-----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, RscekXLeyL5kemCB9gZFEFX12M2ZtYMk6LRbKQdCrscu8zBiqhSZz/ySq5mlx4lk TUfuo6d/Ab2VxYcl8Xw45A== 0000916641-98-000353.txt : 19980331 0000916641-98-000353.hdr.sgml : 19980331 ACCESSION NUMBER: 0000916641-98-000353 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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-K SEC ACT: SEC FILE NUMBER: 000-20146 FILM NUMBER: 98579261 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-K 1 EAGLE FINANCIAL 10-K UNITED STATES 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, 1997 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.[ ] PAGE 1 OF 68 PAGES. Exhibit index on page 39 . ------ ------ ------ The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 20, 1998 was $31,787,400. The aggregate market value of the stock was computed using a market rate of $25.00 per share. The number of shares of Registrant's Common Stock outstanding as of March 20, 1998 was 1,410,432. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's 1997 Annual Report to Shareholders are incorporated by reference in Parts I, II, and IV of this Form 10-K. (2) Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. 1 EAGLE FINANCIAL SERVICES, INC. INDEX TO FORM 10-K Page ------ PART I Item 1. Business.................................................. 3 Item 2. Properties............................................... 17 Item 3. Legal Proceedings........................................ 17 Item 4. Submission of Matters to a Vote of Security Holders...... 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 18 Item 6. Selected Financial Data................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 20 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 34 Item 8. Financial Statements and Supplementary Data.............. 35 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 35 PART III Item 10. Directors and Executive Officers of the Registrant....... 36 Item 11. Executive Compensation.................................. 36 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 36 Item 13. Certain Relationships and Related Transactions.......... 36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 37 2 PART I Item 1. Business. General 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. During 1997 the Bank formed Eagle Investment Services, a division of the Bank which sells non-deposit investment products through a third party provider, UVEST Investment Services. During 1997 the Bank also formed Eagle Home Funding, a wholly owned subsidiary of the Bank, which offers secondary market mortgage products. 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. Eagle Home Funding is located at 615 Jubal Early Drive in Winchester, in the same retail center as the Jubal Early branch. The Bank had twenty officers, 55 other full-time and 19 part-time employees as of December 31, 1997. None of the Bank's employees are represented by a union or covered under a collective bargaining agreement. Employee relations have been good. The Bank's loan portfolio is primarily comprised of real estate loans, particularly those secured by 1-4 family residential properties. The Bank also offers many other types of loans including consumer loans, commercial real estate loans, commercial and industrial loans (not secured by real estate), agricultural production loans, and construction loans. See the respective sections in Items 6, 7, and 8 for additional discussion and analysis of the Bank's loan portfolio. 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. 3 Statistical Information The following statistical information is furnished pursuant to the requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the Securities Act of 1933.
INDEX Table 1 Average Balances, Income/Expenses and Average Rates Table 2 Rate/Volume Variance Table 3 Analysis of Allowance for Loans Losses Table 4 Allocation of Allowance for Loan Losses Table 5 Loan Portfolio Table 6 Maturity Schedule of Selected Loans Table 7 Non-Performing Assets Table 8 Maturity Distribution and Yields of Securities Table 9 Deposits and Rates Paid Table 10 Maturities of Certificates of Deposit of $100,000 and More Table 11 Risk Based Capital Ratios Table 12 Interest Rate Sensitivity Schedule
4 Table 1 - Average Balances, Income/Expenses and Average Rates (In Thousands) (Fully Taxable Equivalent)
1997 1996 ---------------------------------- --------------------------------- Average Income/ Average Average Income/ Average Balances Expense Rate Balances Expense Rate --------- --------- --------- --------- --------- -------- ASSETS: Loans Taxable $81,525 $7,184 8.81% $84,772 $7,660 9.04% Tax-exempt (1) 1,389 107 7.70% 1,410 138 9.79% Non-accrual 495 0 0% 0 0 0% --------- --------- --------- --------- Total Loans $83,409 $7,291 8.74% $86,182 $7,798 9.05% --------- --------- --------- --------- Securities Taxable $28,671 $1,809 6.13% $23,528 $1,443 6.13% Tax-Exempt (1) 3,106 219 7.05% 3,289 239 7.27% --------- --------- --------- --------- Total Securities $31,777 $2,028 6.38% $26,817 $1,682 6.27% --------- --------- --------- --------- Federal funds sold $1,793 $101 5.63% $918 $51 5.56% --------- --------- --------- ---------- Total Earning Assets $116,979 $9,420 8.05% $113,917 $9,531 8.37% ========= ========= Less: Reserve for loan losses (817) (853) Cash and due from banks 4,643 4,197 Bank premises and equipment, net 4,122 4,097 Other assets 3,209 2,858 --------- --------- Total Assets $128,136 $124,216 ========= ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT: Deposits Demand deposits $15,846 $ 0 $12,900 $ 0 --------- --------- --------- --------- NOW accounts $15,062 $309 2.05% $15,262 $321 2.10% Money market accounts 16,709 520 3.11% 17,393 535 3.08% Savings accounts 13,956 341 2.44% 13,594 342 2.52% Time deposits 50,655 2,729 5.39% 49,349 2,656 5.38% --------- --------- --------- --------- Total Interest- Bearing Deposits $96,382 $3,899 4.05% $95,598 $3,854 4.03% Fed funds purchased 115 5 4.35% 974 57 5.85% Federal Home Loan Bank advances 0 0 0% 0 0 0% --------- --------- --------- --------- Total Interest- Bearing Liabilities $96,497 $3,904 4.05% $96,572 $3,911 4.05% --------- --------- --------- --------- Other Liabilities $1,143 $1,053 --------- --------- Stockholders' Equity $14,650 $13,691 --------- --------- Total Liabilities & Shareholders' Equity $128,136 $124,216 ========= ========= Net interest spread 4.00% 4.32% Interest expense as a percent of average earning assets 3.34% 3.43% Net interest margin 4.72% 4.93% (1) Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%.
