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FBSS > SEC Filings for FBSS > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for FAUQUIER BANKSHARES, INC.



Quarterly Report



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 Fauquier Bankshares, Inc. ("the Company"), and are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" "may," "will" or similar expressions. Although we believe our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results could differ materially from those contemplated. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in:
interest rates, 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 Bank's 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.


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 3,730,877 shares of common stock, par value $3.13 per share, held by approximately 369 holders of record at the close of business on June 30, 2014. The Bank has ten full service branch offices located in the Virginia communities of Old Town-Warrenton, Warrenton, Catlett, The Plains, Sudley Road-Manassas, New Baltimore, Bealeton, Bristow, Haymarket, and Gainesville. Additionally, the Bank is projected to open an eleventh branch at 8781 Centreville Road in Manassas, Virginia during the second half of 2014. The executive offices of the Company and the main office of the Bank are located at 10 Courthouse Square, Warrenton, Virginia 20186.

The Bank's 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:
interest bearing and non-interest-bearing demand deposit accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, ATM, debit and credit cards, cash management, direct deposits, notary services, night depository, prepaid debit cards, cashier's checks, domestic and international collections, savings bonds, automated teller services, drive-in tellers, mobile and 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 Maestro, Accel and Plus ATM networks, thereby permitting customers to utilize the convenience of larger ATM networks. The Bank also is a member of the Certificate of Deposit Account Registry Service ("CDARS") and Insured Cash Sweep Service ("ICS"), to provide customers multi-million dollar FDIC insurance on certificates of deposit investments and deposit sweeps through the transfer and/or exchange with other FDIC insured institutions. CDARS and ICS are registered service marks of Promontory Interfinancial Network, LLC.

The Bank operates a Wealth Management Services ("WMS" or "Wealth Management") division that began with the granting of trust powers to the Bank in 1919. The WMS division provides personalized services that include investment management, trust, estate settlement, retirement, insurance, and brokerage services.

The Bank, through its subsidiary Fauquier Bank Services, Inc., has equity ownership interests in Bankers Insurance, LLC, a Virginia independent insurance company, Bankers Title Shenandoah, LLC, a title insurance company, and Infinex Investments, Inc., a full service broker/dealer. Bankers Insurance and Bankers Title Shenandoah are owned by a consortium of Virginia community banks, and Infinex is owned by banks and banking associations in various states.

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 Bank's lending activities are its deposits, repayment of loans, the sale and maturity of investment securities, and borrowings from the Federal Home Loan Bank of Atlanta ("FHLB"). Additional revenues are derived from fees for deposit-related and WMS-related services. The Bank's principal expenses are the interest paid on deposits and operating and general administrative expenses.

As is the case with banking institutions generally, the Bank's operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System ("Federal Reserve"). As a Virginia-chartered bank and a member of the Federal Reserve, the Bank is supervised and examined by the Federal Reserve and the Virginia State Corporation Commission. Interest rates on competing investments and general market rates of interest influence deposit flows and costs of funds. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans.

As of June 30, 2014, the Company had total consolidated assets of $600.8 million, total loans net of allowance for loan losses of $436.6 million, total consolidated deposits of $522.8 million, and total consolidated shareholders' equity of $53.5 million.


GENERAL. The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in our estimates. In addition, GAAP itself may change from one previously acceptable accounting method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact the Company's transactions could change.

ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on three basic principles of accounting: (i) Accounting Standards Codification ("ASC") 450 "Contingencies" (previously Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies") which requires that losses be accrued when they are probable of occurring and estimable, (ii) ASC
310 "Receivables" (previously SFAS No. 114, "Accounting by Creditors for Impairment of a Loan") which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance and
(iii) Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues," which requires adequate documentation to support the allowance for loan losses estimate.

