-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MoaL3kuRih4ecXBPtcHMl0YuCqKVdk9ewFU/k+H4TAsVKVFm1ZaaEH87yymctpUh cW2WuQzvc46qUQKXchGGPQ== 0000916641-97-000377.txt : 19970416 0000916641-97-000377.hdr.sgml : 19970416 ACCESSION NUMBER: 0000916641-97-000377 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAGLE FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000880641 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541601306 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20146 FILM NUMBER: 97581435 BUSINESS ADDRESS: STREET 1: 2 E MAIN ST CITY: BERRYVILLE STATE: VA ZIP: 22611 BUSINESS PHONE: 7039552510 MAIL ADDRESS: STREET 1: PO BOX 391 CITY: BERRYVILLE STATE: VA ZIP: 22611 10-K405 1 EAGLE FINANCIAL 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------- For the fiscal year ended Commission File Number 0-20146 December 31, 1996 EAGLE FINANCIAL SERVICES, INC. (Exact name of Registrant as specified in its charter) Virginia 54-1601306 (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) Post Office Box 391 Berryville, Virginia 22611 (Address or principal executive offices) (Zip Code) (540) 955-2510 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, Par Value $2.50 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 X No Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's 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.[X] PAGE 1 OF 76 PAGES. Exhibit index on page 12. ------ ------ ----- The aggregate market value of the voting stock held by non-affiliates of the Registrant at April 1, 1997 was $30,847,366. The number of shares of Registrant's Common Stock outstanding as of April 1, 1997 was 1,402,153. DOCUMENTS INCORPORATED BY REFERENCE Listed hereunder are the following documents which are incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Document Part Proxy statement for Registrant's III 1997 Annual Meeting of Stockholders Registrant's 1996 Annual Report IV to Stockholders (filed as a part of the Company's Proxy Statement) -2- EAGLE FINANCIAL SERVICES, INC. INDEX TO FORM 10-K Page ------ PART I Item 1. Business.................................................. 4 Item 2. Properties............................................... 5 Item 3. Legal Proceedings........................................ 5 Item 4. Submission of Matters to a Vote of Security Holders...... 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 6 Item 6. Selected Financial Data................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 8 Item 8. Financial Statements and Supplementary Data.............. 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 8 PART III Item 10. Directors and Executive Officers of the Registrant....... 11 Item 11. Executive Compensation.................................. 11 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 11 Item 13. Certain Relationships and Related Transactions.......... 11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 12 -3- PART I Item 1. Business. The Registrant was incorporated October 2, 1991 by the Bank of Clarke County, Berryville, Virginia (the "Bank"), for the purpose of establishing a one bank holding company upon consummation of a Plan of Share Exchange between the Registrant and the Bank. The Bank is a Virginia banking corporation chartered on April 1, 1881. On December 31, 1991, the Share Exchange was consummated resulting in the Bank becoming a wholly-owned subsidiary of the Registrant. The Registrant has no other subsidiaries. The Registrant is regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, which limits the Registrant's activities to managing or controlling banks and engaging in other activities closely related to banking. The Bank is a member of the Federal Deposit Insurance Corporation and is a state member bank of the Federal Reserve System. The Bank is supervised and regulated by the Federal Reserve Board and the Virginia Bureau of Financial Institutions. The Bank offers a wide range of retail commercial banking services, including demand and time deposits and installment, mortgage and other consumer lending services. The Bank makes seasonal and term commercial loans, both alone and in conjunction with other banks or governmental agencies. The Bank also offers a wide variety of trust services to customers. The Bank's main office is located in Berryville, Clarke County, Virginia, and it operates branch offices in Boyce, Jubal Early Drive in Winchester, Senseny Road in Frederick County and in Stephens City. Clarke and Frederick Counties and the City of Winchester are the Bank's primary trade area. Within its primary trade area, the Bank competes with numerous large and small financial institutions, credit unions, insurance companies and other non-bank competitors. The Bank had eighteen officers, fifty-two other full-time and fifteen part-time employees as of December 31, 1996. None of the Bank's employees are represented by a union or covered under a collective bargaining agreement. Employee relations have been good. One of the primary businesses in Clarke County is agriculture. Although agricultural loans result in some seasonal changes in the Bank's lending operations, the Bank also serves commercial and industrial customers which limits the effect of seasonal credit demands by farmers and others engaged in the agricultural business. - -4- The loss of any one depositor or the failure by any one borrower to repay a loan would not have a material adverse effect on the Bank. Item 2. Properties. The present headquarters building of the Registrant and the Bank was substantially enlarged and remodeled in 1983-84 and again in 1993. The building now consists of a two-story building of brick construction, with approximately 20,000 square feet of floor space located at 2 East Main Street, Berryville, Virginia. The office operates ten teller windows, including one drive-up facility, one walk-up facility and a 24 hour automated teller machine. The Bank also operates a branch office in Boyce, Virginia at 108 West Main Street. Both such facilities are owned by the Bank. The Bank opened a branch in Winchester in August, 1992 at 625 East Jubal Early Drive. This branch site is leased. The Bank also purchased a 1.5 acre lot located adjacent to the Food Lion north of Berryville on Route 340. The site will house a branch on this site in the future. In addition, the Bank owns 18 North Church Street in Berryville for future expansion. This site is currently leased. The Bank has also purchased a .75 acre lot on Senseny Road and opened a full service branch in June 1995. The Bank opened a branch in Stephens City on March 15, 1996. This branch was purchased from First Union National Bank of Virginia under a purchase and assumption agreement dated October 26, 1995. Item 3. Legal Proceedings. There are no material pending legal proceedings against the Registrant or the Bank and no material proceedings to which any director, officer or affiliate of the Registrant, any beneficial owner of more than 5% of the Common Stock of the Registrant, or any associate of such director, officer or affiliate of the Registrant, is a party adverse to the Registrant or the Bank or has a material interest adverse to the Registrant or the Bank. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. -5- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Common Stock of the Registrant is not listed for trading on a registered exchange or any automated quotation system. Accordingly, there is no established public trading market for shares of the Registrant's Common Stock. Trades in shares of the Registrant's Common Stock occur sporadically on a local basis. Based on information available to the Registrant concerning such trading, the following table shows the trading ranges of the Common Stock of the Registramt and dividends for the periods indicated.
Dividends Per Share 1996 1995 1994 1996 1995 1994 High Low High Low High Low 1st Quarter $19.00 $18.75 $18.00 $17.50 $16.75 $16.25 $0.00 $0.00 $0.00 2nd Quarter 19.50 19.00 18.00 18.00 16.75 16.75 0.22 0.21 0.19 3rd Quarter 20.00 19.50 18.50 18.00 17.00 16.75 0.00 0.00 0.00 4th Quarter 20.50 20.00 18.75 18.50 17.50 17.00 0.38 0.34 0.33
The Registrant declared a 100% stock dividend effected in the form of a two for one split as of December 31, 1996. The par value remained unchanged. The share prices above have been changed to reflect the stock split. The Registrant paid semiannual dividends in 1996, 1995, and 1994. The dividend policy was changed to begin paying quarterly dividends beginning February 15, 1997 The Registrant's future dividends will, of course, depend upon its earnings and financial condition and upon other factors not presently determinable. After the Share Exchange, it is anticipated that the Registrant will obtain the funds needed for the payment of its dividends and expenses from the Bank, chiefly in the form of dividends. There were 882 holders of record of the Registrant's Common Stock as of April 1, 1997. -6- Item 6. Selected Financial Data. The following Selected Financial Data for the five fiscal years ended December 31, 1996 should be read in conjunction with Item 7, Management's Discussion & Analysis of Financial Condition and Results of Operations and the Financial Statements of the Registrant incorporated by reference in response to Item 8, Financial Statements and Supplementary Data.
Year Ended December 31, ------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------- ------------------ -------------- ----------------- -------------- INCOME STATEMENT DATA: Interest Income $9,402,870 $8,726,902 $7,896,082 $7,713,898 $8,066,113 Interest Expense 3,910,612 3,584,788 2,722,451 2,927,042 3,490,897 ------------- ------------------ -------------- ----------------- -------------- Net Interest Income 5,492,258 5,142,114 5,173,631 4,786,856 4,575,216 Less: Provision for Loan Losses 290,000 240,000 203,000 163,333 300,000 ------------- ------------------ -------------- ----------------- -------------- Net Interest Income after Provision for Loan Losses 5,202,258 4,902,114 4,970,631 4,623,523 4,275,216 Non-Interest Income 1,024,770 811,968 590,458 586,309 542,939 ------------- ------------------ -------------- ----------------- -------------- Net Revenue 6,227,028 5,714,082 5,561,089 5,209,832 4,818,155 Non-Interest Expense 4,378,387 3,976,155 3,626,679 3,325,600 2,893,624 ------------- ------------------ -------------- ----------------- -------------- Income before Income Taxes 1,848,641 1,737,927 1,934,410 1,884,232 1,924,531 Applicable Income Taxes 537,304 477,237 573,407 540,439 597,307 ------------- ------------------ -------------- ----------------- -------------- Net Income 1,311,337 1,260,690 1,361,003 1,343,793 1,327,224 ============= ================== ============== ================= ============== PERFORMANCE RATIOS: Return on Average Assets 1.06% 1.12% 1.25% 1.25% 1.31% Return on Average Equity 9.58% 9.94% 11.90% 12.93% 14.39% Dividend Payout Ratio 31.86% 30.18% 26.17% 25.24% 22.34% PER SHARE DATA (1) : Net Income $0.94 $0.91 $0.99 $0.98 $0.98 Cash Dividends Declared 0.30 0.28 0.26 0.25 0.22 Book Value 10.14 9.44 8.67 7.94 7.18 Market Price * 20.50 18.75 17.50 16.25 14.50 Average Shares Outstanding 1,392,298 1,383,152 1,369,330 1,361,496 1,347,646 BALANCE SHEET DATA: Assets $126,241,741 $121,492,853 $114,607,016 $110,804,265 $111,525,581 Loans (Net of Unearned Income) 87,870,194 85,871,203 80,634,132 73,643,768 70,734,637 Securities 26,089,574 26,618,148 23,833,408 20,374,505 20,184,687 Deposits 111,087,867 105,612,562 99,007,815 99,475,856 101,123,382 Stockholders' Equity 14,196,856 13,120,419 11,969,374 10,855,243 9,778,087
(1) Adjusted for a stock split effected in the form of a 100% stock dividend of Eagle Financial Services, Inc. stock on December 31, 1996. * The Company issues one class of stock, Common, which is not listed for trading on a registered exchange or quoted on the National Association of Securities Dealers Automated Quotation System (NASDAQ). Trades in the Company's stock occur sporadically on a local basis. Accordingly, there is no established public trade market for shares of the Company's stock, and quotations do not necessarily reflect the price that would be paid in an active and liquid market. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. Pursuant to General Instruction G(2), information required by this Item is incorporated by reference from pages 35 to 40 of the Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1996. In addition, under Securities Act Guide 3,II.B., the Schedules entitled Maturity Distribution and Yields of Securities as of December 31, 1996; Deposits and Rates Paid for the years ended December 31, 1996, 1995 and 1994; and Maturities of Certificates of Deposit of $100,000 and More as of December 31, 1995 are displayed on the following two pages. Item 8. Financial Statements and Supplementary Data Pursuant to General Instruction G(2) information required by this Item is incorporated by reference from pages 12 to 34 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. -8-
Maturity Distribution and Yields of Securities December 31, 1996 Due in one year Due after 1 Due after 5 or less through 5 years through 10 years ---------- -------- --------------- ------- -------------- --------- Amount Yield Amount Yield Amount Yield ---------- -------- --------------- ------- -------------- --------- Securities held to maturity: U.S. Treasury securities $ 449,775 5.04% $ 249,880 5.15% $ 0 0.00% Obligations of U.S. government corporations and agencies 249,960 6.07% 2,227,998 6.04% 2,989,533 6.52% Mortgage-backed securities 0 0.00% 7,188,320 6.28% 7,130,040 6.93% Other taxable securities 100,000 5.60% 0 0.00% 0 0.00% ---------- ------------- ------------ Total taxable 799,735 9,666,198 10,119,573 Tax-exempt securities (1) 100,000 7.96% 2,075,000 7.02% 570,521 7.52% ---------- ------------- ------------ Total $ 899,735 $ 11,741,198 $ 10,690,094 ---------- ------------- ------------ Securities available for sale: Obligations of U.S. government corporations and agencies $ 0 0.00% $ 742,372 5.28% $ 250,000 7.22% Other taxable securities 0 0.00% 0 0.00% 0 0.00% ---------- ------------- ------------ Total $ 0 $ 742,372 $ 250,000 ========== ============= ============ Total securities: $ 899,735 $ 12,483,570 $ 10,940,094 ========== ============= ============