Average Balances, Income/Expenses and Average Rates (continued) (In Thousands) (Fully Taxable Equivalent) 1995 --------------------------------- Average Income/ Average Balances Expense Rate --------- --------- -------- ASSETS: Loans Taxable $81,855 $7,407 9.05% Tax-exempt (1) 1,334 116 8.70% Non-accrual 36 0 0% --------- --------- Total Loans $83,225 $7,523 9.04% --------- --------- Securities Taxable $17,102 $1,030 6.02% Tax-Exempt (1) 3,073 240 7.81% --------- --------- Total Securities $20,175 $1,270 6.29% --------- --------- Federal funds sold $951 $55 5.78% --------- ---------- Total Earning Assets $104,351 $8,848 8.48% ========= Less: Reserve for loan losses (847) Cash and due from banks 3,849 Bank premises and equipment, net 3,295 Other assets 2,228 --------- Total Assets $112,876 ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT: Deposits Demand deposits $11,548 $ 0 --------- --------- NOW accounts $12,761 $318 2.49% Money market accounts 16,932 542 3.20% Savings accounts 12,699 351 2.76% Time deposits 44,496 2,315 5.20% --------- --------- Total Interest- Bearing Deposits $86,888 $3,526 4.06% Fed funds purchased 908 56 6.17% Federal Home Loan Bank advances 25 3 12.00% --------- --------- Total Interest- Bearing Liabilities $87,821 $3,585 4.08% --------- --------- Other Liabilities $820 --------- Stockholders' Equity $12,686 --------- Total Liabilities & Shareholders' Equity $112,875 ========= Net interest spread 4.40% Interest expense as a percent of average earning assets 3.44% Net interest margin 5.04% (1) Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%.
5 Table 2 - Rate/Volume Variance (In Thousands)
1997 Compared to 1996 1996 Compared to 1995 --------------------------------------------------------------------- Due to Due to Due to Due to Change Volume Rate Change Volume Rate ---------- -------- ------- --------- ------- --------- INTEREST INCOME: Loans; taxable ($476) ($286) ($190) $253 $253 $0 Loans; tax-exempt (31) (2) (29) 22 7 15 Securities; taxable 366 323 43 413 394 19 Securities; tax-exempt (20) (13) (7) (1) (60) 59 Federal funds sold 50 49 1 (4) (2) (2) ---------- -------- ------- --------- ------- --------- Total Interest Income ($111) $71 ($182) $683 $592 $91 ---------- -------- ------- --------- ------- --------- INTEREST EXPENSE: NOW accounts ($12) ($4) ($8) $3 $15 ($12) Money market accounts (15) (20) 5 (7) 19 (26) Savings accounts (1) 5 (6) (9) 38 (47) Time deposits 73 68 5 341 259 82 Federal funds purchased (52) (40) (12) 1 4 (3) Federal Home Loan Bank Advances 0 0 0 (3) (3) 0 ---------- -------- ------- --------- ------- --------- Total Interest Expense ($7) $9 ($16) $326 $332 ($6) ---------- -------- ------- --------- ------- --------- Net Interest Income ($104) $62 ($166) $357 $260 $97 ---------- -------- ------- --------- ------- ---------
6 Table 3 - Analysis of Allowance for Loans Losses (In Thousands)
Year Ended December 31, ------------------------------------------------------ 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Allowance for Loan Losses, January 1 $914 $828 $808 $744 $761 Loans Charged-Off: Commercial, financial and agricultural $4 $0 $144 $52 $75 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 42 0 0 0 48 Consumer 640 267 130 122 151 ------ ------ ------ ------ ------ Total Loans Charged-Off $686 $267 $274 $174 $274 ------ ------ ------ ------ ------ Recoveries: Commercial, financial and agricultural $1 $6 $10 $11 $25 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 4 0 0 0 9 Consumer 39 57 44 24 60 ------ ------ ------ ------ ------ Total Recoveries $44 $63 $54 $35 $94 ------ ------ ------ ------ ------ Net Charge-Offs $642 $204 $220 $139 $180 ------ ------ ------ ------ ------ Provision for Loan Losses $477 $290 $240 $203 $163 ------ ------ ------ ------ ------ Allowance for Loan Losses, December 31 $749 $914 $828 $808 $744 ====== ====== ====== ====== ====== Ratio of Net Charge-Offs to Average Loans: 0.77% 0.24% 0.26% 0.18% 0.25% ====== ====== ====== ====== ======
7 Table 4 - Allocation of Allowance for Loan Losses (In Thousands)
1997 1996 1995 --------------------- --------------------- --------------------- 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 $323 8.8% $365 10.6% $323 10.8% Real Estate: mortgage 125 74.0% 75 68.4% 55 65.1% Consumer 301 17.2% 474 21.0% 450 24.1% --------- --------- --------- $749 $914 $828 ========= ========= =========
