the Companys federal funds
purchased are approximate fair value.
Federal
Home Loan Bank Advances
The fair values of the Companys FHLB advances are
estimated using discounted cash flow analyses based on the
Companys current incremental borrowing rates for similar
types of borrowing arrangements.
Off-Balance-Sheet
Financial Instruments
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar agreements,
taking into account the remaining terms of the agreements and
the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the
committed rates.
The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
At December 31, 2008 and 2007, the fair value of loan
commitments and standby letters of credit were deemed immaterial.
79
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The estimated fair values of the Companys financial
instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments
|
|
$
|
11,023
|
|
|
$
|
11,023
|
|
|
$
|
17,532
|
|
|
$
|
17,532
|
|
Federal funds sold
|
|
|
|
|
|
|
|
|
|
|
2,020
|
|
|
|
2,020
|
|
Securities
|
|
|
37,839
|
|
|
|
37,839
|
|
|
|
37,377
|
|
|
|
37,377
|
|
Loans, net
|
|
|
434,678
|
|
|
|
452,946
|
|
|
|
409,108
|
|
|
|
411,050
|
|
Accrued interest receivable
|
|
|
1,550
|
|
|
|
1,550
|
|
|
|
1,749
|
|
|
|
1,749
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
400,294
|
|
|
$
|
402,589
|
|
|
$
|
404,559
|
|
|
$
|
404,557
|
|
FHLB advances
|
|
|
45,000
|
|
|
|
46,037
|
|
|
|
35,000
|
|
|
|
35,110
|
|
Federal funds purchased
|
|
|
18,275
|
|
|
|
18,275
|
|
|
|
|
|
|
|
|
|
Company obligated mandatorily redeemable capital securities
|
|
|
4,124
|
|
|
|
3,116
|
|
|
|
4,124
|
|
|
|
4,117
|
|
Accrued interest payable
|
|
|
863
|
|
|
|
863
|
|
|
|
923
|
|
|
|
923
|
|
The Company assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal
operations. As a result, the fair values of the Companys
financial instruments will change when interest rate levels
change and that change may be either favorable or unfavorable to
the Company. Management attempts to match maturities of assets
and liabilities to the extent believed necessary to minimize
interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate
environment. Conversely, depositors who are receiving fixed
rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling
rate environment. Management monitors rates and maturities of
assets and liabilities and attempts to minimize interest rate
risk by adjusting terms of new loans and deposits and by
investing in securities with terms that mitigate the
Companys overall interest rate risk.
|
|
Note 19.
|
Other
Operating Expenses
|
The principal components of Other operating expenses
in the Consolidated Statements of Income are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Postage and courier expenses
|
|
$
|
299,035
|
|
|
$
|
336,268
|
|
|
$
|
280,842
|
|
Taxes, other than income taxes
|
|
|
284,676
|
|
|
|
299,929
|
|
|
|
317,652
|
|
Charge-offs, other than loan charge-offs
|
|
|
350,128
|
|
|
|
271,039
|
|
|
|
280,428
|
|
Telephone
|
|
|
232,416
|
|
|
|
228,975
|
|
|
|
213,562
|
|
Directors compensation
|
|
|
332,143
|
|
|
|
349,570
|
|
|
|
258,845
|
|
FDIC deposit insurance expense
|
|
|
290,922
|
|
|
|
47,460
|
|
|
|
49,219
|
|
Other (no items exceed 1% of total revenue)
|
|
|
1,295,431
|
|
|
|
1,198,251
|
|
|
|
1,317,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,084,751
|
|
|
$
|
2,731,492
|
|
|
$
|
2,717,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors compensation is allocated and expensed
separately at both the Bank and at the parent company. The above
year to year comparisons of directors compensation are on
a consolidated basis. The growth in directors compensation
from 2006 to 2007 is primarily due to the change in the Chairman
of the Board from an employee Chairman for five months of 2006
to a non-employee Chairman for the remainder of 2006, and all of
2007.