Maturity Distribution and Yields of Securities December 31, 1996 (continued) Due after 10 years and Equity Securities Total -------------- -------- -------------- ----------- Amount Yield Amount Yield -------------- -------- -------------- ----------- Securities held to maturity: U.S. Treasury securities $ 121,976 7.63% $ 821,631 5.45% Obligations of U.S. government corporations and agencies 0 0.00% 5,467,491 6.31% Mortgage-backed securities 642,099 7.00% 14,960,459 6.62% Other taxable securities 0 0.00% 100,000 5.60% ------------- -------------- Total taxable 764,075 21,349,581 Tax-exempt securities (1) 250,000 6.63% 2,995,521 7.12% ------------- -------------- Total $ 1,014,075 $ 24,345,102 ------------- -------------- Securities available for sale: Obligations of U.S. government corporations and agencies $ 0 0.00% $ 992,372 5.77% Other taxable securities 752,100 6.61% 752,100 6.61% ------------- -------------- Total $ 752,100 $ 1,744,472 ============= ============== Total securities: $ 1,766,175 $ 26,089,574 ============= ==============
(1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 34%. 9 Deposits and Rates Paid
December 31, --------------------------------------------------------------------- 1996 1995 1994 --------------------- ---------------------- --------------------- Amount Rate Amount Rate Amount Rate --------- --------- ---------- -------- --------- --------- (Dollars in thousands) Noninterest-bearing $15,175 $11,972 $13,078 --------- ---------- --------- Interest-bearing: NOW accounts 16,773 2.10% 14,089 2.49% 11,812 2.53% Money market accounts 17,172 3.08% 16,932 3.20% 16,985 2.81% Regular savings accounts 13,421 2.52% 12,325 2.76% 12,716 2.75% Certificates of deposit: Less than $100,000 37,204 5.38% 39,116 5.11% 35,307 3.86% $100,000 and more 11,343 5.40% 11,179 5.57% 9,110 4.04% --------- ---------- --------- Total interest-bearing $95,913 4.03% $93,641 4.06% $85,930 3.22% --------- ---------- --------- Total deposits $111,088 $105,613 $99,008 ========= ========== =========
Maturities of Certificates of Deposit of $100,000 and More
Within Three to Six to One to Over Three Six Twelve Five Five Months Months Months Years Years Total --------- -------- --------- --------- -------- --------- (Dollars in thousands) At December 31, 1995 $ 5,170 $ 1,038 $ 2,932 $ 2,203 ---- $ 11,343 ========= ======== ========= ========= ======== =========
10 PART III Item 10. Directors and Executive Officers of the Registrant. Item 11. Executive Compensation. Item 12. Security Ownership of Certain Beneficial Owners and Management. Item 13. Certain Relationships and Related Transactions. Pursuant to General Instruction G(3), the information called for by Part III, Items 10. through 13., is incorporated herein by reference from the Company's definitive proxy statement, dated April 1, 1997, for the Company's Annual Meeting of Shareholders to be held April 16, 1997. -11- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed or incorporated by reference as part of this report: (1) Financial Statements. Independent Auditor's Report Consolidated Balance Sheets - At December 31, 1996 and 1995 ....................... 12 Consolidated Statements of Income - Years ended December 31, 1996, 1995,1994 ............ 13 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1996, 1995, 1994 ........... 14 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995, 1994 ........... 15 Notes to Financial Statements ....................... 17 (2) Schedules. Selected Financial Data ............................. 11 Average Balances, Income/Expenses and Average Rates ................................... 35 Allocation of Allowance for Loan Losses ............. 37 Maturities of CDs of $100,000 and More ....Seq Pg.... 10 Deposits and Rates Paid ......Seq Pg................ 10 Risk-Based Capital Ratios ........................... 40 Financial Highlights ................................ 10 Analysis of Reserve for Loan Losses ................. 36 Past Due Loans and Non-Performing Assets ............. 39 Interest Rate Sensitivity Schedule ................... 40 Loan Portfolio ....................................... 38 Rate/Volume Variance ................................. 36 Security Maturity Analysis ......Seq Pg............... 9 All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. -12- (3) Exhibit. Exhibit No. Description of Exhibit 3.1 Articles of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 of Registrant's Form S-4 Registration Statement, Registration No. 33-43681.) 3.2 Bylaws of Registrant (incorporated herein by reference to Exhibit 3.2 of Registrant's Form S-4 Registration Statement, Registration No. 33-43681). 10.1 Description of Executive Supplemental Income Plan 11 Computation of Per Share Earnings 13 Annual Report to Security Holders 21 Subsidiaries of the Registrant (b) Reports on Form 8-K. None. -13- 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, this 1st day of April, 1997. Eagle Financial Services, Inc. By /s/ LEWIS M. EWING --------------------------------- Lewis M. Ewing, President & CEO 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/ LEWIS M. EWING President (principal April 1, 1997 - --------------- executive officer) Lewis M. Ewing and Director /s/ JOHN R. MILLESON Treasurer (principal April 1, 1997 - -------------------- financial officer) John R. Milleson /s/ JAMES W. MCCARTY, JR. Controller (principal April 1, 1997 - ------------------------- accounting officer) James W. McCarty, Jr. /s/ JOHN D. HARDESTY Chairman of the Board April 1, 1997 - ---------------------- and Director John D. Hardesty /s/ J. FRED JONES Director April 1, 1997 - ---------------------- J. Fred Jones /s/ ROBERT W. SMALLEY, JR. Director April 1, 1997 - -------------------------- Robert W. Smalley, Jr. /s RANDALL G. VINSON Director April 1, 1997 - ---------------------- Randall G. Vinson Director April 1, 1997 /s/ JOHN F. MILLESON, JR. - ------------------------- John F. Milleson, Jr.
EAGLE FINANCIAL SERVICES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Sequential Exhibit No. Description of Exhibit Page No. 3.1 Articles of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 of Registrant's Form S-4 Registration Statement, Registration No. 33-43681). N/A 3.2 Bylaws of Registrant (incorporated herein by reference to Exhibit 3.2 of Registrant's Form S-4 Registration Statement, Registration No. 33-43681). N/A 10.1 Description of Executive Supplemental Income Plan 11 Computation of Per Share Earnings 13 Annual Report to Security Holders 21 Subsidiaries of the Registrant
-15- EX-10.1 2 EXHIBIT 10.1 Exhibit 10 Description of Executive Supplemental Income Plan The Registrant's Executive Supplemental Income Plan is not a written plan. A description of the plan can be found at page 16 of this Annual Report of Form 10-K. -17- EX-11 3 EXHIBIT 11 Exhibit 11 Eagle Financial Services, Inc. and Subsidiary Computations of Weighted Average Shares Outstanding and Earnings Per Share 1996 1995 1994 Shares Shares Shares Outstanding Outstanding Outstanding (As Restated) (As Restated) (As Restated) ----------- -------------- -------------- 1,390,570 1,381,348 1,367,676 1,390,570 1,381,348 1,367,676 1,390,570 1,381,348 1,367,676 1,390,570 1,381,348 1,367,676 1,390,570 1,381,348 1,367,676 1,390,570 1,381,348 1,367,676 1,394,026 1,384,954 1,370,984 1,394,026 1,384,954 1,370,984 1,394,026 1,384,954 1,370,984 1,394,026 1,384,954 1,370,984 1,394,026 1,384,954 1,370,984 1,394,026 1,384,954 1,370,984 ----------- -------------- -------------- 16,707,576 16,597,812 16,431,960 12 12 12 ------------- ----------- -------------- -------------- Weighted Average Shares Outstanding 1,392,298 1,383,152 1,369,330 ------------- ----------- -------------- -------------- Net Income 1,311,337 1,260,690 1,361,003 ------------- ----------- -------------- -------------- Earnings Per Share .94 .91 .99 ------------- ----------- -------------- -------------- EX-13 4 EXHIBIT 13 INDEPENDENT AUDITOR'S REPORT To the Stockholders and Directors Eagle Financial Services, Inc. and Subsidiary Berryville, Virginia We have audited the accompanying consolidated balance sheets of Eagle Financial Services, Inc. and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 1996, 1995, and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eagle Financial Services, Inc. and Subsidiary as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996, 1995, and 1994, in conformity with generally accepted accounting principles. Yount, Hyde & Barbour, P.C. Winchester, Virginia January 17, 1997 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 1996 and 1995
Assets 1996 1995 ---------------- --------------- Cash and due from banks $ 4 409 250 $ 4 106 467 Securities (fair value: 1996, $25,786,814; 1995, $26,659,486) (Note 2) 26 089 574 26 618 148 Federal funds sold 1 553 000 - - Loans, net of unearned discounts (Notes 3 and 11) 87 870 194 85 871 203 Less allowance for loan losses (Note 4) (913 955) (828 104) ---------------- --------------- Net loans 86 956 239 85 043 099 Bank premises and equipment, net (Note 5) 4 251 675 3 493 722 Other real estate owned 46 605 46 605 Other assets 2 935 398 2 184 812 ---------------- --------------- Total assets $ 126 241 741 $ 121 492 853 ================ =============== Liabilities and Stockholders' Equity Liabilities Deposits (Note 6): Noninterest bearing $ 15 175 041 $ 11 971 823 Interest bearing 95 912 826 93 640 739 ---------------- --------------- Total deposits $ 111 087 867 $ 105 612 562 Federal funds purchased - - 1 867 000 Other liabilities 957 018 892 872 Commitments and contingent liabilities (Notes 10, 15 and 17) - - - - ---------------- --------------- Total liabilities $ 112 044 885 $ 108 372 434 ---------------- --------------- Stockholders' Equity Preferred stock, $10 par value; authorized 500,000 shares; no shares outstanding $ - - $ - - Common stock, $2.50 par value; authorized 1,500,000 shares; issued 1996, 1,399,885 shares; issued 1995, 695,285 shares 3 499 714 1 738 212 Surplus 1 945 891 1 782 186 Retained earnings (Note 13) 8 756 281 9 612 627 Unrealized gain (loss) on securities available for sale, net (5 030) (12 606) ---------------- --------------- Total stockholders' equity $ 14 196 856 $ 13 120 419 ---------------- --------------- Total liabilities and stockholders' equity $ 126 241 741 $ 121 492 853 ================ ===============
See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 -------------- --------------- --------------- Interest Income Interest and fees on loans $ 7 750 646 $ 7 483 952 $ 6 533 391 Interest on federal funds sold 51 219 54 740 94 397 Interest on securities held to maturity: Taxable interest income 1 308 152 833 620 871 725 Interest income exempt from federal income taxes 158 070 158 409 170 530 Interest and dividends on securities available for sale: Taxable interest income 90 459 158 215 213 113 Dividends 44 324 37 966 12 926 -------------- --------------- --------------- Total interest income $ 9 402 870 $ 8 726 902 $ 7 896 082 -------------- --------------- --------------- Interest Expense Interest on deposits (Note 6) $ 3 853 810 $ 3 525 861 $ 2 686 044 Interest on federal funds purchased 56 802 56 144 34 868 Interest on Federal Home Loan Bank advances - - 2 783 1 539 -------------- --------------- --------------- Total interest expense $ 3 910 612 $ 3 584 788 $ 2 722 451 -------------- --------------- --------------- Net interest income $ 5 492 258 $ 5 142 114 $ 5 173 631 Provision for loan losses (Note 4) 290 000 240 000 203 000 -------------- --------------- --------------- Net interest income after provision for loan losses $ 5 202 258 $ 4 902 114 $ 4 970 631 -------------- --------------- --------------- Other Income Trust Department income $ 199 587 $ 145 318 $ 134 011 Service charges on deposit accounts 522 436 374 082 301 153 Other service charges and fees 196 232 181 853 86 618 Income (loss) on equity investment 595 (18 689) (36 838) Other operating income 105 920 129 404 105 514 -------------- --------------- --------------- $ 1 024 770 $ 811 968 $ 590 458 -------------- --------------- --------------- See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Income (Continued) Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994 -------------- --------------- --------------- Other Expenses Salaries and wages $ 1 732 542 $ 1 492 105 $ 1 359 821 Pension and other employee benefits (Notes 8, 9 and 16) 478 669 443 291 502 971 Occupancy expenses 323 962 241 353 236 802 Equipment expenses 472 462 378 102 301 558 FDIC assessment 2 000 111 904 215 359 Stationery and supplies 150 313 154 605 112 668 Postage 126 724 125 253 100 210 Credit card expense 93 637 99 004 93 732 Bank franchise tax 113 484 124 865 61 239 ATM network fees 129 385 89 723 64 126 Other operating expenses 755 209 715 950 578 193 -------------- --------------- --------------- $ 4 378 387 $ 3 976 155 $ 3 626 679 -------------- --------------- --------------- Income before income taxes $ 1 848 641 $ 1 737 927 $ 1 934 410 Income Tax Expense (Note 7) 537 304 477 237 573 407 -------------- --------------- --------------- Net income $ 1 311 337 $ 1 260 690 $ 1 361 003 ============== =============== =============== Earnings Per Share Per average share outstanding, net income $ .94 $ .91 $ .99 ============== =============== ===============
See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995, and 1994