8 Table 5 - Loan Portfolio (In Thousands)
December 31, -------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Loans secured by real estate: Construction and land development $588 $1,434 $0 $0 $0 Secured by farmland 3,700 4,013 4,112 3,888 3,410 Secured by 1-4 family residential 44,863 45,156 41,411 35,803 33,363 Nonfarm, nonresidential loans 11,141 9,518 10,372 13,698 13,297 Loans to farmers (except secured by real estate) 770 1,446 1,605 1,777 1,462 Commercial and industrial loans (except those secured by real estate) 5,116 6,145 6,349 6,247 5,563 Loans to individuals (except those secured by real estate) 14,458 19,633 22,508 19,547 16,186 All other loans 1,251 1,732 1,239 1,239 1,382 ------ ------ ------ ------ ------ Total loans 81,887 89,077 87,596 82,199 74,663 Less: Unearned discount (462) (1,207) (1,725) (1,565) (1,019) ------ ------ ------ ------ ------ Total Loans, Net $81,425 $87,870 $85,871 $80,634 $73,644 ====== ====== ====== ====== ======
9 Table 6 - Maturity Schedule of Selected Loans (In Thousands)
After 1 Year Within Within After 1 Year 5 Years 5 Years Total ------- ------- ------- ------- Loans secured by real estate $10,127 $45,034 $5,131 $60,292 Agricultural production loans 297 473 0 770 Commercial and industrial loans 2,528 2,588 0 5,116 Consumer loans 2,559 10,557 880 13,996 All other loans 1,154 97 0 1,251 ------- ------- ------- ------- $16,665 $58,749 $6,011 $81,425 ======= ======= ======= ======= For maturities over one year: Interest rates - floating $1,835 $1,917 $3,752 Interest rates - fixed 56,914 4,094 61,008 ------- ------- ------- $58,749 $6,011 $64,760 ======= ======= =======
10 Table 7 - Non-Performing Assets (In Thousands)
December 31, -------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ Nonaccrual loans $437 $0 $430 $0 $30 Restructured loans 0 0 0 0 0 Other real estate owned 190 47 47 47 150 ------ ------ ------ ------ ------ Total Non-Performing Assets $627 $47 $477 $47 $180 ====== ====== ====== ====== ====== Loans past due 90 days accruing interest $614 $967 $1,694 $683 $219 ====== ====== ====== ====== ====== Allowance for loan losses to period end loans 0.92% 1.04% 0.96% 1.00% 1.01% Non-performing assets to period end loans and other real estate owned 0.77% 0.05% 0.52% 0.06% 0.24%
11 Table 8 - Maturity Distribution and Yields of Securities (In Thousands)
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 $250 5.34% $0 0.00% $122 7.63% Obligations of U.S. government corporations and agencies 500 6.06% 9,148 6.30% 500 6.90% Mortgage-backed securities 507 7.30% 8,161 6.14% 8,590 7.11% Obligations of states and political subdivisions, taxable 0 0.00% 1,703 6.68% 0 0.00% ------- ------- ------- Total taxable 1,257 19,012 9,212 Obligations of states and political subdivisions, tax-exempt (1) 550 7.03% 1,850 7.06% 1,030 6.98% ------- ------- ------- Total $1,807 $20,862 $10,242 ------- ------- ------- Securities available for sale: Obligations of U.S. government corporations and agencies $749 5.22% $2,767 6.47% $0 0.00% Other taxable securities 0 0.00% 0 0.00% 0 0.00% ------- ------- ------- Total $749 $2,767 $0 ------- ------- ------- Total securities: $2,556 $23,629 $10,242 ======= ======= ======= (1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 34%.
Maturity Distribution and Yields of Securities (continued) (In Thousands)
Due after 10 years and Equity Securities Total ---------------- ---------------- Amount Yield Amount Yield ------- ----- ------- ----- Securities held to maturity: U.S. Treasury securities $0 0.00% $372 6.09% Obligations of U.S. government corporations and agencies 0 0.00% 10,148 6.32% Mortgage-backed securities 0 0.00% 17,258 6.66% Obligations of states and political subdivisions, taxable 0 0.00% 1,703 6.68% ------- ------- Total taxable 0 29,481 Obligations of states and political subdivisions, tax-exempt (1) 250 4.38% 3,680 7.00% ------- ------- Total $250 $33,161 ------- ------- Securities available for sale: Obligations of U.S. government corporations and agencies $0 5.22% $3,516 6.20% Other taxable securities 742 6.69% 742 6.69% ------- ------- Total $742 $4,258 ------- ------- Total securities: $992 $37,419 ======= ======= (1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 34%.