The Company's allowance for loan losses has three basic components: the specific allowance, the general allowance and the unallocated component. 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 identified as impaired. The specific allowance uses various techniques to arrive at an estimate of loss. Analysis of the borrower's 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. 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 identified as impaired. The general allowance begins with estimates of probable losses inherent in the homogeneous portfolio based upon various statistical analyses. These include analysis of historical 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. The unallocated 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.

Specifically, the Company uses both external and internal qualitative factors when determining the non-loan-specific allowances. The external factors utilized include: unemployment in the Company's defined market area of Fauquier County, Prince William County, and the City of Manassas ("market area"), as well as state and national unemployment trends; new residential construction permits for the market area; bankruptcy statistics for the Virginia Eastern District and trends for the United States; and foreclosure statistics for the market area and the state. Quarterly, these external qualitative factors as well as relevant anecdotal information are evaluated from data compiled from local periodicals such as The Washington Post, The Fauquier Times Democrat, and The Bull Run Observer, which cover the Company's market area. Additionally, data is gathered from the Federal Reserve Beige Book for the Richmond Federal Reserve District, Global Insight's monthly economic review, the George Mason School of Public Policy Center for Regional Analysis, and daily economic updates from various other sources. Internal Bank data utilized includes: loans past due aging statistics, nonperforming loan trends, trends in collateral values, loan concentrations, loan review status downgrade trends, and lender turnover and experience trends. Both external and internal data is analyzed on a rolling eight quarter basis to determine risk profiles for each qualitative factor. Ratings are assigned through a defined matrix to calculate the allowance consistent with authoritative accounting literature. A narrative summary of the reserve allowance is produced quarterly and reported directly to the Company's Board of Directors. The Company's application of these qualitative factors to the allowance for loan losses has been consistent over the reporting period.

The Company employs an independent outsourced loan review function, which annually substantiates and/or adjusts internally generated risk ratings. This independent review is reported directly to the Company's Board of Directors' audit committee, and the results of this review are factored into the calculation of the allowance for loan losses.


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. The Company and the Bank's primary operating businesses are in commercial and retail lending, deposit accounts and core deposits, and assets under WMS management.

Net income of $1,239,000 for the second quarter of 2014 was a 54.1% increase from the net income for the second quarter of 2013 of $804,000. Loans, net of reserve, totaling $436.6 million at June 30, 2014, decreased 1.8% when compared with December 31, 2013, and increased 0.1% when compared with June 30, 2013. Deposits, totaling $522.8 million at June 30, 2014, decreased 3.2% compared with December 31, 2013, and increased 0.7% when compared with June 30, 2013. Assets under WMS management, totaling $429.3 million in market value at June 30, 2014, increased 10.1% from December 31, 2013 and 20.5% from June 30, 2013.

Net interest income is the largest component of net income, and equals the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Future trends regarding net interest income are dependent on the absolute level of market interest rates, the shape of the yield curve, the amount of lost income from non-performing assets, the amount of prepaying loans, the mix and amount of various deposit types, competition for loans and deposits, and many other factors, as well as the overall volume of interest-earning assets. These factors are individually difficult to predict, and when taken together, the uncertainty of future trends compounds. Based on management's current projections, net interest income may increase as average interest-earning assets increase, but this may be offset in part or in whole by a possible contraction in the Bank's net interest margin resulting from competitive market conditions and/or a flat or inverted yield curve. A steeper yield curve is projected to result in an increase in net interest income, while a flatter or inverted yield curve is projected to result in a decrease in net interest income. The current absolute level of historically low market interest rates, as well as the current slowness of new loan production, is also projected to result in a decrease in net interest income.