80
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Compensation paid to the employee Chairman for the first five
months of 2006 totaled $34,880, and was part of salary and
benefit expense for 2006.
FDIC deposit insurance is projected to increase from $290,922 in
2008 to $580,000 in 2009. The increase to FDIC deposit insurance
expense does not include the impact of any special assessment
under consideration as of March 10, 2009. The FDIC is
required by law to establish a Restoration Plan any time the
Deposit Insurance Fund (DIF) reserve ratio falls
below 1.15%. The projected increase in FDIC deposit insurance
assessment is due to recent failures of FDIC-insured
institutions which lowered the reserve ratio of the DIF from
1.19% as of March 30, 2008 to 0.76% as of
September 30, 2008. The agency also indicated that it
expects a higher rate of failures over the next several years.
|
|
Note 20.
|
Concentration
Risk
|
The Company maintains its cash accounts in several correspondent
banks. The total amount by which cash on deposit in those banks
exceeds the federally insured limits is $121,000 at
December 31, 2008.
|
|
Note 21.
|
Capital
Requirements
|
The Company (on a consolidated basis) and the Bank are subject
to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Companys and the Banks financial statements. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet
specific capital guidelines that involve quantitative measures
of their assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Management
believes, as of December 31, 2008 and 2007, that the
Company and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 2008, the most recent notification from
the Federal Reserve Bank of Richmond categorized the Bank as
well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well
capitalized, an institution must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or
events since that notification that management believes have
changed the institutions category.
The Companys and the Banks actual capital amounts
and ratios are also presented in the table. No amount was
deducted from capital for interest-rate risk.
81
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Capitalized Under
|
|
|
|
|
|
|
Minimum Capital
|
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Requirement
|
|
|
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
As of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
52,472
|
|
|
|
12.5
|
%
|
|
$
|
33,541
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Fauquier Bank
|
|
$
|
51,980
|
|
|
|
12.4
|
%
|
|
$
|
33,531
|
|
|
|
8.0
|
%
|
|
$
|
41,914
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
47,692
|
|
|
|
11.4
|
%
|
|
$
|
16,771
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Fauquier Bank
|
|
$
|
47,201
|
|
|
|
11.3
|
%
|
|
$
|
16,766
|
|
|
|
4.0
|
%
|
|
$
|
25,149
|
|
|
|
6.0
|
%
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
47,692
|
|
|
|
9.4
|
%
|
|
$
|
20,359
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Fauquier Bank
|
|
$
|
47,201
|
|
|
|
9.3
|
%
|
|
$
|
20,347
|
|
|
|
4.0
|
%
|
|
$
|
25,434
|
|
|
|
5.0
|
%
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
50,683
|
|
|
|
13.0
|
%
|
|
$
|
31,248
|
|
|
|
8.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Fauquier Bank
|
|
$
|
50,003
|
|
|
|
12.8
|
%
|
|
$
|
31,238
|
|
|
|
8.0
|
%
|
|
$
|
39,047
|
|
|
|
10.0
|
%
|
Tier 1 Capital (to Risk Weighted Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
46,498
|
|
|
|
11.9
|
%
|
|
$
|
15,624
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Fauquier Bank
|
|
$
|
45,818
|
|
|
|
11.7
|
%
|
|
$
|
15,619
|
|
|
|
4.0
|
%
|
|
$
|
23,428
|
|
|
|
6.0
|
%
|
Tier 1 Capital (to Average Assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
46,498
|
|
|
|
9.5
|
%
|
|
$
|
19,602
|
|
|
|
4.0
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
The Fauquier Bank
|
|
$
|
45,818
|
|
|
|
9.4
|
%
|
|
$
|
19,590
|
|
|
|
4.0
|
%
|
|
$
|
24,487
|
|
|
|
5.0
|
%
|
|
|
Note 22.
|
Company-Obligated
Mandatorily Redeemable Capital Securities
|
On March 26, 2002, the Company established a subsidiary
trust that issued $4.0 million of capital securities as
part of a pooled trust preferred security offering with other
financial institutions (Trust I). The Company used the offering
proceeds for the purposes of expansion and the repurchase of
additional shares of its common stock. The interest rate on the
capital security resets every three months at 3.60% above the
then current three month LIBOR. Interest is paid quarterly.