Unrealized Gain (Loss) on Securities Common Retained Available for Stock Surplus Earnings Sale, Net Total ------------- ------------ ------------ ----------- ------------ Balance, December 31, 1995 $ 1 738 212 $ 1 782 186 $ 9 612 627 $ (12 606) $ 13 120 419 Balance, December 31, 1993 $ 1 709 600 $ 1 430 919 $ 7 714 724 $ - - $ 10 855 243 Net income - 1994 - - - - 1 361 003 - - 1 361 003 Sale of common stock to ESOP (2,400 shares) 6 000 68 448 - - - - 74 448 Issuance of common stock - dividend investment plan (4,434 shares) (Note 14) 11 085 134 001 - - - - 145 086 Dividends declared ($0.52 per share) - - - - (356 140) - - (356 140) Principal advances on ESOP debt guarantee (Note 9) - - - - (19 000) - - (19 000) Principal curtailments on ESOP debt guarantee (Note 9) - - - - 31 832 - - 31 832 Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $63,414 - - - - - - (123 098) (123 098) ------------- ------------ ------------ ---------- ------------ Balance, December 31, 1994 $ 1 726 685 $ 1 633 368 $ 8 732 419 $ (123 098) $ 11 969 374 Net income - 1995 - - - - 1 260 690 - - 1 260 690 Issuance of common stock - dividend investment plan (4,611 shares) (Note 14) 11 527 148 818 - - - - 160 345 Dividends declared ($.55 per share) - - - - (380 482) - - (380 482) Principal advances on ESOP debt guarantee (Note 9) - - - - (14 388) - - (14 388) Principal curtailments on ESOP debt guarantee (Note 9) - - - - 14 388 - - 14 388 Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $56,918 - - - - - - 110 492 110 492 See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity (Continued) Years Ended December 31, 1996, 1995, and 1994 Unrealized Gain (Loss) on Securities Common Retained Available for Stock Surplus Earnings Sale, Net Total ------------- ------------ ------------ ----------- ------------ Balance, December 31, 1995 $ 1 738 212 $ 1 782 186 $ 9 612 627 $ (12 606) $ 13 120 419 Net income - 1996 - - - - 1 311 337 - - 1 311 337 Issuance of common stock - dividend investment plan (4,662 shares) (Note 14) 11 656 163 875 - - - - 175 531 Dividends declared ($.60 per share) - - - - (417 826) - - (417 826) Issuance of common stock - stock split effected in the form of 100% stock dividend (699,943 shares) 1 749 857 (1 749 857) - - - - - - Discretionary transfer from retained earnings - - 1 749 857 (1 749 857) - - - - Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $3,903 - - - - - - 7 576 7 576 Fractional shares purchased (11) (170) - - - - (181) ------------- ------------ --------------- ---------- ------------ Balance, December 31, 1996 $ 3 499 714 $ 1 945 891 $ 8 756 281 $ (5 030) $ 14 196 856 ============= ============ =============== ========== ============
See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ------------- --------------- -------------- Cash Flows from Operating Activities Net income $ 1 311 337 $ 1 260 690 $ 1 361 003 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 399 076 287 456 254 110 Amortization of intangible assets 52 496 12 600 12 600 (Income) loss on equity investment (595) 18 689 36 838 Provision for loan losses 290 000 240 000 203 000 (Gain) on sale of other real estate owned - - - - (4 666) Premium amortization (discount accretion) on securities, net (2 854) 8 532 25 843 Deferred tax (benefit) (891) (37 710) (17 514) Changes in assets and liabilities: (Increase) decrease in other assets (805 499) (86 106) 63 725 Increase in other liabilities 64 146 263 045 169 493 ------------- --------------- -------------- Net cash provided by operating activities $ 1 307 216 $ 1 967 196 $ 2 104 432 ------------- --------------- -------------- Cash Flows from Investing Activities Proceeds from maturities and principal payments of securities held to maturity $ 5 128 436 $ 5 820 188 $ 3 245 898 Proceeds from maturities and principal payments of securities available for sale 1 748 844 496 000 1 000 000 Purchases of securities held to maturity (6 178 873) (8 704 650) (7 453 956) Purchases of securities available for sale (155 500) (243 400) (463 200) Proceeds from maturities of interest-bearing deposits - - - - 758 131 Purchases of bank premises and equipment (1 157 029) (837 492) (116 904) Purchase of equity investment - - - - (326 222) Proceeds from sale of other real estate owned - - - - 108 066 Net increase in loans (2 203 140) (5 456 584) (7 129 897) ------------- --------------- -------------- Net cash (used in) investing activities $ (2 817 262) $ (8 925 938) $ (10 378 084) ------------- --------------- -------------- See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994 ------------- --------------- -------------- Cash Flows from Financing Activities Net increase (decrease) in demand deposits, money market and savings accounts $ 7 222 447 $ 727 513 $ (10 758 918) Net increase (decrease) in certificates of deposit (1 747 141) 5 877 234 10 290 877 Proceeds from sale of common stock to ESOP - - - - 74 448 Increase (decrease) in federal funds purchased (1 867 000) 1 867 000 - - Net increase (decrease) in Federal Home Loan Bank advances - - (3 000 000) 3 000 000 Cash dividends paid (242 295) (220 137) (211 054) Fractional shares purchased (181) - - - - ------------- --------------- -------------- Net cash provided by financing activities $ 3 365 830 $ 5 251 610 $ 2 395 353 ------------- --------------- -------------- Increase (decrease) in cash and cash equivalents $ 1 855 783 $ (1 707 132) $ (5 878 299) Cash and Cash Equivalents Beginning 4 106 467 5 813 599 11 691 898 ------------- --------------- -------------- Ending $ 5 962 250 $ 4 106 467 $ 5 813 599 ============= =============== ============== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 3 960 889 $ 3 412 668 $ 2 621 981 ============= =============== ============== Income taxes $ 592 372 $ 542 248 $ 627 296 ============= =============== ============== Supplemental Schedule of Noncash Investing and Financing Activities Issuance of common stock - dividend investment plan $ 175 531 $ 160 345 $ 145 086 ============= =============== ============== Unrealized gain (loss) on securities available for sale $ 11 479 $ 167 410 $ (186 512) ============= =============== ==============
See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements Note 1. Nature of Banking Activities and Significant Accounting Policies Eagle Financial Services, Inc. and Subsidiary (the Company) grant commercial, financial, agricultural, residential and consumer loans to customers in Virginia and the Eastern Panhandle of West 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 flow or proceeds from the sale of selected assets of the borrowers. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to accepted practice within the banking industry. Principles of Consolidation The consolidated financial statements of Eagle Financial Services, Inc. and its wholly-owned subsidiary, Bank of Clarke County (the Bank), include the accounts of both companies. All material intercompany balances and transactions have been eliminated in consolidation. Trust Assets Securities and other property held by the Trust Division in a fiduciary or agency capacity are not assets of the Company and are not included in the accompanying consolidated financial statements. Securities The Company adopted FASB No. 115, "Accounting for Certain Investment in Debt and Equity Securities" effective beginning January 1, 1994. This statement addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are classified in three categories and accounted for as follows: a. Securities Held to Maturity Securities classified as held to maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. b. Securities Available for Sale Securities classified as available for sale are those debt and equity securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in stockholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. c. Trading Securities Trading securities, which are generally held for the short term in anticipation of market gains, are carried at fair value. Realized and unrealized gains and losses on trading account assets are included in interest income on trading account securities. The Company had no trading securities at December 31, 1996 and 1995. Derivative Financial Instruments In October, 1994, FASB No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" was issued. It requires various disclosures for derivative financial instruments which are futures, forward, swap or option contract, or other financial instruments with similar characteristics. The Company does not have any derivative financial instruments as defined under this statement. Other Real Estate Owned Other real estate owned is carried at the lower of estimated market value or the carrying amount of the loan. A reserve for other real estate owned is maintained to recognize estimated selling costs or declines in value. Provisions for estimated selling costs or declines in value, net gains and losses on the sale of other real estate owned, and net direct expenses attributable to these properties are included in other operating expenses. Assets, other than real estate, acquired in the settlement of loans are recorded as other assets. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Loans Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods which result in level rates of return on principal. Loans are charged off when in the opinion of management they are deemed to be uncollectible after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantees. Unearned interest on certain installment loans is amortized to income over the life of the loans, using the sum-of-digits formula. For all other loans, interest is computed on the loan balance outstanding. Loan origination and commitment fees and direct loan origination costs are being recognized as collected and incurred. The use of this method does not produce results that are materially different from results which would have been produced if such costs and fees were deferred and amortized as an adjustment of the loan yield over the life of the related loan. On January 1, 1995, the Company adopted FASB No. 114, "Accounting by Creditors for Impairment of a Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Statement 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 of those loans is to be based on the fair value of the collateral. Statement 114, as amended, also requires certain disclosures about investments in impaired loans and the allowance for credit losses and interest income recognized on loans. Loans are placed on nonaccrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those 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 nonaccrual loans is recognized only to the extent of interest payments received. Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral 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, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation of property and equipment is computed principally on the straight-line and declining-balance methods. Maintenance and repairs of property and equipment are charged to operations and major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts and gain or loss is included in operations. Intangible Assets Acquired intangible assets, such as the value of purchased core deposits and organizational costs, are amortized over the periods benefited, not exceeding fifteen years. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Postretirement Benefits The Company provides certain health care and life insurance benefits for all retired employees and one current employee who have met certain eligibility requirements. All other employees retiring after reaching age 65 and having at least 15 years service with the Company will be allowed to stay on the Company's group life and health insurance policies, but will be required to pay premiums. Effective January 1, 1993, the Company adopted FASB No. 106 to account for its share of the costs of those benefits. Under that Statement, the Company's share of the estimated costs that will be paid after retirement is generally being accrued by charges to expense over the employees' active service periods to the dates they are fully eligible for benefits, except that the Company's unfunded cost that existed at January 1, 1993 is being accrued primarily in a straight-line manner that will result in its full accrual by December 31, 2013. Prior to 1993, the Company expensed its share of costs as they were paid. Pension Plan The Company has a trusteed, noncontributory pension plan covering substantially all full-time employees. The Company computes the net periodic pension cost of the plan in accordance with FASB No. 87, "Employers' Accounting for Pensions." Earnings and Dividends Paid Per Share Earnings and dividends per share of common stock are based on the weighted average number of shares outstanding during each year after giving retroactive effect to the 100% stock dividend declared in 1996. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2. Securities The amortized costs and fair values of securities being held to maturity as of December 31, 1996 and 1995, are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value -------------- -------------- -------------- --------------- 1996 ------------------------------------------------------------------- U.S. Treasury securities $ 821 632 $ 6 090 $ (4 361) $ 823 361 Obligations of U.S. government corporations and agencies 5 467 491 1 964 (72 992) 5 396 463 Mortgage-backed securities 14 960 458 25 267 (254 950) 14 730 775 Obligations of states and political subdivisions 2 995 521 14 680 (18 468) 2 991 733 Other 100 000 10 - - 100 010 -------------- -------------- -------------- --------------- $ 24 345 102 $ 48 011 $ (350 771) $ 24 042 342 ============== ============== ============== =============== 1995 ------------------------------------------------------------------- U.S. Treasury securities $ 1 373 588 $ 12 340 $ (5 832) $ 1 380 096 Obligations of U.S. government corporations and agencies 4 249 817 19 166 (21 467) 4 247 516 Mortgage-backed securities 14 196 391 75 086 (67 013) 14 204 464 Obligations of states and political subdivisions 3 171 195 32 331 (3 125) 3 200 401 Other 299 988 - - (148) 299 840 -------------- -------------- -------------- --------------- $ 23 290 979 $ 138 923 $ (97 585) $ 23 332 317 ============== ============== ============== ===============
The amortized cost and fair value of securities being held to maturity as of December 31, 1996, by contractual maturity, are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are not included in the maturity categories in the maturity summary.