12 Table 9 - Deposits and Rates Paid (In Thousands)
December 31, --------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- ------------------- Amount Rate Amount Rate Amount Rate --------- ------ --------- ------ --------- ------ Noninterest-bearing $17,774 $15,175 $11,972 --------- --------- --------- Interest-bearing: NOW accounts 15,796 2.05% 16,773 2.10% 14,089 2.49% Money market accounts 16,232 3.11% 17,172 3.08% 16,932 3.20% Regular savings accounts 13,572 2.44% 13,421 2.52% 12,325 2.76% Certificates of deposit: Less than $100,000 38,743 5.39% 37,204 5.38% 39,116 5.11% $100,000 and more 14,962 5.49% 11,343 5.40% 11,179 5.57% --------- --------- --------- Total interest-bearing $99,305 4.05% $95,913 4.03% $93,641 4.06% --------- --------- --------- Total deposits $117,079 $111,088 $105,613 ========= ========= =========
13 Table 10 - Maturities of Certificates of Deposit of $100,000 and More (In Thousands)
Within Three to Six to One to Over Three Six Twelve Five Five Months Months Months Years Years Total -------- -------- -------- -------- -------- -------- At December 31, 1997 $6,524 $3,925 $2,531 $1,882 $100 $14,962 ======== ======== ======== ======== ======== ========
14 Table 11 - Risk Based Capital Ratios (In Thousands)
December 31, -------------------------------------- 1997 1996 ---------- ---------- Tier 1 Capital: Stockholders' Equity $14,445 $13,540 Tier 2 Capital: Allowable Allowance for Loan Losses 749 914 ---------- ---------- Total Capital: $15,194 $14,454 ---------- ---------- Risk Adjusted Assets: $82,443 $83,712 ---------- ---------- Risk Based Capital Ratios: Tier 1 to Risk Adjusted Assets 17.52% 16.17% Total Capital to Risk Adjusted Assets 18.43% 17.27%
15 Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
December 31, 1997 ------------------------------------------------------ Mature or Reprice Within ------------------------------------------------------ Over Three Months Over Three Through One Year Over Months Twelve To Five Five Or Less Months Years Years Total --------- --------- --------- -------- -------- INTEREST-EARNING ASSETS: Loans (net of unearned income) $13,228 $7,333 $56,727 $4,599 $81,887 Securities and other interest-earning assets 4,404 4,225 18,343 10,447 37,419 Federal funds sold 2,300 0 0 0 2,300 --------- --------- --------- -------- -------- Total interest-earning assets $19,932 $11,558 $75,070 $15,046 $121,606 --------- --------- --------- -------- -------- INTEREST-BEARING LIABILITIES: Certificates of deposit: $100,000 and more $6,524 $6,456 $1,982 $0 $14,962 less than $100,000 13,092 13,144 12,507 0 38,743 Other deposits 45,429 171 0 0 45,600 --------- --------- --------- -------- -------- Total interest-bearing liabilities $65,045 $19,771 $14,489 $0 $99,305 --------- --------- --------- -------- -------- Interest sensitivity gap: Asset sensitive (Liability sensitive) ($45,113) ($8,213) $60,581 $15,046 $22,301 ========= ========= ========= ======== ======== Cumulative interest rate gap: ($45,113) ($53,326) $7,255 $22,301 ========= ========= ========= ======== Ratio of cumulative gap to total interest earning assets: -37.10% -43.85% 5.97% 18.34% ========= ========= ========= ========
16 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. This office has seven teller stations in the lobby, a remote drive- through facility with a walk-up window, and a 24 hour automated teller machine. The Bank also owns and operates branch offices at 108 West Main Street, Boyce, Virginia, 1508 Senseny Road, Winchester, Virginia, and 382 Fairfax Pike, Stephens City, Viringia. The Bank also presently operates a leased branch at 625 East Jubal Early Drive in Winchester and has leased a site at 40 West Piccadilly Street in downtown Winchester, Virginia to open a branch location during January 1998. 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. The Bank also owns a building at 18 North Church Street in Berryville for future expansion. This site is currently leased. 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. 17 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 Registrant and dividends for the periods indicated.