Under applicable regulatory guidelines, the capital securities
are treated as Tier 1 capital for purposes of the Federal
Reserves capital guidelines for bank holding companies, as
long as the capital securities and all other cumulative
preferred securities of the Company together do not exceed 25%
of Tier 1 capital.
On September 21, 2006, the Companys wholly-owned
Connecticut statutory business trust privately issued
$4 million face amount of the trusts Floating Rate
Capital Securities in a pooled capital securities offering
(Trust II). Simultaneously, the trust used the proceeds of
that sale to purchase $4.0 million principal amount of the
Companys Floating Rate Junior Subordinated Deferrable
Interest Debentures due 2036. The interest rate on the capital
security resets every three months at 1.70% above the then
current three month LIBOR. Interest is paid quarterly.
The purpose of the September 2006 Trust II issuance was to
use the proceeds to redeem the existing capital securities of
Trust I on March 26, 2007. Because of changes in the
market pricing of capital securities from 2002 to 2006, the
September 2006 issuance was priced 190 basis points less
than that of the March 2002 issuance, and the repayment of the
March 2002 issuance in March 2007 reduced the interest expense
associated with the distribution
82
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
on capital securities of subsidiary trust by $76,000 annually.
The Company redeemed all the existing capital securities issued
by Trust I on March 26, 2007.
Total capital securities at December 31, 2008 and 2007 were
$4,124,000. The Trust II issuance of capital securities and
the respective subordinated debentures are callable at any time
after five years from the issue date. The subordinated
debentures are an unsecured obligation of the Company and are
junior in right of payment to all present and future senior
indebtedness of the Company. The capital securities are
guaranteed by the Company on a subordinated basis.
|
|
Note 23.
|
Parent
Corporation Only Financial Statements
|
FAUQUIER
BANKSHARES, INC.
(Parent Corporation Only)
Balance
Sheets
December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash on deposit with subsidiary bank
|
|
$
|
40,484
|
|
|
$
|
121,258
|
|
Investment in subsidiaries, at cost, plus equity in
undistributed net income
|
|
|
44,997,076
|
|
|
|
45,147,440
|
|
Other assets
|
|
|
642,786
|
|
|
|
758,541
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
45,680,346
|
|
|
$
|
46,027,239
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Company-obligated mandatorily redeemable capital securities
|
|
$
|
4,124,000
|
|
|
$
|
4,124,000
|
|
Other liabilities
|
|
|
68,409
|
|
|
|
75,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,192,409
|
|
|
|
4,199,487
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
11,036,687
|
|
|
|
10,974,293
|
|
Retained earnings, which are substantially distributed earnings
of subsidiaries
|
|
|
32,668,530
|
|
|
|
31,626,627
|
|
Accumulated other comprehensive income (loss)
|
|
|
(2,217,280
|
)
|
|
|
(773,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
41,487,937
|
|
|
|
41,827,752
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
45,680,346
|
|
|
$
|
46,027,239
|
|
|
|
|
|
|
|
|
|
|
83
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
FAUQUIER
BANKSHARES, INC.