Amortized Fair Cost Value -------------- --------------- Due in one year or less $ 1 349 736 $ 1 351 802 Due after one year through five years 4 102 879 4 056 341 Due after five years through ten years 3 560 053 3 526 497 Due after ten years 371 976 376 927 Mortgage-backed securities 14 960 458 14 730 775 -------------- --------------- $ 24 345 102 $ 24 042 342 ============== ===============
Amortized costs and fair values of securities available for sale as of December 31, 1996 and 1995, are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value -------------- -------------- ------------- -------------- 1996 ----------------------------------------------------------------- Obligations of U.S. government corporations and agencies $ 999 994 6 $ (7 628) $ 992 372 Other 752 100 - - - - 752 100 -------------- -------------- ------------- -------------- $ 1 752 094 $ 6 $ (7 628) $ 1 744 472 ============== ============== ============= ============== 1995 ----------------------------------------------------------------- Obligations of U.S. government corporations and agencies $ 2 749 669 $ 4 760 $ (23 860) $ 2 730 569 Other 596 600 - - - - 596 600 -------------- -------------- ------------- -------------- $ 3 346 269 $ 4 760 $ (23 860) $ 3 327 169 ============== ============== ============= ==============
The amortized cost and fair value of securities available for sale as of December 31, 1996, by contractual maturity, are shown below.
Amortized Fair Cost Value -------------- --------------- Due after one year through five years $ 750 000 $ 742 372 Due after five years through ten years 249 994 250 000 Other 752 100 752 100 -------------- --------------- $ 1 752 094 $ 1 744 472 ============== ===============
Proceeds from maturities and principal payments of securities being held to maturity during 1996, 1995 and 1994 were $5,128,436, $5,820,188 and $3,245,898. There were no sales of securities being held to maturity during 1996, 1995 and 1994. Proceeds from maturities and principal payments of securities available for sale during 1996, 1995 and 1994 were $1,748,844, $496,000 and $1,000,000. There were no sales of securities available for sale during 1996, 1995 and 1994. Securities having a book value of $6,967,840 and $7,259,464 at December 31, 1996 and 1995, were pledged to secure public deposits and for other purposes required by law. Note 3. Loans, Net The composition of the net loans is as follows:
December 31, 1996 1995 ---------- ----------- (thousands) Loans secured by real estate: Construction and land development $ 1 434 $ - - Secured by farmland 4 013 4 112 Secured by 1-4 family residential 45 156 41 411 Nonfarm, nonresidential loans 9 518 10 372 Loans to farmers (except secured by real estate) 1 446 1 605 Commercial and industrial loans (except those secured by real estate) 6 145 6 349 Loans to individuals (except those secured by real estate) 19 633 22 401 Loans to U.S. state and political subdivision 1 517 1 239 All other loans 215 107 ---------- ----------- Total loans $ 89 077 $ 87 596 Less: Unearned income (1 207) (1 725) Allowance for loan losses (914) (828) ---------- ----------- Loans, net $ 86 956 $ 85 043 ========== ===========
Note 4. Allowance for Loan Losses Changes in the allowance for loan losses are as follows:
December 31, ------------------------------------------------- 1996 1995 1994 ------------- ------------- ------------ Balance, beginning $ 828 104 $ 807 617 $ 744 150 Provision charged to operating expense 290 000 240 000 203 000 Recoveries added to the allowance 63 561 54 960 34 114 Loan losses charged to the allowance (267 710) (274 473) (173 647) ------------- ------------- ------------ Balance, ending $ 913 955 $ 828 104 $ 807 617 ============= ============= ============
There were no impaired loans as of December 31, 1996. Information about impaired loans as of and for the year ended December 31, 1995 is as follows: Impaired loans for which an allowance has been provided $ 430 124 Impaired loans for which no allowance has been provided - - ------------ Total impaired loans $ 430 124 ============ Allowance provided for impaired loans, included in the allowance for loan losses $ 43 000 Average balance in impaired loans $ 35 844 Interest income recognized $ - -
There were no loans on which the accrual of interest was discontinued or reduced in 1996 and 1995, except for the loans included in the impaired loan disclosure under FASB 114. Note 5. Premises and Equipment, Net The major classes of premises and equipment and the total accumulated depreciation are as follows:
December 31, ------------------------------ 1996 1995 ------------ ------------- Land $ 787 918 $ 449 204 Land held for future branch site 150 587 150 587 Buildings and improvements 3 534 056 3 141 077 Furniture and equipment 2 685 566 2 247 085 Construction in progress - - 13 145 ------------ ------------- $ 7 158 127 $ 6 001 098 Less accumulated depreciation 2 906 452 2 507 376 ------------ ------------- Bank premises and equipment, net $ 4 251 675 $ 3 493 722 ============ =============
Depreciation expense was $399,076, $287,456, and $254,110 for the years ended December 31, 1996, 1995, and 1994, respectively. Note 6. Deposits Deposits outstanding at December 31, 1996, 1995, and 1994, and the related interest expense for the years then ended, are summarized as follows:
1996 1995 ------------------------------------------------------------------ Amount Expense Amount Expense --------------- -------------- ---------------- -------------- Noninterest bearing $ 15 175 041 $ - - $ 11 971 823 $ - - --------------- -------------- ---------------- -------------- Interest bearing: Interest checking $ 16 772 462 $ 320 709 $ 14 088 827 $ 318 369 Money market accounts 17 171 896 535 299 16 932 323 542 425 Regular savings 13 421 289 342 267 12 325 269 350 633 Certificates of deposit: Less than $100,000 37 204 152 2 105 623 39 115 817 1 798 908 $100,000 and more 11 343 027 549 912 11 178 503 515 526 --------------- -------------- ---------------- -------------- Total interest bearing $ 95 912 826 $ 3 853 810 $ 93 640 739 $ 3 525 861 --------------- -------------- ---------------- -------------- Total deposits $ 111 087 867 $ 3 853 810 $ 105 612 562 $ 3 525 861 =============== ============== ================ ============== 1994 -------------------------------- Amount Expense --------------- -------------- Noninterest bearing $ 13 078 233 $ - - --------------- -------------- Interest bearing: Interest checking $ 11 811 684 $ 282 840 Money market accounts 16 984 792 655 250 Regular savings 12 716 020 380 998 Certificates of deposit: Less than $100,000 35 307 175 1 113 584 $100,000 and more 9 109 911 253 372 --------------- -------------- Total interest bearing $ 85 929 582 $ 2 686 044 --------------- -------------- Total deposits $ 99 007 815 $ 2 686 044 =============== ==============
Note 7. Income Taxes Net deferred tax assets consist of the following components as of December 31, 1996 and 1995:
December 31, 1996 1995 ------------ ------------- Deferred tax assets: Allowance for loan losses $ 224 213 $ 196 009 Deferred compensation 86 082 74 216 Accrued postretirement benefits 72 915 55 993 Reserve for other real estate owned 2 040 2 040 Securities available for sale 2 591 6 494 Other - - 9 407 ------------ ------------- $ 387 841 $ 344 159 ------------ ------------- Deferred tax liabilities: Property and equipment $ 294 407 $ 293 047 Prepaid pension costs 53 142 7 808 ------------ ------------- $ 347 549 $ 300 855 ------------ ------------- $ 40 292 $ 43 304 ============ =============
The provision for income taxes charged to operations for the years ended December 31, 1996, 1995 and 1994 consists of the following:
December 31, 1996 1995 1994 ----------- ------------ ----------- Current tax expense $ 538 195 $ 514 947 $ 590 921 Deferred tax (benefit) (891) (37 710) (17 514) ----------- ------------ ----------- $ 537 304 $ 477 237 $ 573 407 =========== ============ ===========
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 1996, 1995 and 1994, due to the following:
1996 1995 1994 ----------- ------------ ----------- Computed "expected" tax expense $ 628 538 $ 590 895 $ 657 699 (Decrease) in income taxes resulting from: Tax-exempt interest (84 622) (75 477) (73 881) Other (6 612) (38 181) (10 411) ----------- ------------ ----------- $ 537 304 $ 477 237 $ 573 407 =========== ============ ===========
Low income housing credits totalled $48,000, $46,227 and $51,073 for 1996, 1995 and 1994. Note 8. Defined Benefit Pension Plan The amount of expense recognized for the Company's pension plan totaled $69,426, $66,884 and $26,768 for the years ended December 31, 1996, 1995, and 1994, respectively. The components of the pension cost charged against expense for 1996, 1995, and 1994, consisted of the following:
1996 1995 1994 -------------- --------------- ------------- Service cost (benefits earned) $ 57 734 $ 51 682 $ 39 136 Interest cost on projected benefit obligation 87 942 82 421 64 292 Actual return on plan assets (108 168) (66 948) (69 787) Gain or loss to the extent recognized 5 109 - - 5 971 Net amortization and deferral 26 809 (271) (12 844) $ 69 426 $ 66 884 $ 26 768 ============== =============== =============
The following table sets forth the plan's funded status as of December 31, 1996 and 1995, respectively.