The Bank's non-performing assets totaled $4.8 million or 0.81% of total assets at June 30, 2014, as compared with $7.6 million or 1.23% of total assets at December 31, 2013, and $8.2 million or 1.39% of total assets at June 30, 2013. Nonaccrual loans totaled $2.2 million or 0.50% of total loans at June 30, 2014 compared with $2.2 million or 0.48% of total loans at December 31, 2013, and $6.7 million or 1.51% of total loans at June 30, 2013. There was no provision for loan losses for the first six months of 2014 compared with $967,000 for the first six months of 2013. The significant decrease in the provision for loan losses was due to the reduction in historical delinquency and credit loss experience trends. During the first six months ended June 30, 2014, there were net recoveries of $86,000 or 0.02% of total average loans compared with net charge-offs of $389,000 or 0.09% of total average loans for the same six months of 2013. Total allowance for loan losses was $6.8 million or 1.52% of total loans at June 30, 2014 compared with $6.7 million or 1.48% of loans at December 31, 2013 and $6.8 million or 1.54% of loans at June 30, 2013.


Net income of $1,239,000 for the quarter ended June 30, 2014 was a 54.1% increase from the net income for the quarter ended June 30, 2013 of $804,000. Earnings per share on a fully diluted basis were $0.33 for the second quarter of 2014 compared with $0.22 for the second quarter of 2013. Profitability as measured by return on average assets increased from 0.54% in the second quarter of 2013 to 0.83% for the same period in 2014. Profitability as measured by return on average equity increased from 6.65% to 9.35% over the same respective quarters in 2013 and 2014. The increase in net income was primarily due to the $800,000 decrease in the provision for loan losses in the second quarter of 2014 compared with the second quarter of 2013, partially offset by the $102,000 decrease in net interest income over the same periods.

Net interest income decreased $102,000 or 2.1% to $4.82 million for the quarter ended June 30, 2014 from $4.92 million for the quarter ended June 30, 2013. The decrease in net interest income was due primarily to the decrease in interest and fees on loans. This was partially offset by reduced interest expense on deposits and FHLB advances over the same period. The Company's net interest margin decreased from 3.60% in the second quarter of 2013 to 3.55% in the second quarter of 2014.

Total interest income decreased $269,000 or 4.7% to $5.48 million for the second quarter of 2014 from $5.75 million for the second quarter of 2013. This decrease was primarily due to the decline in the yield on earning assets from 4.19% during the second quarter of 2013 to 4.02% during the second quarter of 2014.

The tax-equivalent average yield on loans was 4.58% for the second quarter of 2014, down from 4.89% in the second quarter of 2013. Average loan balances decreased $2.4 million or 0.5% from $446.6 million during the second quarter of 2013 to $444.2 million during the second quarter of 2014. The decrease in balances and yield resulted in a $383,000 or 7.1% decline in interest and fee income from loans for the second quarter of 2014, compared with the same period in 2013. On a tax equivalent basis, the decrease was $377,000 or 6.9%.

Average investment security balances increased $7.3 million from $49.8 million in the second quarter of 2013 to $57.1 million in the second quarter of 2014. The tax-equivalent average yield on investments increased from 2.65% for the second quarter of 2013 to 3.09% for the second quarter of 2014. Interest and dividend income on security investments increased $111,000 or 37.1%, from $299,000 for the second quarter of 2013 to $410,000 for the second quarter of 2014. Approximately $79,000 of the increase in interest income on securities was due to the receipt and recognition of past due interest on the Bank's investment in trust preferrred securities. For further discussion on trust preferred securities, see "Securities" in Note 2 of the Notes to Consolidated Financial Statements contained herein. Interest income on deposits in other banks increased $3,000 from second quarter 2013 to second quarter 2014 resulting from increased balances in certificates of deposits at other banks.

Total interest expense decreased $167,000 or 20.3% from $824,000 for the second quarter of 2013 to $657,000 for the second quarter of 2014 primarily due to the decline in average balances of time deposits and FHLB advances.