Dividends Per Share 1997 1996 1995 1997 1996 1995 High Low High Low High Low 1st Quarter $22.00 $20.50 $19.00 $18.75 $18.00 $17.50 $0.08 $0.00 $0.00 2nd Quarter 23.00 22.00 19.50 19.00 18.00 18.00 0.08 0.11 0.11 3rd Quarter 24.00 23.00 20.00 19.50 18.50 18.00 0.08 0.00 0.00 4th Quarter 24.00 24.00 20.50 20.00 18.75 18.50 0.08 0.19 0.17
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 restated to reflect the stock split. The Registrant paid semiannual dividends in 1996 and 1995. Dividends per share have been restated to reflect the 100% stock dividend. The dividend policy was changed to begin paying quarterly dividends beginning February 15, 1997. The Registrant's future dividends will depend upon its earnings and financial condition and upon other factors not presently determinable. It is anticipated that the Registrant will obtain the funds needed for the payment of its dividends and expenses from the Bank in the form of dividends. There were 938 holders of record of the Registrant's Common Stock as of March 20, 1998. 18 Item 6. Selected Financial Data. The following Selected Financial Data for the five fiscal years ended December 31, 1997 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, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 Income Statement Data: ---------- ---------- ---------- ---------- ---------- Interest Income $9,310,237 $9,402,870 $8,726,902 $7,896,082 $7,713,898 Interest Expense 3,904,197 3,910,612 3,584,788 2,722,451 2,927,042 ---------- ---------- ---------- ---------- ---------- Net Interest Income 5,406,040 5,492,258 5,142,114 5,173,631 4,786,856 Less: Provision for Loan Losses 476,667 290,000 240,000 203,000 163,333 ---------- ---------- ---------- ---------- ---------- Net Interest Income after Provision for Loan Losses 4,929,373 5,202,258 4,902,114 4,970,631 4,623,523 Non-Interest Income 1,245,781 1,024,770 811,968 590,458 586,309 ---------- ---------- ---------- ---------- ---------- Net Revenue 6,175,154 6,227,028 5,714,082 5,561,089 5,209,832 Non-Interest Expense 4,690,999 4,378,387 3,976,155 3,626,679 3,325,600 ---------- ---------- ---------- ---------- ---------- Income before Income Taxes 1,484,155 1,848,641 1,737,927 1,934,410 1,884,232 Applicable Income Taxes 372,143 537,304 477,237 573,407 540,439 ---------- ---------- ---------- ---------- ---------- Net Income 1,112,012 1,311,337 1,260,690 1,361,003 1,343,793 ========== ========== ========== ========== ========== Performance Ratios: Return on Average Assets 0.87% 1.06% 1.12% 1.25% 1.25% Return on Average Equity 7.59% 9.58% 9.94% 11.90% 12.93% Dividend Payout Ratio 40.38% 31.86% 30.18% 26.17% 25.24% Per Share Data (1): Net Income, basic and diluted $0.79 $0.94 $0.91 $0.99 $0.98 Cash Dividends Declared 0.32 0.30 0.28 0.26 0.25 Book Value 10.69 10.14 9.44 8.67 7.94 Market Price * 24.00 20.50 18.75 17.50 16.25 Average Shares Outstanding 1,404,645 1,392,298 1,383,152 1,369,330 1,361,496 Balance Sheet Data: Assets $133,239,401 $126,241,741 $121,492,853 $114,607,016 $110,804,265 Loans (Net of Unearned Income) 81,425,186 87,870,194 85,871,203 80,634,132 73,643,768 Securities 37,418,780 26,089,574 26,618,148 23,833,408 20,374,505 Deposits 117,079,355 111,087,867 105,612,562 99,007,815 99,475,856 Stockholders' Equity 15,058,115 14,196,856 13,120,419 11,969,374 10,855,243 (1) Adjusted for a 100% stock dividend effected in the form of a two for one split 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.
19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. PERFORMANCE SUMMARY In 1997, the Company grew from total assets of $126.2 million to $133.2 million. This is an increase of $7.0 million or 5.5%. The investment portfolio was responsible for the majority of the increase. Securities increased from $26.1 million in 1996 to $37.4 million in 1997. Net loans fell from $87.0 million in 1996 to $80.7 million in 1997, resulting in a decrease of $6.3 million or 7.2%. The investment portfolio increase is due to the tightening of credit in the loan portfolio. Paydowns resulting from the decreases in the loan portfolio were invested in securities, primarily U.S. Agencies. Total deposits grew $6.0 million or 5.4% from $111.1 million in 1996 to $117.1 million in 1997. Stockholders' Equity has risen from $14.2 million in 1996 to $15.1 million in 1997, a 6.3% increase. The net income of the company for 1997 was $1.11 million, down from last year of $1.31 million. The decrease in net income can be attributed to the increase in the provision for loan loss. The provision for loan loss increased $187,000 or 64.5% from 1996 to 1997. Over the past five years, the Company has earned $6.39 million, resulting in an increase in stockholders' equity of 54.0% 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 $14.50 per share to $24.00 over the same five year period, an increase of 65.5% 20 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 decreased by $0.08 million or 1.6% from $5.49 million in 1996 to $5.41 million in 1997. 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 4.93% in 1996 to 4.72% in 1997. The earning assets yielded 8.05% on a fully taxable equivalent basis in 1997 as compared to 8.37% in 1996, a decrease of 0.33%. The average rate on total loans decreased from 9.05% in 1996 to 8.74% in 1997. The total income earned on loans decreased by $0.51 million or 6.5% primarily due to the decrease in the average balances of total loans. Income on investment securities increased from $1.68 million in 1996 to $2.01 million in 1997, an increase of $0.33 million or 19.7%. The average balances increased by $5.0 million or 18.5% on investment securities, while the average rate increased by 0.11% from 6.27% in 1996 to 6.38% in 1997. Interest expense decreased in 1997 as compared to 1996. Average balances on interest-bearing liabilities decreased by $0.1 million or 0.08% from $96.6 million in 1996 to $96.5 million in 1997 while the interest expense decreased $7,000 or .02%. The average rate on interest-bearing liabilities remained unchanged at 4.05% for 1996 and 1997. Average time deposits increased by $1.3 million or 2.6% from $49.3 million in 1996 to $50.7 million in 1997. The average rate on time deposits changed only slightly from 5.38% in 1996 to 5.39% in 1997. Interest expense as a percent of average earning assets decreased from 3.43% in 1996 to 3.34% in 1997. 