1996 1995 -------------- --------------- Actuarial present value of benefit obligations: Vested benefits $ 1 025 392 $ 896 614 ============== =============== Accumulated benefits $ 1 040 589 $ 896 614 ============== =============== Projected benefits $ (1 126 270) $ (1 126 270) Plan assets at fair value 1 127 104 977 700 -------------- --------------- Funded status $ (92 602) $ (148 570) Unrecognized net loss 156 039 189 256 Prior service costs attributable to plan amendments 139 963 149 508 Unrecognized (net asset) at date of initial application (64 227) (77 071) -------------- --------------- Prepaid pension cost $ 137 173 $ 113 123 =============== ===============
A weighted average discount rate of 8% and a 6% rate of increase in future compensation levels were used in determining the actuarial present value of the benefit obligations. The expected long-term rate of return on plan assets was 8%. Note 9. Employee Benefits The Company has established an Employee Stock Ownership Plan (ESOP) to provide additional retirement benefits to substantially all employees. Contributions under the plan amounted to $70,579 in 1994. There were no contributions in 1996 or 1995. The contributions are made to the Bank of Clarke County Employee Retirement Trust to be used to purchase the Company's common stock. The plan is leveraged to the extent that money was borrowed during 1995 and 1994 to purchase available stock. The debt related to these borrowings was guaranteed by the Company. At December 31, 1996 and 1995, there was no outstanding debt related to the ESOP. The Company sponsors a 401(k) savings plan under which eligible employees may choose to save up to 15 percent of their salary on a pretax basis, subject to certain IRS limits. The Company matches 25 percent (up to 6 percent of the employee's salary) of employee contributions with Company common stock. The shares for this purpose are provided principally by the Company's employee stock ownership plan (ESOP), supplemented, as needed, by newly issued shares. Contributions under the plan amounted to $8,160 and $7,925 in 1996 and 1995, respectively. The plan was not in effect in 1994. In addition, an Executive Supplemental Income Plan was developed for certain key employees. Benefits are to be paid in monthly installments following retirement or death. The agreement provides that if employment is terminated for reasons other than death or disability prior to age 65, the amount of benefits could be reduced or forfeited. The executive supplemental income benefit expense for 1996, 1995, and 1994 based on the present value of the retirement benefits, amounted to $38,499, $34,899 and $43,216, respectively. The plan is unfunded. However, life insurance has been acquired on the lives of those employees in amounts sufficient to discharge the obligations thereunder. Note 10. Commitments and Contingencies In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. The Company does not anticipate any material losses as a result of these commitments. The Bank entered into a five-year noncancellable lease agreement for a branch office in Winchester on August 1, 1995. This lease requires payment of certain operating expenses and contains a renewal option clause for one additional five-year term. The total minimum rental commitment at December 31, 1996 under the lease is $156,237, which is due as follows:
Due in the year ending December 31, 1997 $ 43 601 1998 43 601 1999 43 601 2000 25 434 ------------- $ 156 237 =============
The total rental expense was $49,035, $43,669 and $41,314 in 1996, 1995 and 1994, respectively. As a member of the Federal Reserve System, the Bank is required to maintain certain average reserve balances. These reserve balances include usable vault cash and amounts on deposit with the Federal Reserve. For the final weekly reporting period in the years ended December 31, 1996 and 1995, the amount of daily average required balances were approximately $744,000 and $588,000, respectively. See Note 14 with respect to financial instruments with off-balance sheet risk. Note 11. Transactions with Directors and Officers The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. These persons and firms were indebted to the Company for loans totaling $8,080,611 and $877,664 at December 31, 1996 and 1995, respectively. During 1996, total principal additions were $1,035,205 and total principal payments were $1,104,808. Note 12. Capital Requirements The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification 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 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, and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Reserve categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage ratios as set forth in the table. The Company's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purpose Action Provisions --------------------- ------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Amount in Thousands) As of December 31, 1996: Total Capital (to Risk Weighted Assets) Consolidated $ 14 454 17.27% >=$ 6 697 >= 8.00% >=$ 8 371 >= 10.00% Bank of Clarke County $ 14 116 16.93% >=$ 6 670 >= 8.00% >=$ 8 338 >= 10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated $ 13 540 16.17% >=$ 3 348 >= 4.00% >=$ 5 023 >= 6.00% Bank of Clarke County $ 13 202 15.83% >=$ 3 335 >= 4.00% >=$ 5 003 >= 6.00% Tier 1 Capital (to Average Assets) Consolidated $ 13 540 10.90% >=$ 4 969 >= 4.00% >=$ 6 211 >= 5.00% Bank of Clarke County $ 13 202 10.66% >=$ 4 955 >= 4.00% >=$ 6 194 >= 5.00% To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purpose Action Provisions --------------------- ------------------ ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Amount in Thousands) As of December 31, 1995: Total Capital (to Risk Weighted Assets) Consolidated $ 13 929 16.40% >=$ 6 794 >= 8.00% >=$ 8 492 >= 10.00% Bank of Clarke County $ 13 585 16.06% >=$ 6 766 >= 8.00% >=$ 8 457 >= 10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated $ 13 101 15.43% >=$ 3 397 >= 4.00% >=$ 5 095 >= 6.00% Bank of Clarke County $ 12 757 15.08% >=$ 3 383 >= 4.00% >=$ 5 074 >= 6.00% Tier 1 Capital (to Average Assets) Consolidated $ 13 101 11.61% >=$ 4 515 >= 4.00% >=$ 5 644 >= 5.00% Bank of Clarke County $ 12 757 11.34% >=$ 4 501 >= 4.00% >=$ 5 626 >= 5.00%
Note 13. Retained Earnings Transfers of funds from the banking subsidiary to the Parent Company in the form of loans, advances and cash dividends, are restricted by federal and state regulatory authorities. At December 31, 1996, the aggregate amount of unrestricted funds, which could be transferred from the Bank to the Parent Company without prior regulatory approval, amounted to $3,185,414 or 22.4% of the consolidated net assets. Note 14. Dividend Investment Plan The Company has in effect a Dividend Investment Plan which provides an automatic conversion of dividends into common stock for enrolled stockholders. It is based on 95% of the stock's fair market value on each dividend record date. Note 15. Financial Instruments With Off-Balance Sheet Risk The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the contract or notional amount of the Company's exposure to off-balance sheet risk as of December 31, 1996 and 1995, is as follows:
1996 1995 -------------- ----------------- Financialinstruments whose contract amounts represent credit risk: Commitments to extend credit $ 10 160 277 $ 8 093 000 Standby letters of credit $ 46 631 $ 148 000
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 customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds real estate and bank deposits as collateral supporting those commitments for which collateral is deemed necessary. At December 31, 1996, none of the outstanding letters of credit were collateralized. The Company has cash accounts in other commercial banks. The amount on deposit at one of these banks at December 31, 1996 exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $1,130,465. Note 16. Postretirement Benefit Plan The Company sponsors a postretirement life and health care plan for all retirees and two current employees that have met certain eligibility requirements. All other employees retiring after reaching age 65 and having at least 15 years service with the Company will be allowed to stay on the Company's group life and health insurance policies, but will be required to pay unsubsidized premiums. The plan is contributory, with retiree contributions that are adjustable annually based on various factors, some of which are discretionary. The plan is unfunded. Net periodic postretirement benefit cost included the following components for the years ended December 31, 1996, 1995 and 1994.
1996 1995 1994 ----------- ------------ ------------ Service cost-benefits attributable to service during the year $ 11 818 $ 11 452 $ 11 991 Interest on accumulated postretire- ment benefit obligation 33 567 35 701 30 066 Amortization of transition obligation 20 189 20 189 20 189 Net amortization and deferral (2 896) (2 239) (188) ----------- ------------ ------------ $ 62 678 $ 65 103 $ 62 058 ============ =========== ============
The following table sets forth the plan's obligation recognized in the accompanying balance sheets at December 31, 1996 and 1995:
1996 1995 ----------- ----------- Accumulated postretirement benefit obligation: Retirees $ 157 743 $ 160 227 Other fully eligible participants 75 452 77 015 Other active participants 213 817 188 551 ------------ ----------- $ 447 012 $ 425 793 ============ =========== Plan assets: Accumulated postretirement benefit obligation $ (459 108) $ (425 793) Unrecognized transition obligation 323 029 343 218 Unrecognized net experience (gains) (83 116) (86 012) ------------ ----------- Obligation included on balance sheet $ (219 195) $ (168 587) ============ ===========
For measurement purposes, a 10 percent annual rate of increase in per capita health care costs of covered benefits was assumed for 1996, with such annual rate of increase gradually declining to 5 percent in 2004. If assumed health care cost trend rates were increased by 1 percentage point in each year, the accumulated postretirement benefit obligation at December 31, 1996 would be increased by $ and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1996 would be increased by $ . The weighted average discount rate used in estimating the accumulated postretirement benefit obligation was % for 1996 and 1995. Note 17. Federal Home Loan Bank Advances and Available Lines of Credit The Company has a $13,000,000 line of credit with the Federal Home Loan Bank of Atlanta. Advances bear interest at a floating rate based on the daily rate credit and would mature on January 4, 1997. Advances are secured by the Company's real estate loan portfolio. There is no limit to the number of renewal options available to the Company. The unused line of credit totaled $13,000,000 at December 31, 1996 and 1995. The Company had unused lines of credit totaling $14,100,000 with nonaffiliated banks at December 31, 1996. Note 18. Disclosures About Fair Value of Financial Instruments 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 Short-Term Investments For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Securities For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. Loans For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. 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, 1996 and 1995, the carrying amounts and fair values of loan commitments and standby letters of credit were immaterial. The estimated fair values of the Company's financial instruments are as follows:
1996 1995 ----------------------------------------- --------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------------- ---------------- ---------------- --------------- (in thousands) (in thousands) Financial assets: Cash and short-term investments $ 5 962 250 $ 5 962 250 $ 4 106 467 $ 4 106 467 Securities 26 089 574 25 786 814 26 618 148 26 659 486 Loans 87 870 194 85 659 000 85 871 203 82 754 896 Less: allowance for loan losses (913 955) - - (828 104) - - ---------------- ---------------- ---------------- --------------- Total financial assets $ 119 008 063 $ 117 408 064 $ 115 767 714 $ 113 520 849 ================ ================ ================ =============== Financial liabilities: Deposits $ 111 087 867 $ 111 186 000 $ 105 612 562 $ 105 589 000 Federal funds purchased - - - - 1 867 000 1 867 000 ---------------- ---------------- ---------------- --------------- Total financial liabilities $ 111 087 867 $ 111 186 000 $ 107 479 562 $ 107 456 000 ================ ================ ================ ===============
Note 19. Condensed Financial Information - Parent Company Only
EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Balance Sheets December 31, 1996 and 1995 Assets 1996 1995 -------------- -------------- Cash $ 5 521 $ 4 073 Income tax credits receivable - - 48 000 Prepaid expenses 453 11 720 Securities 60 000 9 000 Organizational costs, net of accumulated amortization - - 13 024 Investment in subsidiary, at cost, plus undistributed net income 13 859 593 12 763 908 Equity investment in Johnson Williams Limited Partnership 271 289 270 694 -------------- -------------- Total assets $ 14 196 856 $ 13 120 419 ============== ============== Liabilities and Stockholders' Equity Liabilities $ - - $ - - -------------- -------------- Stockholders' Equity Preferred stock $ - - $ - - Common stock 3 499 714 1 738 212 Surplus 1 945 891 1 782 186 Retained earnings 8 756 281 9 612 627 Unrealized gain (loss) on securities available for sale, net (5 030) (12 606) -------------- -------------- Total stockholders' equity $ 14 196 856 $ 13 120 419 -------------- -------------- Total liabilities and stockholders' equity $ 14 196 856 $ 13 120 419 ============== ==============
EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Income Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994 ------------- ------------- ------------- Income Dividends from subsidiary $ 200 000 $ 200 000 $ 326 222 ------------- ------------- ------------- Interest on securities 1 414 2 561 2 607 ------------- ------------- ------------- Total income $ 201 414 $ 202 561 $ 328 829 ------------- ------------- ------------- Expenses Amortization of organizational costs $ 13 023 $ 12 600 $ 12 600 Legal expense 565 1 376 8 487 Other operating expenses 22 989 29 163 27 474 ------------- ------------- ------------- Total expenses $ 36 577 $ 43 139 $ 48 561 ------------- ------------- ------------- Other Income Income (loss) on equity investment $ 595 $ (18 689) $ (36 838) Other - - 25 064 - - ------------- ------------- ------------- Total other income $ 595 $ 6 375 $ (36 838) ------------- ------------- ------------- Income before allocated tax benefits and undistributed net income of subsidiary $ 165 432 $ 165 797 $ 243 430 Allocated Income Tax Benefit (57 797) (59 629) (55 531) ------------- ------------- ------------- Income before equity in undistributed net income of subsidiary $ 223 229 $ 225 426 $ 298 961 Equity in Undistributed Net Income of Subsidiary 1 088 108 1 035 264 1 062 042 ------------- ------------- ------------- Net income $ 1 311 337 $ 1 260 690 $ 1 361 003 ============= ============= ============= Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Cash Flows Years Ended December 31, 1996, 1995, and 1994 1996 1995 1994 ------------- ------------- ------------- Cash Flows from Operating Activities Net income $ 1 311 337 $ 1 260 690 $ 1 361 003 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organizational costs 13 023 12 600 12 600 (Income) loss on equity investment (595) 18 689 36 838 Undistributed earnings of subsidiary (1 088 108) (1 035 264) (1 062 042) Changes in assets and liabilities: (Increase) decrease in prepaid expenses 11 267 (11 630) 30 720 (Increase) decrease in income tax credits receivable 48 000 (48 000) - - ------------- ------------- ------------- Net cash provided by operating activities $ 294 924 $ 197 085 $ 379 119 ------------- ------------- ------------- Cash Flows from Investing Activities Purchase of securities $ (51 000) $ (220 000) $ (35 000) Purchase of equity investment - - - - (326 222) Proceeds from maturities of securities - - 246 000 98 352 ------------- ------------- ------------- Net cash provided by (used in) investing activities $ (51 000) $ 26 000 $ (262 870) ------------- ------------- ------------- Cash Flows from Financing Activities Proceeds from sale of common stock to ESOP $ - - $ - - $ 74 448 Cash dividends paid (242 295) (220 137) (211 054) Retirement of common stock (181) - - - - ------------- ------------- ------------- Net cash (used in) financing activities $ (242 476) $ (220 137) $ (136 606) ------------- ------------- ------------- Increase (decrease) in cash $ 1 448 $ 2 948 $ (20 357) Cash Beginning 4 073 1 125 21 482 ------------- ------------- ------------- Ending $ 5 521 $ 4 073 $ 1 125 ============= ============= ============= Supplemental Schedule of Noncash Financing Activities Issuance of common stock - dividend investment plan $ 175 531 $ 160 345 $ 145 086 ============= ============= ============= Unrealized gain (loss) on securities available for sale $ 11 479 $ 167 410 $ (186 512) ============= ============= =============
Performance Summary In 1996, the Company grew from total assets of $121.5 million to $126.2 million. This is an increase of $4.7 million or 3.9%. Loan growth was responsible for the majority of the increase. Net loans grew from $85.0 million in 1995 to $87.0 million in 1996, resulting in an increase of $2.0 million or 2.3%. Total deposits grew $5.5 million or 5.2% from $105.6 million in 1995 to $111.1 million in 1996. Stockholders' Equity has risen from $13.1 million in 1995 to $14.2 million in 1996, an 8.2% increase. The net income of the company for 1996 was $1.31 million, up slightly from last year of $1.26 million. Over the past five years, the Company has earned $6.60 million, resulting in an increase in stockholders' equity of 66.1% over those five years. The market value of the Company has risen steadily over the same period. The market value of the stock has gone from $12.00 per share to $20.50 over the same five year period, an increase of 70.8% Average Balances, Income/Expenses and Average Rates (In Thousands) (Fully Taxable Equivalent)
1996 1995 ---------------------------------- --------------------------------- Average Income/ Average Average Income/ Average ASSETS: Balances Expense Rate Balances Expense Rate --------- --------- --------- --------- --------- -------- Loans Taxable $84,772 $7,660 9.04% $81,855 $7,407 9.05% Tax-exempt (1) 1,410 138 9.79% 1,334 116 8.70% Non-accrual -- -- -- 36 -- -- --------- --------- --------- --------- Total Loans $86,182 $7,798 9.05% $83,225 $7,523 9.04% --------- --------- --------- --------- Securities Taxable $23,528 $1,443 6.13% $17,102 $1,030 6.02% Tax-Exempt (1) 3,289 239 7.27% 3,073 240 7.81% --------- --------- --------- --------- Total Securities $26,817 $1,682 6.27% $20,175 $1,270 6.29% --------- --------- --------- --------- Federal funds sold $918 $51 5.56% $951 $55 5.78% --------- ========= --------- ========= Total Earning Assets $113,917 $9,531 8.37%$104,351 $8,848 8.48% ========= ========= Less: Reserve for loan losses (853) (847) Cash and due from banks 4,197 3,849 Bank premises and equipment, net 4,097 3,295 Other assets 2,858 2,228 ========= ========= Total Assets $124,216 $112,876 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT: Deposits Demand deposits $12,900 $ -- $11,548 $ -- --------- --------- --------- --------- NOW accounts $15,262 $321 2.10% $12,761 $318 2.49% Money market accounts 17,393 535 3.08% 16,932 542 3.20% Savings accounts 13,594 342 2.52% 12,699 351 2.76% Time deposits 49,349 2,656 5.38% 44,496 2,315 5.20% --------- --------- --------- --------- Total Interest-Bearing Deposits $95,598 $3,854 4.03% $86,888 $3,526 4.06% Fed funds purchased 974 57 5.85% 908 56 6.17% Federal Home Loan Bank advances -- -- -- 25 3 12.00% --------- --------- --------- --------- Total Interest-Bearing Liabilities $96,572 $3,911 4.05% $87,821 $3,585 4.08% --------- --------- --------- --------- Other Liabilities $1,053 $820 --------- --------- Stockholders' Equity $13,691 $12,686 --------- --------- Total Liabilities & Shareholders' Equity $124,216 $112,875 ========= ========= Net interest spread 4.32% 4.40% Interest expense as a percent of average earning assets 3.43% 3.44% Net interest margin 4.93% 5.04% 1994 --------------------------------- Average Income/ Average ASSETS: Balances Expense Rate -------- --------- --------- Loans Taxable $74,642 $6,470 8.67% Tax-exempt (1) 1,300 95 7.31% Non-accrual -- -- -- -------- --------- Total Loans $75,942 $6,565 8.64% -------- --------- Securities Taxable $18,607 $1,098 5.90% Tax-Exempt (1) 3,251 258 7.94% -------- --------- Total Securities $21,858 $1,356 6.20% -------- --------- Federal funds sold $2,743 $94 3.43% -------- ========= Total Earning Assets $100,543 $8,015 7.97% ========= Less: Reserve for loan losses (800) Cash and due from banks 3,936 Bank premises and equipment, net 3,000 Other assets 2,566 ======== Total Assets $109,245 ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT: Deposits Demand deposits $12,682 $ -- -------- --------- NOW accounts $11,182 $283 2.53% Money market accounts 23,293 655 2.81% Savings accounts 13,847 381 2.75% Time deposits 35,139 1,367 3.89% -------- --------- Total Interest-Bearing Deposits $83,461 $2,686 3.22% Fed funds purchased 739 35 4.74% Federal Home Loan Bank advances 41 2 4.88% -------- --------- Total Interest-Bearing Liabilities $84,241 $2,723 3.23% -------- --------- Other Liabilities $882 -------- Stockholders' Equity $11,440 -------- Total Liabilities & Shareholders' Equity $109,245 ======== Net interest spread 4.74% Interest expense as a percent of average earning assets 2.71% Net interest margin 5.26%
(1) Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. Net Interest Income and Net Interest Margin Net interest income, the difference between total interest income and total interest expense, is the Company's primary source of earnings. Net interest income increased by $0.35 million or 6.8% from $5.14 million in 1995 to $5.49 million in 1996. The amount of net interest income is derived from the volume of earning assets, the rates earned on those assets, and the cost of funds. The difference between rates on earning assets and the cost of funds is measured by the net interest margin, which decreased from 5.04% in 1995 to 4.93% in 1996. The earning assets yielded 8.37% on a fully taxable equivalent basis in 1996 as compared to 8.48% in 1995, a decrease of 0.11%. The average rate on total loans increased from 9.04% in 1995 to 9.05% in 1996. The total income earned on loans increased by $0.28 million or 3.7% due to the increase in average balances of total loans. Income on investment securities increased from $1.27 million in 1995 to $1.68 million in 1996, an increase of $0.41 million or 32.3%. The average balances increased by $6.6 million or 32.9% on investment securities, while the average rate was reduced .02% from 6.29% in 1995 to 6.27% in 1996. Interest expense increased in 1996 as compared to 1995. Average balances on interest-bearing liabilities increased by $8.8 million or 10.0% from $87.8 million in 1995 to $96.6 million in 1996 and the interest expense increased $0.33 million. The average rate decreased on interest-bearing deposits .03% from 4.08% in 1995 to 4.05% in 1996. Average time deposits increased by $4.9 million or 10.9% from $44.5 million in 1995 to $49.3 million in 1996. The average rate on time deposits increased from 5.20% in 1995 to 5.38% in 1996, an increase of 0.18%. Interest expense as a percent of average earning assets decreased from 3.44% in 1995 to 3.43% in 1996. RATE/VOLUME VARIANCE (In Thousands)
1996 Compared to 1995 1995 Compared to 1994 --------------------------------------- -------------------------------------- Due to Due to Due to Due to Change Volume Rate Change Volume Rate ---------- ---------- ----------- ---------- ---------- ---------- INTEREST INCOME: Loans; taxable $ 253 $ 253 $ 0 $ 937 $ 647 $ 290 Loans; tax-exempt 22 7 15 21 3 18 Securities; taxable 413 394 19 (68) (91) 23 Securities; tax-exempt (1) (60) 59 (18) (14) (4) Federal funds sold (4) (2) (2) (39) (39) 0 ---------- ---------- ----------- ----------- ---------- ---------- Total Interest Income $ 683 $ 592 $ 91 $ 833 $ 506 $ 327 ---------- ---------- ----------- ----------- ---------- ---------- INTEREST EXPENSE: Savings and NOW accounts $ (6) $ (101) $ 95 $ 5 $ 11 $ (6) Money market accounts (7) 19 (26) (113) (229) 116 Time deposits 341 259 82 948 418 530 Federal funds purchased 1 4 (3) 21 21 0 Federal Home Loan Bank advances (3) (3) 0 1 1 0 ---------- ---------- ----------- ----------- ---------- ---------- Total Interest Expense $ 326 $ 178 $ 148 $ 862 $ 222 $ 640 ---------- ---------- ----------- ----------- ---------- ---------- Net Interest Income $ 357 $ 414 ($ 57) ($ 29) $ 284 ($ 313) ========== ========== =========== =========== ========== ==========