(Parent Corporation Only)
Statements
of Income
For Each of the Three Years in the Period Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
1,153
|
|
|
$
|
1,067
|
|
|
$
|
107
|
|
Dividends from Subsidiaries
|
|
|
2,853,779
|
|
|
|
2,796,892
|
|
|
|
2,589,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,854,932
|
|
|
|
2,797,959
|
|
|
|
2,589,804
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
200,263
|
|
|
|
374,586
|
|
|
|
435,771
|
|
Legal and professional fees
|
|
|
237,552
|
|
|
|
206,214
|
|
|
|
108,479
|
|
Directors fees
|
|
|
188,193
|
|
|
|
249,670
|
|
|
|
157,470
|
|
Miscellaneous
|
|
|
135,306
|
|
|
|
138,392
|
|
|
|
149,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
761,314
|
|
|
|
968,862
|
|
|
|
850,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefits and equity in undistributed
net income of subsidiaries
|
|
|
2,093,618
|
|
|
|
1,829,097
|
|
|
|
1,738,993
|
|
Income tax benefit
|
|
|
(252,862
|
)
|
|
|
(324,138
|
)
|
|
|
(313,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed net income of subsidiaries
|
|
|
2,346,480
|
|
|
|
2,153,235
|
|
|
|
2,052,337
|
|
Equity in undistributed net income of subsidiaries
|
|
|
1,306,235
|
|
|
|
2,800,187
|
|
|
|
3,551,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,652,715
|
|
|
$
|
4,953,422
|
|
|
$
|
5,603,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
FAUQUIER
BANKSHARES, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
FAUQUIER
BANKSHARES, INC.
(Parent Corporation Only)
Statements
of Cash Flows
For Each of the Three Years in the Period Ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,652,715
|
|
|
$
|
4,953,422
|
|
|
$
|
5,603,542
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings of subsidiaries
|
|
|
(1,306,235
|
)
|
|
|
(2,800,187
|
)
|
|
|
(3,551,205
|
)
|
Deferred tax benefit
|
|
|
5,593
|
|
|
|
5,275
|
|
|
|
|
|
Decrease in undistributed dividends receivable from subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of nonqualified options exercised
|
|
|
(21,783
|
)
|
|
|
(419,527
|
)
|
|
|
(24,068
|
)
|
Amortization of unearned compensation
|
|
|
263,575
|
|
|
|
256,230
|
|
|
|
220,268
|
|
(Increase) decrease in other assets
|
|
|
131,945
|
|
|
|
463,310
|
|
|
|
(80,258
|
)
|
Increase (decrease) in other liabilities
|
|
|
(7,078
|
)
|
|
|
38,690
|
|
|
|
(26,998
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
2,718,732
|
|
|
|
2,497,213
|
|
|
|
2,141,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) issuance of capital securiteis
|
|
|
|
|
|
|
(4,124,000
|
)
|
|
|
4,124,000
|
|
Cash dividends paid
|
|
|
(2,853,779
|
)
|
|
|
(2,796,892
|
)
|
|
|
(2,589,697
|
)
|
Contribution of capital to subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
209,304
|
|
|
|
1,158,997
|
|
|
|
325,484
|
|
Acquisition of common stock
|
|
|
(155,031
|
)
|
|
|
(722,767
|
)
|
|
|
(43,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2,799,506
|
)
|
|
|
(6,484,662
|
)
|
|
|
1,816,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(80,774
|
)
|
|
|
(3,987,449
|
)
|
|
|
3,957,863
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
121,258
|
|
|
|
4,108,707
|
|
|
|
150,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
40,484
|
|
|
$
|
121,258
|
|
|
$
|
4,108,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to provide assurance that the information required
to be disclosed in the reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported
within the time periods required by the Securities and Exchange
Commission. An evaluation of the effectiveness of the design and
operations of the Companys disclosure controls and
procedures at the end of the period covered by this report was
carried out under the supervision and with the participation of
the management of Fauquier Bankshares, Inc., including the Chief
Executive Officer and the Chief Financial Officer. Based on such
an evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded the Companys disclosure
controls and procedures were effective as of the end of such
period.
Managements
Report on Internal Control Over Financial Reporting
The management of Fauquier Bankshares, Inc.