21 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 0.77% in 1997 compared to 0.24% and 0.26% during 1996 and 1995, respectively. The provision for loan losses increased $187,000 or 64.5% in 1997 and $50,000 or 20.8% in 1996, while the allowance for loan losses as a percentage of loans decreased from 1.04% at the end of 1996 to .92% in 1997. Charged-off loans increased $419,000 or 156.9% and recoveries decreased $19,000 or 30.2% in 1997 compared to 1996. Net charge-offs increased by $438,000 or 214.7% from 1996 to 1997. During 1997 the loan department began the process of tightening credit standards. The result of that effort was an increase in the amount of net charge-offs. Along with the tightening of credit standards, an increased focus on collection efforts was made during the year. The Bank hired an experienced collector to coordinate the efforts of the entire loan department. The coverage for the allowance for loan losses over non-performing assets and loans 90 days past due and still accruing interest has decreased from 90.1% in 1996 to 60.4% in 1997. Loans past due greater than 90 days decreased during the year. At year end 1997, loans past due greater than 90 days was .75% of total loans, net unearned discount. The amount of loans past due greater than 90 days decreased from $967,000 in 1996 to $615,000 in 1997. Of the $615,000, 84.6% 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 1.17 times in 1997, 4.48 times in 1996, and 3.77 times in 1995. 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. 22 OTHER INCOME AND EXPENSES Total other income increased $221,011 or 21.6% from 1996 to 1997 and $212,802 or 26.2% from 1995 to 1996. Total other expenses increased $312,612 or 7.1% from 1996 to 1997 and $402,232 or 10.1% from 1995 to 1996. The efficiency ratio of the Company, a measure of its performance based upon the relationship between non-interest expense and operating income, was 65.9% in 1995 and 65.8% in 1996 and 69.5% in 1997. Trust Department income increased $33,593 or 16.8% in 1997 over 1996 and increased $54,269 or 37.3% in 1996 over 1995. The increases in 1997 and 1996 can be attributed to restructuring the trust services fee schedule and overall growth of the Trust Department. Trust Department income is expected to increase in 1998 due to growth in the number of accounts and total assets administered by the Trust Department. Service charges on deposit accounts increased $9,841 or 1.9% in 1997 over 1996 and increased $148,354 or 39.7% in 1996 over 1995. 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 $93,233 or 47.5% and $14,379 or 7.9% in 1997 and 1996, respectively. The increase in other service charges and fees during 1997 was due to non-customer convenience fees received from transactions performed at our ATM's, increased activity on credit card merchant accounts, and origination fees received by Eagle Home Funding, the mortgage company subsidiary of the Bank which was opened during July 1997. The 1998 amount of other service charges and fees for 1998 is expected to increase over 1997 due to increasing ATM non-customer convenience fees and a full year of operation by Eagle Home Funding. The Company had a loss on equity investment of $4,880 during 1997 and income on equity investment of $595 during 1996. 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 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 increased $89,819 or 84.8% in 1997 and decreased $23,484 or 18.2% in 1996. The increase during 1997 can be attributed to commissions received from the sale of non-deposit investment products by Eagle Investment Services. This amount is expected to increase during 1998 with continued growth in sales by Eagle Investment Services. Salaries and wages increased $219,027 or 12.64% in 1997 and $240,437 or 16.1% in 1996. The increase in 1997 reflects the hiring of additional personnel for the Berryville branch and the increase in 1996 reflects the hiring of additional personnel for the Stephens City branch. The amount of salaries and wages for 1998 should increase over 1997 due to the addition of the Old Post Office branch. Pension and other employee benefits increased $13,244 or 2.8% in 1997 and increased $35,378 or 8.0% in 1996. The 1997 increase can be attributed to the cost of benefits for personnel hired during 1996 and 1997. The 1998 amount of pension and other employee benefits should increase slightly over 1997. See Notes 8 and 9 to the Consolidated Financial Statements as of December 31, 1997 for a discussion of the defined benefit pension plan and employee benefits. Occupancy expenses increased $8,954 or 2.8% in 1997 and $82,609 or 34.2% in 1996. Equipment expenses decreased $3,677 or 0.8% and increased $94,360 or 25.0% in 1997 and 1996, respectively. Management is pleased that total occupancy and equipment expenses increased only $5,277 or 0.7% in 1997 over 1996. 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 1998 amounts are expected to increase over 1997 due to the investment in additional computer equipment and the opening of the Old Post Office branch during January 1998. The FDIC assessment increased $11,362 or 568% and decreased $109,904 or 98.2% in 1997 and 1996, respectively. The increase in 1997 was expected due to increased deposits and the decrease in 1996 was due to the insurance fund covering banks once again having sufficient reserves. The amount of FDIC assessment should increase slightly during 1998 due to growth in deposits. Stationary and supplies increased $39,841 or 26.5% in 1997 and decreased $4,292 or 2.8% in 1996. The increase in 1997 was due to the opening and operation of Eagle Home Funding and the purchase of supplies necessary to open the Old Post Office branch in January 1998. 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. Stationary and supplies expense is expected to increase slightly in 1998. Postage expense decreased $7,011 or 5.5% and increased $1,471 or 1.2% during 1997 and 1996, respectively. The amount of postage expense is expected to increase slightly during 1998. Credit card expense increased $7,519 or 8.0% during 1997 and decreased $5,367 or 5.4% during 1996. 