Provision and Allowance for Loan Losses The provision for loan losses is based upon management's estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the loan portfolio. The ratio of net charge-offs to average loans was 0.24% in 1996 compared to 0.26% and 0.18% during 1995 and 1994, respectively. The provision for loan losses increased $50,000 or 20.8% in 1996 and $37,000 or 18.2% in 1995, while the allowance for loan losses as a percentage of loans increased from 0.96% at the end of 1995 to 1.04% in 1996. Charged-off loans decreased $7,000 or 2.6% and recoveries increased $9,000 or 16.7% in 1996 compared to 1995. Net charge-offs decreased by $16,000 or 7.3% from 1995 to 1996. The coverage for the allowance for loan losses over non-performing assets and loans 90 days past due and still accruing interest has increased from 38.1% in 1995 to 90.1% in 1996. Loans past due greater than 90 days decreased during the year. At year end 1996, loans past due greater than 90 days was 1.10% of total loans, net unearned discount. The amount of loans past due greater than 90 days decreased from $1,694,000 in 1995 to $967,000 in 1996. Of the $967,000, 51.2% are secured by real estate and management would expect only immaterial losses from the balance of the past due loans. The allowance for loan losses as of year end covered net charge-offs 4.48 times in 1996, 3.77 times in 1995, and 5.79 times in 1994. The Company reviews the adequacy of the allowance for loan losses monthly and utilizes the results of these evaluations to establish the provision for loan losses. The allowance is maintained at a level believed by management to absorb potential losses in the loan portfolio. The methodology considers specific identifications, specific and estimate pools, trends in delinquencies, local and regional economic trends, concentrations, commitments, off balance sheet exposure and other factors. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (In Thousands)
Year Ended December 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- Allowance for Loan Losses, January 1 $828 $808 $744 $761 $682 ---------- ---------- ---------- ---------- ---------- Loans Charged-Off: Commercial, financial and agricultural $0 $144 $52 $75 $113 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 0 0 0 48 0 Consumer 267 130 122 151 193 ---------- ---------- ---------- ---------- ---------- Total Loans Charged-Off $267 $274 $174 $274 $306 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial, financial and agricultural $6 $10 $11 $25 $12 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 0 0 0 9 0 Consumer 57 44 24 60 73 ---------- ---------- ---------- ---------- ---------- Total Recoveries $63 $54 $35 $94 $85 ---------- ---------- ---------- ---------- ---------- Net Charge-Offs $204 $220 $139 $180 $221 ---------- ---------- ---------- ---------- ---------- Provision for Loan Losses $290 $240 $203 $163 $300 ---------- ---------- ---------- ---------- ---------- Allowance for Loan Losses, December 31 $914 $828 $808 $744 $761 ========== ========== ========== ========== ========== Ratio of Net Charge-Offs to Average Loans: 0.24% 0.26% 0.18% 0.25% 0.33% ========== ========== ========== ========== ==========
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (In Thousands)
1996 1995 1994 ---------------------------- ----------------------------- ---------------------------- Allowance Percentage Allowance Percentage Allowance Percentage for Loan of Total for Loan of Total for Loan of Total Losses Loans Losses Loans Losses Loans ------------ ------------ ------------- ------------- ------------ ------------ Commercial, financial, and agricultural $365 10.6% $323 10.8% $302 11.5% Real Estate: mortgage 75 68.4% 55 65.1% 53 66.2% Consumer 474 21.0% 450 24.1% 453 22.3% ------------ ------------- ------------ $914 $828 $808 ============ ============= ============
Other Income and Expenses Total other income increased $212,802 or 26.2% from 1995 to 1996 and $221,510 or 37.5% from 1994 to 1995. Total other expenses increased $402,232 or 10.1% from 1995 to 1996 and $349,476 or 9.6% from 1994 to 1995. The efficiency ratio of the Company, a measure of its performance based upon the relationship between non-interest expense and operating income, was 62.9% in 1994, 65.9% in 1995 and 65.8% in 1996. With the acquisition of the Stephens City branch, management is pleased that the efficiency ratio decreased slightly during 1996. Trust Department income increased $54,269 or 37.3% in 1996 over 1995 and increased $11,307 or 8.4% in 1995 over 1994. The increase in 1996 can be attributed to restructuring the trust services fee schedule and overall growth of the Trust Department. The increase in 1995 can be attributed to growth in the number of accounts administered by the Trust Department and fees earned on the administration of estates which vary in number from year to year. Trust Department income is expected to increase in 1997 due to growth in the number of accounts and total assets administered by the Trust Department. Service charges on deposit accounts increased $148,354 or 39.7% in 1996 over 1995 and increased $72,929 or 24.2% in 1995 over 1994. Increases in service charges on deposit accounts are expected to continue in the future due to growth in the number of deposit accounts at the Bank and enhancements to the deposit products currently being offered to our customers. Other service charges and fees increased $14,379 or 7.9% and $95,235 or 109.9% in 1996 and 1995 , respectively. The amount of other service charges and fees for 1997 is expected to increase due to the imposition of non-customer fees on certain transactions and the establishment of Eagle Investment Services.. The Company had Income on equity investment of $595 during 1996 and a Loss on equity investment of $18,689 during 1995. These amounts represent the Company's share of the operating income or loss on its investment in the Johnson-Williams Limited Partnership. This partnership is a low- to moderate-income housing development for the elderly. The improved financial performance in 1996 can be attributed to the facility remaining fully leased during the year. Due to the status of the partnership, the Company receives substantial income tax credits on the investment. The investment in this project is viewed as a long term benefit to the Company both financially and for the good of the community. Other operating income decreased $23,484 or 18.2% in 1996 and increased $23,890 or 22.6% in 1995. Fluctuations in other operating income can be attributed to fees received on the usage volume of the Bank's ATM's and credit cards. Other operating income should increase in 1997 over 1996 due to the installation of additional ATM's and enhancements of the credit card products. Salaries and wages increased $240,437 or 16.1% in 1996 and $132,284 or 9.7% in 1995. The increase in 1996 reflects the hiring of additional personnel for the Stephens City branch and the increase in 1995 reflects the hiring of additional personnel for the Senseny Road branch. The amount of salaries and wages for 1997 should increase slightly over 1996. Pension and other employee benefits increased $35,378 or 8.0% in 1996 and decreased $59,680 or 11.9% in 1995. The 1996 increase can be attributed to the cost of benefits for personnel hired during 1995 and 1996. The 1995 decrease can be attributed to a lack of contributions to the Employee Stock Ownership Plan (E.S.O.P.). The 1997 amount of pension and other employee benefits should increase slightly over 1996. See Notes 8 and 9 to the Consolidated Financial Statements as of December 31, 1996 for a discussion of the defined benefit pension plan and employee benefits. Occupancy expenses increased $82,609 or 34.2% in 1996 and $4,551 or 1.9% in 1995. Equipment expenses increased $94,360 or 25.0% and $76,544 or 25.4% in 1996 and 1995, respectively. The increases in 1996 can be attributed to the opening and operation of the Stephens City branch and upgrading the Bank's computer system. The increase in 1995 can be attributed to the opening and operation of the Senseny Road branch. The 1997 amounts are expected to increase slightly over 1996 due to the investment in additional computer equipment. The FDIC assessment decreased $109,904 or 98.2% and $103,455 or 48.0% in 1996 and 1995, respectively. The dramatic decreases in 1996 and 1995 are due to the insurance fund covering banks once again having sufficient reserves. The amount of FDIC assessment will increase slightly during 1997 due to growth in deposits. Stationary and supplies decreased $4,292 or 2.8% in 1996 and increased $41,937 or 37.2% in 1995. The slight decrease in 1996 is a result of an effort to cut supply costs despite additional purchases necessary to open and operate the Stephens City branch. The significant increase during 1995 can be attributed to opening and operating the Senseny Road branch. Stationary and supplies expense is not expected to change significantly in 1997. Postage expense increased $1,471 or 1.2% and $25,043 or 25.0% during 1996 and 1995, respectively. These increases can be attributed to an ever increasing volume of accounts and transactions for which we distribute periodic correspondence, however, the amount of increase for 1996 was greatly reduced by no longer mailing correspondence which is not required by federal regulations. The amount of postage expense is not expected to increase significantly during 1997. Credit card expense decreased $5,367 or 5.4% during 1996 and increased $5,272 or 5.6% during 1995. Fluctuations in credit card expense are attributable to changes in the number of accounts and volume of transactions for which we are billed by our credit card server. The amount of credit card expense is expected to increase slightly during 1997. Bank franchise tax decreased $11,381 or 9.1% during 1996 and increased $63,626 or 103.9% during 1995. The significant increase in 1995 is due to an amendment of the returns for the previous three years which resulted in an underpayment of $36,191. Without the amendment payment during 1995, the amount of 1996 franchise tax increased $24,810 or 28.0%. This increase was expected due to growth of the Bank's capital. The 1997 amount of bank franchise tax is expected to be slightly greater than the 1996 amount. ATM network fees increased $39,662 or 44.2% during 1996 and $25,597 or 39.9% during 1995. These increases in ATM network fees can be attributed to an increased number of ATM transactions being completed at the Bank's growing number of ATM's. This amount is expected to increase during 1997 due to the installation of additional ATM's. Other operating expenses increased $39,259 or 5.5% in 1996 and $137,757 or 23.8% in 1995. The increase in 1996 can be attributed to the amortization of intangible assets acquired during the acquisition of the Stephens City branch. The increase in 1995 can be attributed to the use of an outside trust processor and service fees paid on Eagle Checking accounts. The amount of other operating expenses should not increase significantly during 1997. Income Tax Expense The Company adopted FASB Statement No. 109, "Accounting for Income Taxes" on a prospective basis on January 1, 1993. The notes to the financial statements discuss this method of accounting. The cumulative effect from the change in accounting principle was deemed to be immaterial in determining net income for 1994. Income tax expense was $537,304, $477,237 and $573,407 for 1996, 1995 and 1994, respectively. The average effective rate for the three year period is 28.76% and that trend is expected to continue. Balance Sheet The Company uses its funds primarily to support lending activities from which it derives the greatest amount of income. The objective is to invest 70% to 85% of total deposits in loans. With total loans increasing 2.3% and total deposits increasing by 5.2%, the ratio of loans to deposits remained steady. The ratio was 79.1% in 1996 and 81.3% in 1995. The majority of the remaining funds are invested in securities. In order to accommodate daily fluctuations in deposit and loan demand, any additional funds are sold overnight as federal funds. The Company's focus is upon safety and soundness, liquidity and meeting the banking needs within our community as we manage our balance sheet. Loan Portfolio Loans, net of unearned income increased $2.0 million or 2.3% in 1996 and $5.2 million or 6.5% in 1995. Net loans are expected to increase slightly during 1997. The loan portfolio consists primarily of loans for owner-occupied single family dwellings, loans to acquire consumer products such as automobiles, and loans to small farms and businesses. Loans secured by real estate were $60.1 million or 67.5% of total loans in 1996 and $55.9 million or 63.8% of total loans in 1995, which represents an increase of $4.2 million or 7.5% during the year. These loans are well-secured and based on conservative appraisals in a stable market. The Company generally does not make real estate loans outside its primary market area which consists of Clarke and Frederick Counties and the City of Winchester, all of which are located in the Northern Shenandoah Valley in the state of Virginia. Loans to individuals are the second largest element of the loan portfolio. Total loans to individuals were $19.6 million or 22.0% of total loans in 1996 and $22.5 million or 25.7% of total loans in 1995, which represents a decrease of $2.9 million or 12.8% during the year. These loans are expected to increase steadily throughout 1997. Commercial and agricultural loans were $7.6 million or 8.5% of total loans in 1996 and $8.0 million or 9.1% of total loans in 1995, which represents a decrease of $0.4 million or 5.0% during 1996. The amount of commercial and agricultural loans is not expected to change significantly during 1997. LOAN PORTFOLIO (In Thousands) The following table sets forth the amounts of specified categories of loans at the date indicated.