(Management) is responsible for establishing and
maintaining adequate internal control over financial reporting
(as defined in
Rule 13a-15(f)
of the Securities Exchange Act of 1934). Managements
internal control over financial reporting is a process designed
under the supervision of the Companys Chief Executive
Officer and Chief Financial Officer 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 in the
United States of America.
As of December 31, 2008, Management has assessed the
effectiveness of the internal control over financial reporting
based on the criteria for effective internal control over
financial reporting established in Internal
Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the
assessment, Management determined that it maintained effective
internal control over the financial reporting as of
December 31, 2008, based on those criteria.
Smith Elliott Kearns & Company, LLC, the independent
registered public accounting firm that audited the
Companys consolidated financial statements included in
this Annual Report on
10-K, has
issued an attestation report on the effectiveness of
Managements internal control over reporting as of
December 31, 2008. The report, which states an unqualified
opinion on the effectiveness of Managements internal
control over financial reporting as of December 31, 2008,
is incorporated for reference in Item 8 above, under the
heading Report of Independent Registered Public
Accounting Firm.
No changes were made in Managements internal control over
financial reporting during the year ended December 31, 2008
that have materially affected, or that are reasonably likely to
materially affect, Managements internal control over
financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information concerning the Companys executive officers is
provided in Part I of this
Form 10-K
under the caption Executive Officers of the
Registrant. All other information concerning the Company
required by this item is contained in the Companys
definitive proxy statement for the 2009 annual meeting of
shareholders to be held on May 19, 2009 (the 2009
proxy statement) under the captions Election of
Class I and Class III Directors,
86
Meetings and Committees of the Board of Directors,
and Section 16(a) Beneficial Ownership Reporting
Compliance, and is incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics
that applies to the directors, executive officers and employees
of the Company and the Bank. This Code was amended May 18,
2006 and is incorporated in Exhibit 14.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information relating to executive and director compensation
and the Companys Compensation and Benefits Committee is
contained in the Companys 2009 proxy statement under the
captions Directors Compensation and
Executive Compensation and is incorporated herein by
reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information regarding security ownership required by this
item is contained in the Companys 2009 proxy statement
under the caption Security Ownership of Certain Beneficial
Owners and Management, and is incorporated herein by
reference.
The following table sets forth information as of
December 31, 2008 with respect to compensation plans under
which equity securities of the Company are authorized for
issuance:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column 9(a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
66,480
|
|
|
$
|
9.84
|
|
|
|
242,294
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
10,700
|
|
|
$
|
9.75
|
|
|
|
87,072
|
(2)
|
Total
|
|
|
77,180
|
|
|
$
|
9.83
|
|
|
|
329,366
|
|
|
|
|
(1) |
|
Includes 242,294 shares available to be granted in the form
of options, restricted stock or stock appreciation rights under
the Omnibus Stock Ownership and Long Term Incentive Plan. |
|
(2) |
|
Includes no shares available to be granted under the
Non-Employee Director Stock Option Plan and 87,072 shares
available to be granted under the Director Deferred Compensation
Plan. |
For additional information concerning the material features of
the Companys equity compensation plans, including the
Non-Employee Director Stock Option Plan and Director Deferred
Compensation Plan which have not been approved by the
shareholders, please see Note 14 of our Notes to
Consolidated Financial Statements.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information required by this item is contained in the
Companys 2009 proxy statement under the caption
Meetings and Committees of the Board of directors
and Related Party Transactions, and is incorporated
herein by reference.
87
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information required by this item is contained in the
Companys 2009 proxy statement under the captions
Principal Accountant Fees and Pre-Approval
Policies, and is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) (1) -Financial Statements
The following consolidated financial statements of Fauquier
Bankshares, Inc. and subsidiaries are filed as part of this
document under Item 8. Financial Statements and
Supplementary Data.