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 during 1998. Bank franchise tax decreased $18,140 or 16.0% during 1997 and decreased $11,381 or 9.1% during 1996. The increase in 1997 was expected due to growth of the Bank=s capital. The 1998 amount of bank franchise tax is expected to be slightly greater than the 1997 amount due to additional growth of the Bank's capital. ATM network fees decreased $9,558 or 7.4% during 1997 and increased $39,662 or 44.2% during 1996. Fluctuations in the amount of ATM network fees can be attributed to the number and type of transactions being performed at the Bank's growing number of ATM locations. Other operating expenses increased $51,051 or 6.8% in 1997 and $39,259 or 5.5% in 1996. The increase in 1997 over 1996 was due to increased spending on education and training of employees and increased spending on marketing efforts, particularly television advertising. The increase in 1996 can be attributed to the amortization of intangible assets acquired during the acquisition of the Stephens City branch. The amount of other operating expenses should not increase significantly during 1998. 23 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 $372,143, $537,304 and $477,237 for 1997, 1996 and 1995, respectively. The average effective rate for the three-year period is 27.35% and this is not expected to vary significantly during future periods. 24 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 decreasing $6.4 million or 7.3% and total deposits increasing by $6.0 million or 5.4%, the ratio of loans to deposits decreased 9.6% from 79.1% in 1996 to 69.5% in 1997. 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. 25 LOAN PORTFOLIO Loans, net of unearned income decreased $6.4 million or 7.3% in 1997 after an increase of $2.0 million from 1995 to 1996. Net loans are expected to increase slightly during 1998. 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 $60.3 million or 73.6% of total loans in 1997 and $60.1 million or 67.5% of total loans in 1996, which represents an increase of $.2 million or .3% 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 $14.5 million or 17.7% of total loans in 1997 and $19.6 million or 22.0% of total loans in 1996, which represents a decrease of $5.1 million or 26.0% during the year. These loans are expected to remain steady throughout 1998. Commercial and agricultural loans were $5.9 million or 7.2% of total loans in 1997 and $7.6 million or 8.5% of total loans in 1996, which represents a decrease of $1.7 million or 22.5% during 1997. The amount of commercial and agricultural loans is expected to increase significantly during 1998. 26 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 non-performing assets and loans that are 90+ days past due and accruing interest was $1.24 million on December 31, 1997, and $1.01 million on December 31, 1996, an increase of $0.23 million or 22.8%. 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. There were no impaired loans as of December 31, 1997 and 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 1998. This expectation is based on the potential problem loans on December 31, 1997. The amount of classified loans has decreased by $0.26 million from $2.63 million in 1996 to $2.37 million during 1997. These loans are primarily well-secured and in the process of collection and the allowance for loan losses includes $267,225 in specific allocations for these loans as well as percentage allocations for classified assets without specific allocations. 27 SECURITIES The book value of the securities portfolio as of December 31, 1997 was $37.4 million, compared to $26.1 million as of December 31, 1996. Securities increased $11.3 million or 43.3% in 1997 over 1996. The increase from 1996 to 1997 is primarily due to a $7.2 million or 111.0% increase of investment in obligations of U.S. government corporations and agencies, a $2.4 million or 79.7% increase of investment in obligations of states and political subdivisions, and a $2.3 million or 15.4% increase of investment in mortgage-backed securities. 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 $33.2 million and a fair value of $33.2 million were classified as held to maturity as of December 31, 1997. 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. This represents an $8.8 million or 36.2% increase in book value and a $9.2 million or 38.1% increase in fair value in 1997 over 1996. 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 $4.3 million and a related unrealized after tax gain of $9,810 were classified as available for sale as of December 31, 1997. 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. This represents a $2.5 million or 144.1% increase in fair value and a $14,840 or 295.0% increase in unrealized after tax gain in 1997 compared to 1996. 28 DEPOSITS Total deposits increased $6.0 million or 5.4% from $111.0 million in 1996 to $117.0 million in 1997. Non-interest bearing demand deposits increased $2.6 million or 17.1% in 1997 after a $3.2 million or 26.8% increase in 1996 from 1995. Interest checking decreased $1.0 million or 5.8% from $16.8 million in 1996 to $15.8 million in 1997. Money market accounts decreased $1.0 million or 5.5% from $17.2 million in 1996 to $16.2 million in 1997. Certificates of deposit increased $5.2 million or 10.6% from $48.5 million in 1996 to $53.7 million in 1997. Total interest bearing deposits increased $3.4 million or 3.5% from $95.9 million in 1996 to $99.3 million in 1997. Total deposits are expected to grow during 1998 due to opening the Old Post Office branch in downtown Winchester, Virginia 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. Core deposits totaled $102.1 million or 87.2% of total deposits in 1997 as compared to $99.7 million or 89.8% of total deposits in 1996. Certificates of deposit of $100,000 or more totaled $15.0 million or 12.8% of total deposits in 1997 as compared to $11.3 million or 10.2% of total deposits in 1996. The Company neither purchases brokered deposits nor solicits deposits from sources outside of its primary market area. 29 STOCKHOLDERS' EQUITY The Company continues to be a strongly capitalized financial institution. Total stockholders' equity on December 31, 1997 was $15.1 million, reflecting a percentage of total assets of 11.3% compared to $14.2 million and 11.2% at year-end 1996. Stockholders' equity per share increased $0.55 or 5.4% from $10.14 per share in 1996 to $10.69 per share in 1997. The return on average stockholders' equity was 7.59% in 1997, down from 9.58% in 1996. During 1997 the Company paid $0.32 per share in dividends as compared to $0.30 per share in 1996, an increase of 6.7% The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock. The Dividend Investment Plan had 41.3% and 42.3% of total outstanding shares at December 31, 1997 and 1996, 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, 1997, the Company's Tier I capital ratio was 17.52% compared to 16.17% in 1996, the Tier II capital ratio was 18.43% compared to 17.27% in 1996 and the leverage ratio was 11.06% compared to 10.90% in 1996. See Note 12 to the Consolidated Financial Statements as of December 31, 1996 for additional discussion and analysis of regulatory capital requirements. 