December 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------- Loans secured by real estate: Construction and land development $1,434 $0 $0 $0 $0 Secured by farmland 4,013 4,112 3,888 3,410 3,157 Secured by 1-4 family residential 45,156 41,411 35,803 33,363 30,210 Nonfarm, nonresidential loans 9,518 10,372 13,698 13,297 12,994 Loans to farmers (except secured by real estate) 1,446 1,605 1,777 1,462 1,596 Commercial and industrial loans (except those secured by real estate) 6,145 6,349 6,247 5,563 5,078 Loans to individuals (except those secured by real estate) 19,633 22,508 19,547 16,186 17,302 All other loans 1,732 1,239 1,239 1,382 1,327 ------------ ------------ ------------ ------------ ------------- Total loans 89,077 87,596 82,199 74,663 71,664 Less: Unearned discount (1,207) (1,725) (1,565) (1,019) (929) ------------ ------------ ------------ ------------ ------------- Total Loans, Net $87,870 $85,871 $80,634 $73,644 $70,735 ============ ============ ============ ============ ============= The following table sets forth maturities of loans at December 31, 1996. After 1 Year WIthin Within After 1 Year 5 Years 5 Years Total ------------ ------------ ------------ ------------- Loans secured by real estate $17,994 $39,634 $2,493 $60,121 Agricultural production loans 732 714 ----- 1,446 Commercial and industrial loans 3,436 2,645 64 6,145 Consumer loans 3,254 14,319 853 18,426 All other loans 1,362 370 ----- 1,732 ============ ============ ============ ============= $26,778 $57,682 $3,410 $87,870 ============ ============ ============ ============= For maturities over one year: Interest rates - floating $1,732 $2,270 $4,002 Interest rates - fixed 55,950 1,140 57,090 ============ ============ ============= $57,682 $3,410 $61,092 ============ ============ =============
Risk Elements and Non-Performing Assets The Company continues to minimize its risk and enhance its profitability by focusing on providing community based financing and maintaining policies and procedures ensuring safe and sound banking practices. Non-performing assets consist of nonaccrual loans, restructured loans, and other real estate owned (foreclosed properties). The total nonperforming assets and loans that are 90+ days past due and accruing interest was $1.74 million on December 31, 1995, and $1.01 million on December 31, 1996, a decrease of $0.73 million or 42.0%. On January 1, 1996, the Company adopted FASB No. 114, "Accounting by Creditors for Impairment of a Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Statement 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. As of December 31, 1995, the Company had impaired loans for which an allowance was provided amounting to $430,124. There was no interest income recognized on those loans in 1995. There were no impaired loans as of December 31, 1996. The loans past due 90+ days and still accruing interest are primarily well-secured and in the process of collection and therefore, are not classified as nonaccrual. Any loan over 90 days past due without being in the process of collection or where the collection of its principal or interest is doubtful would be placed on nonaccrual status. Any accrued interest would then be reversed and future accruals would be discontinued with interest income being recognized on a cash basis. The ratio of non-performing assets and other real estate owned to loans is expected to remain at its low level relative to the Company's peers and management expects this ratio to decrease in 1997. This expectation is based on the potential problem loans on December 31, 1996. The amount of classified loans has increased by $1.34 million from $1.29 million in 1995 to $2.63 million during 1996. These loans are primarily well-secured and in the process of collection and the allowance for loan losses includes $252,539 in specific allocations for these loans as well as percentage allocations for classified assets without specific allocations. NON-PERFORMING ASSETS (In Thousands)
December 31, ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------ ------------ ------------ ------------ Nonaccrual loans $ 0 $ 430 $ 0 $ 30 $ 590 Restructured loans 0 0 0 0 0 Other real estate owned 47 47 47 150 0 ------------- ------------ ------------ ------------ ------------ Total Non-Performing Assets $ 47 $ 477 $ 47 $ 180 $ 590 ============= ============ ============ ============ ============ Loans past due 90 days accruing interest $967 $1,694 $683 $219 $277 ============= ============ ============ ============ ============ Allowance for loan losses to period end loans 1.04% 0.96% 1.00% 1.01% 1.07% Non-performing assets to period end loans and other real estate owned 0.05% 0.52% 0.06% 0.24% 0.83%
Securities The book value of the securities portfolio as of December 31, 1996 was $26.1 million, compared to $26.6 million as of December 31, 1995. Securities decreased $0.5 million or 1.9% in 1996 from 1995 and increased $2.8 million or 11.8% in 1995 over 1994. The decrease from 1995 to 1996 is primarily due to a $0.5 million or 7.4% decrease of investment in obligations of U.S. government corporations and agencies and a $0.6 million or 40.2% decrease of investment in U.S. Treasury securities along with a $0.8 million or 5.4% increase of investment in mortgage-backed securities. Recent investment security purchases have been in mortgage-backed securities. These securities provide a slightly higher yield than other types of securities in the portfolio and they provide monthly principle curtailments which are used to fund the loan portfolio. Due to the adoption of FASB No. 115, "Accounting For Certain Investments in Debt and Equity Securities" as of January 1, 1994, the securities portfolio was classified into one of two categories: securities held to maturity and securities available for sale. Securities are classified as held to maturity when the Company has the intent and ability at the time of purchase to hold the securities until maturity. Securities held to maturity are disclosed at cost adjusted for amortization of premiums and accretion of discounts. Securities with a book value of $24.3 million and a fair value of $24.0 million were classified as held to maturity as of December 31, 1996. Securities with a book value of $23.3 million and a fair value of $23.3 million were classified as held to maturity as of December 31, 1995. This represents a $1.0 million or 4.5% increase in book value and a $0.7 million or 3.0% increase in fair value in 1996 over 1995. Securities are classified as available for sale when the Company intends to hold them for an indefinite period of time. These securities may be sold due to: increased loan demand, liquidity needs, changes in market interest rates, regulatory capital requirements, or other related factors. Available for sale securities are disclosed at fair value. Unrealized gains or losses are reported as increases or decreases in stockholders' equity, net of the related deferred tax effect. Securities with a fair value of $1.7 million and a related unrealized after tax loss of $5,030 were classified as available for sale as of December 31, 1996. Securities with a fair value of $3.3 million and a related unrealized after tax loss of $12,606 were classified as available for sale as of December 31, 1995. This represents a $1.6 million or 47.6% decrease in fair value and a $7,576 or 60.1% decrease in unrealized after tax loss in 1996 compared to 1995. See Note 1 to the Consolidated Financial Statements as of December 31, 1996 for a discussion of the classifications set forth under FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities." See Note 2 to the Consolidated Financial Statements as of December 31, 1996 for a composition of the security classifications and an analysis of gross unrealized gains and losses in the securities portfolio. Deposits Total deposits increased $5.5 million or 5.2% from $105.6 million in 1995 to $111.1 million in 1996. Noninterest bearing demand deposits increased $3.2 million or 26.8% in 1996 after a $1.1 million or 8.4% decrease in 1995 from 1994. Interest checking increased $2.7 million or 19.1% from $14.1 million in 1995 to $16.8 million in 1996. The increases in demand deposits and interest checking can be attributed to the acquisition and operation of the Stephens City branch. Money market accounts increased $0.3 million or 1.4% from $16.9 million in 1995 to $17.2 million in 1996. Certificates of deposit decreased $1.8 million or 3.5% from $50.3 million in 1995 to $48.5 million in 1996. Total interest bearing deposits increased $2.3 million or 2.4% from $93.6 million in 1995 to $95.9 million in 1996. Total deposits are expected to grow during 1997 due to enhancements of the products currently being offered and increased marketing efforts. The Company will continue funding assets with deposit liability accounts and focus upon core deposit growth as its primary source of liquidity and stability. Core deposits consist of demand deposits, interest checking accounts, money market accounts, savings accounts, and time deposits of less than $100,000. Certificates of deposit of $100,000 or more totalled $11.3 million or 10.2% of total deposits in 1996 as compared to $11.2 million or 10.6% of total deposits in 1995. The Company neither purchases brokered deposits nor solicits deposits from sources outside of its primary market area. Stockholders' Equity The Company continues to be a strongly capitalized financial institution. Total stockholders' equity on December 31, 1996 was $14.2 million, reflecting a percentage of total assets of 11.2% compared to $13.1 million and 10.8% at year-end 1995. Stockholders' equity per share increased $0.70 or 7.4% from $9.44 per share in 1995, as restated for the 2 for 1 stock split on December 31, 1996, to $10.14 per share in 1996. The return on average stockholders' equity was 9.58% in 1996, down from 9.94% in 1995. During 1996 the Company paid $0.30 per share in dividends as compared to $0.28 per share in 1995, an increase of 7.1% The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock. The Dividend Investment Plan had 42.3% and 42.2% of total outstanding shares at December 31, 1996 and 1995, respectively. Federal regulatory risk-based capital guidelines were fully phased-in on December 31, 1992. These guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk. Tier I capital consists of total stockholders' equity. Tier II capital is comprised of Tier I capital plus the allowable portion of the allowance for loan losses. Financial institutions must maintain a Tier I capital ratio of at least 4% and a Tier II capital ratio of at least 8%. Additionally, a 4% minimum leverage ratio of stockholders' equity to average assets must be maintained. On December 31, 1996, the Company's Tier I capital ratio was 16.17% compared to 15.43% in 1995, the Tier II capital ratio was 17.27% compared to 16.40% in 1995 and the leverage ratio was 10.90% compared to 11.61% in 1995. See Note 12 to the Consolidated Financial Statements as of December 31, 1996 for additional discussion and analysis of regulatory capital requirements. Risk Based Capital Ratios (In Thousands)
December 31, ----------------------------------------------- 1996 1995 --------------- ---------------- Tier 1 Capital: Stockholders' Equity $ 13,540 $ 13,101 Tier 2 Capital: Allowable Allowance for Loan Losses 914 828 Total Capital: $ 14,454 $ 13,929 Risk Adjusted Assets: $ 83,712 $ 84,922 Risk Based Capital Ratios: Tier 1 to Risk Adjusted Assets 16.17% 15.43% Total Capital to Risk Adjusted Assets 17.27% 16.40%
Liquidity and Interest Rate Sensitivity Asset and liability management assures liquidity and maintains the balance between rate sensitive assets and liabilities. Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or through the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At year end 1996, liquid assets totaled $34.5 million which represents 30.8% of total deposits, federal funds purchased and other liabilities. The Company minimizes liquidity demand by relying on core deposits which comprise 89.8% of total deposits. With an average remaining life of 4.6 years, the securities portfolio provides a constant source of funds through paydowns and maturities. As additional sources of liquidity, the Company maintains short-term borrowing arrangements, namely federal funds lines, with larger financial institutions. Finally, the Bank's membership in the Federal Home Loan Bank provides a source of borrowings with a variety of maturities. The Company's senior management monitors the liquidity position regularly and formulates a strategy to maintain an interest sensitive position that maximizes the net interest margin. Interest rate sensitivity management involves stabilizing the net interest margin to assure net income growth through various interest rate cycles and fluctuations. The interest rate sensitivity analysis reflects the earlier of the maturity or repricing date for interest sensitive assets and liabilities as of December 31, 1996. The mismatching of the maturity or repricing dates of interest sensitive assets and liabilities creates "gaps" which measure interest rate sensitivity. At year end the Company had a negative cumulative twelve month gap of $41.4 million or 35.9% of total interest earning assets. A negative gap normally impacts earnings favorably when interest rates decline and adversely when interest rates rise. A weakness of the interest rate sensitivity analysis is that it only provides a general indication of interest sensitivity at a specific point in time. The Company's goal is to manage interest rate exposure in order to hedge against interest rate fluctuations. Senior management and the directorate monitor the interest rate gap regularly and implement strategies such as maintaining a strong balance sheet with core deposit growth and practicing conservative banking policies to accomplish this goal. Interest Rate Sensitivity Schedule (In Thousands)
December 31, 1996 ----------------------------------------------------------- Mature or Reprice Within ----------------------------------------------------------- Over Three Over Three Months One Year Months Through To Over Five Or Less Twelve Months Five Years Years Total ------- ------------- ---------- ----- ----- INTEREST-EARNING ASSETS: Loans (net of unearned income) $ 16,771 $ 14,029 $ 55,930 $ 1,140 $ 87,870 Securities and other interest- earning assets 1,503 3,041 12,343 9,203 26,090 Federal funds sold 1,553 0 0 0 1,553 --------- -------- ---------- --------- --------- Total interest-earning assets $ 19,827 $ 17,070 $ 68,273 $ 10,343 $ 115,513 --------- -------- ---------- --------- --------- INTEREST-BEARING LIABILITIES: Certificates of deposit: $100,000 and more $ 5,170 $3,970 $ 2,203 $ 0 $ 11,343 less than $100,000 6,425 15,409 15,370 0 37,204 Other deposits 47,191 175 0 0 47,366 --------- -------- ---------- --------- --------- Total interest-bearing liabilities $ 58,786 $ 19,554 $ 17,573 $ 0 $ 95,913 --------- -------- ---------- --------- --------- Interest sensitivity gap: Asset sensitive (Liability sensitive) ($ 38,959) ($ 2,484 $ 50,700 $ 10,343 $ 19,600 ========= ======== ========== ========= ========= Cumulative interest rate gap: ($ 38,959) ($ 41,443 $ 9,257 $ 19,600 ========= ======== ========== ========= Ratio of cumulative gap to total interest earning assets: -33.73% -35.88 8.01% 16.97% ========= ======== ========== =========
EX-22 5 EXHIBIT 22 Exhibit 22 The only subsidiary of the Registrant is the Bank of Clarke County, a Virginia banking corporation, located in Berryville, Clarke County, Virginia. It is owned 100% by the Registrant. EX-27 6 EXHIBIT 27
9 1,000 12-MOS DEC-31-1996 DEC-31-1996 4,409 0 1,553 0 1,744 24,345 24,042 87,870 914 126,242 111,088 0 957 0 5,446 0 0 8,751 126,242 7,751 1,601 51 9,403 3,854 3,911 5,492 290 0 4,378 1,849 1,849 0 0 1,311 0.94 0.94 4.82 0 967 0 472 828 267 63 914 253 0 661
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