Report of Independent Registered Public Accounting Firm
Independent Auditors Report
Consolidated Balance Sheets December 31, 2008
and December 31, 2007
Consolidated Statements of Income Years ended
December 31, 2008, 2007, and 2006
Consolidated Statements of Cash Flows Years ended
December 31, 2008, 2007, and 2006
Consolidated Statements of Changes in Shareholders
Equity Years ended December 31, 2008, 2007, and
2006
Notes to Consolidated Financial Statements Years
ended December 31, 2008, 2007, and 2006
(a) (2) -Financial Statement Schedules
All schedules to the consolidated financial statements required
by Article 9 of
Regulation S-X
are omitted since they are either not applicable or the required
information is set forth in the consolidated financial
statements or notes thereto.
(a) (3) -Exhibits
|
|
|
|
|
Exhibit
|
|
Exhibit
|
Number
|
|
Description
|
|
|
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
|
|
Bylaws of Fauquier Bankshares, Inc., as amended and restated,
incorporated by reference to Exhibit 3.2 to
Form 8-K
filed March 21, 2006.
|
|
|
|
|
Certain instruments relating to capital securities not being
registered have been omitted in accordance with
Item 601(b)(4)(iii) of
Regulation S-K.
The registrant will furnish a copy of any such instrument to the
Securities and Exchange Commission upon its request.
|
|
10
|
.1*
|
|
Fauquier Bankshares, Inc. Omnibus Stock Ownership and Long Term
Incentive Plan, as amended and restated effective
January 1, 2000, incorporated by reference to
Exhibit 4.B to
Form S-8
filed October 15, 2002.
|
|
10
|
.1.1*
|
|
Form of Restricted Stock Grant Agreement for Employee,
incorporated by reference to Exhibit 10.1.1 to
Form 8-K
filed February 16, 2005.
|
|
10
|
.1.2*
|
|
Form of Restricted Stock Grant Agreement for Non-Employee
Director, incorporated by reference to Exhibit 10.1.2 to
Form 8-K
filed February 16, 2005.
|
|
10
|
.2*
|
|
Fauquier Bankshares, Inc. Director Deferred Compensation Plan,
as adopted effective May 1, 1995, incorporated by reference
to Exhibit 4.C to
Form S-8
filed October 15, 2002.
|
|
10
|
.3*
|
|
Fauquier Bankshares, Inc. Non-Employee Director Stock Option
Plan, effective April 1, 1995, incorporated by reference to
Exhibit 4.A to
Form S-8
filed October 15, 2002.
|
88
|
|
|
|
|
Exhibit
|
|
Exhibit
|
Number
|
|
Description
|
|
|
10
|
.4*
|
|
Change of Control Agreement, dated November 27, 2000,
between Fauquier Bankshares, Inc. and Eric P. Graap,
incorporated by reference to Exhibit 10.8 to
Form 10-K
filed March 25, 2003.
|
|
10
|
.4.1*
|
|
First Amendment, dated December 31, 2008, to Change of
Control Agreement, dated November 27, 2000, between
Fauquier Bankshares, Inc. and Eric P. Graap.
|
|
10
|
.5*
|
|
Executive Supplemental Retirement Plan Agreement, dated
August 20, 2000, between The Fauquier Bank and C. Hunton
Tiffany, incorporated by reference to Exhibit 10.10 to
Form 10-K
filed March 25, 2003.
|
|
10
|
.6*
|
|
Life Insurance Endorsement Method Split Dollar Plan Agreement,
dated August 10, 2000, between The Fauquier Bank and C.
Hunton Tiffany, incorporated by reference to Exhibit 10.11
to
Form 10-K
filed March 25, 2003.
|
|
10
|
.7*
|
|
Executive Split Dollar Life Insurance Agreement, dated
November 26, 1996, between The Fauquier Bank and Randy K.
Ferrell, incorporated by reference to Exhibit 10.12 to
Form 10-K
filed March 25, 2003.
|
|
10
|
.8*
|
|
Form of the Executive Survivor Income Agreement, dated on or
about May 9, 2003, between The Fauquier Bank and each of C.