Interest paid on deposits decreased $53,000 or 9.2% from $579,000 for the second quarter of 2013 to $526,000 for the second quarter of 2014. Average balances on time deposits declined $27.7 million or 22.0% from $125.8 million to $98.1 million while the average rate increased from 1.38% for the second quarter of 2013 to 1.50% for the second quarter of 2014, resulting in $67,000 less interest expense. Average money market account balances increased $8.1 million from the second quarter of 2013 to the second quarter of 2014 while the rate increased from 0.18% to 0.21%, resulting in $8,000 more interest expense. Average savings account balances increased $5.0 million or 7.0% from the second quarter of 2013 to the second quarter of 2014, while the average rate declined from 0.12% to 0.11%, resulting in a decrease of $1,000 of interest expense for the second quarter of 2014. Average interest bearing checking balances increased $18.5 million or 9.9% from the second quarter of 2013 to the second quarter of 2014, while the average rate decreased from 0.23% to 0.22%, resulting in an increase of $7,000 in checking interest expense for the second quarter of 2014.

From the second quarter of 2013 to the second quarter of 2014, interest expense on FHLB advances decreased $114,000 or 58.5% due to a decrease in average balances from $23.5 million during the three months ended June 30, 2013 to $13.1 million during the three months ended June 30, 2014, while the average rate paid declined from 3.34% to 2.49% over the same time periods. Interest expense on capital securities was $50,000 for the second quarter of 2013 and the second quarter of 2014.

The average rate on total interest-bearing liabilities decreased from 0.72% in the second quarter of 2013 to 0.59% for the second quarter of 2014.

The following table sets forth information relating to the Company's 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 Expense, and Average Yields and Rates

                              Three Months Ended June 30, 2014                  Three Months Ended June 30, 2013
(Dollars in
thousands)                 Average           Income/        Average          Average           Income/        Average
Assets                    Balances           Expense          Rate          Balances           Expense          Rate
Taxable                 $     435,278       $    4,941           4.55 %   $     430,330       $    5,334           4.97 %
Tax-exempt (1)                  7,038              130           7.38 %           7,234              114           6.34 %
Nonaccrual (2)                  1,933                -                            9,083                -
Total Loans                   444,249            5,071           4.58 %         446,647            5,448           4.89 %

Taxable                        50,418              348           2.76 %          42,993              237           2.21 %
Tax-exempt (1)                  6,645               93           5.60 %           6,795               93           5.48 %
Total securities               57,063              441           3.09 %          49,788              330           2.65 %

Deposits in banks              52,220               43           0.33 %          59,924               40           0.27 %
Federal funds sold                 13                -           0.15 %              10                -           0.16 %
Total earning assets          553,545            5,555           4.02 %         556,369       $    5,818           4.19 %

Less: Reserve for
loan losses                    (6,772 )                                          (6,352 )
Cash and due from
banks                           5,070                                             5,081
Bank premises and
equipment, net                 19,808                                            15,064
Other real estate
owned                           1,406                                             1,406
Other assets                   24,933                                            25,978
Total Assets            $     597,990                                     $     597,546

Liabilities and
Shareholders' Equity
Demand deposits         $      87,756                                     $      85,414

Checking accounts             205,092       $      112           0.22 %         186,619       $      105           0.23 %
Money market accounts          52,062               28           0.21 %          44,006               20           0.18 %
Savings accounts               77,240               20           0.11 %          72,203               21           0.12 %
Time deposits                  98,105              366           1.50 %         125,813              433           1.38 %
deposits                      432,499              526           0.49 %         428,641              579           0.54 %

Federal funds
purchased                           8                -           0.00 %               2                -           0.50 %
Federal Home Loan
Bank advances                  13,115               81           2.49 %          23,507              195           3.34 %
Capital securities of
subsidiary trust                4,124               50           4.83 %           4,124               50           4.83 %
liabilities                   449,746              657           0.59 %         456,274              824           0.72 %

Other liabilities               7,306                                             7,317
Shareholders' equity           53,182                                            48,541
Total Liabilities &
Shareholders' Equity    $     597,990                                     $     597,546

Net interest spread                         $    4,898           3.43 %                       $    4,994           3.47 %

Interest expense as a
percent of average
earning assets                                                   0.48 %                                            0.59 %
Net interest margin                                              3.55 %                                            3.60 %

(1) Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. . . .

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