Hunton Tiffany, Randy K. Ferrell, Eric P. Graap, incorporated by
reference to Exhibit 10.13 to
Form 10-Q
filed August 14, 2003.
|
|
10
|
.9*
|
|
Employment Agreement, dated January 19, 2005, between
Fauquier Bankshares, Inc., The Fauquier Bank and Randy K.
Ferrell, as amended.
|
|
10
|
.10*
|
|
Fauquier Bankshares, Inc. Supplemental Executive Retirement
Plan, effective January 1, 2005, incorporated by reference
to Exhibit 10.15 to
Form 10-K
filed March 30, 2005.
|
|
10
|
.11*
|
|
Base Salaries for Named Executive Officers.
|
|
10
|
.12*
|
|
Director Compensation, incorporated by reference to
Exhibit 10.17 to
Form 8-K
filed February 23, 2006.
|
|
10
|
.13*
|
|
Description of Management Incentive Plan, incorporated by
reference to Exhibit 10.18 to
Form 10-K
filed March 30, 2005.
|
|
10
|
.14*
|
|
Consulting Agreement dated June 8, 2005 between The
Fauquier Bank and C.H. Lawrence, Jr., incorporated by reference
to Exhibit 10.20 to
Form 8-K
filed June 14, 2005.
|
|
10
|
.15*
|
|
Employment Agreement, dated April 2, 2007, between Fauquier
Bankshares, Inc., The Fauquier Bank and Gregory D. Frederick, as
amended.
|
|
14
|
|
|
Code of Business Conduct and Ethics, incorporated by reference
to Exhibit 14 to
Form 10-Q
filed August 11, 2006.
|
|
21
|
|
|
Subsidiaries of the Registrant, incorporated herein by reference
to Part I of this
Form 10-K.
|
|
23
|
.1
|
|
Consent of Smith Elliott Kearns & Company, LLC.
|
|
31
|
.1
|
|
Certification of CEO pursuant to
Rule 13a-14(a).
|
|
31
|
.2
|
|
Certification of CFO pursuant to
Rule 13a-14(a).
|
|
32
|
.1
|
|
Certification of CEO pursuant to 18 U.S.C.
Section 1350.
|
|
32
|
.2
|
|
Certification of CFO pursuant to 18 U.S.C.
Section 1350.
|
|
|
|
* |
|
Denotes management contract. |
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FAUQUIER BANKSHARES, INC.
(Registrant)
|
|
|
Dated: March 13, 2009
|
|
/s/ Randy
K.
Ferrell Randy
K. Ferrell
President & Chief Executive Officer
|
|
|
|
Dated: March 13, 2009
|
|
/s/ Eric
P.
Graap Eric
P. Graap
Executive Vice President & Chief Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
/s/ C.H.
Lawrence, Jr.
C.H.
Lawrence, Jr.
|
|
Chairman, Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Randy
K. Ferrell
Randy
K. Ferrell
|
|
President & Chief Executive Officer, Director
(principal executive officer)
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Eric
P. Graap
Eric
P. Graap
|
|
Executive Vice President & Chief Financial Officer,
Director (principal financial and accounting officer)
|
|
March 13, 2009
|
|
|
|
|
|
/s/ John
B. Adams, Jr
John
B. Adams, Jr
|
|
Vice Chairman, Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Randolph
D. Frostick
Randolph
D. Frostick
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Douglas
C. Larson
Douglas
C. Larson
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Jay
B. Keyser
Jay
B. Keyser
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Randolph
T. Minter
Randolph
T. Minter
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Brian.S.
Montgomery
Brian.S.
Montgomery
|
|
Director
|
|
March 13, 2009
|
90
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John
J. Norman, Jr.
John
J. Norman, Jr.
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ P.
Kurt Rodgers
P.
Kurt Rodgers
|
|
Director
|
|
March 13, 2009
|
|
|
|
|
|
/s/ Sterling
T. Strange III
Sterling
T. Strange III
|
|
Director
|
|
March 13, 2009
|
91