30 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 1997, liquid assets totaled $28.6 million which represents 24.2% of total deposits, federal funds purchased and other liabilities. The Company minimizes liquidity demand by relying on core deposits which comprise 87.2% of total deposits. With an average remaining life of 4.1 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, 1997. 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 $53.3 million or 43.9% 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. 31 ACCOUNTING RULE CHANGES FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued in June 1996 and establishes, among other things, new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing. Statement 125 also establishes new accounting requirements for pledged collateral. As issued, Statement 125 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 1996. FASB Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", defers for one year the effective date (a) of paragraph 15 of Statement 125 and (b) for repurchase agreement, dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and 237(b) of Statement 125. FASB Statement No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Statement 130 is effective for financial statements beginning after December 15, 1997. During June of 1997, the FASB issued FASB No. 131, "Disclosure about Segments of an Enterprise and Related Information." FASB No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement becomes effective for financial statements for periods beginning after December 31, 1997. 32 YEAR 2000 During 1997 the Company's subsidiary (the Bank) began to assess the effect of the Year 2000 on its systems, vendors, and customers. The assessment of systems is accomplished through in-house testing and receipt of documentation from manufacturers regarding their product's Year 2000 readiness. The assessment of vendors is accomplished primarily through receipt of documentation regarding their planning, testing, and implementation for Year 2000 compliance of their product(s). The assessment of customers is accomplished through identifying and assisting commercial customers whose operations may be negatively impacted by the century date change. In January 1998, the Bank's Board of Directors approved a Year 2000 Compliance Plan which identified particular steps necessary to achieve Year 2000 readiness and a timeline for accomplishing these steps. The plan also named the Bank's Year 2000 committee which includes members of senior management, operations, data processing, and internal audit. The Bank uses various hardware and software to conduct its business. The core data processing applications of the Bank are run in-house and consist of a mainframe computer and software licensed to the Bank by an outside vendor. The Bank has received correspondence from its core processing application vendor which indicates that their software will be Year 2000 ready. The Bank also relies on a wide area network which allows personal computers throughout the organization to share resources and centralizes the administration of personal computer software applications. Vendors of bank-related software which is installed on the network have sent correspondence indicating that their software will be Year 2000 ready. Upgrading personal computers throughout the organization has been a continuous project during 1997 and is expected to continue throughout 1998. These upgrades are expected to solve any non-compliant personal computer hardware issues related to Year 2000 readiness. Based on the current status of the Bank's Year 2000 assessment, the cost of Year 2000 readiness is not expected to have a material effect on the Company's consolidated financial statements. 33 Item 7A. Quantitative and Qualitative Disclosures about Market Risk As the holding company of Bank of Clarke County bank, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact the amount of interest income and expense the Bank receives or pays on almost all of its assets and liabilities and the market value of its interest earning assets and interest-bearing liabilities, excluding those which have a very short term to maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. It is the responsibility of Bank management to enact appropriate interest rate risk management procedures. The loan portfolio's primary volatility is due to the concentration of loans made in in the Counties of Clarke and Frederick and the City of Winchester. This subjects the portfolio to fluctuations in the local economy. The Bank does not subject itself to foreign currency exchange or commodity price risk due to prohibition through policy and the current nature of operations. As of December 31, 1997, the Company does not have any hedging transactions in place such as interest rate swaps or caps. The Bank's interest rate management strategy is designed to stabilize net interest income and preserve the capital of the Company. The Bank utilizes several procedures to analyze the maturities of assets and liabilities along with their associated rate or yield. Bank management also monitors the economy closely in order to be knowledgeable of events which may immediately or eventually effect the pricing of assets and liabilities. The Bank also uses interest rate sensitivity analysis which measures the term to maturity or repricing for the interest sensitive assets and liabilities of the Bank. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1997. The expected maturities for loans, securities, and certificates of deposit are the based on the contractual maturity of the instruments. The expected maturties of money market, savings, and N.O.W. accounts are based on the Bank's internal interest rate sensitivity report which considers the amount of these accounts which would remain if rates increased. The average interest rates for loans is the weighted average contractual rate of the loans maturing during the period indicated. The average interest rates for taxable securities is the weighted average yield of the securities which mature during the period indicated. The average interest rates for tax-exempt securities is the weighted average tax- equivalent yield assuming a federal tax rate of 34% for the securities which mature during the period indicated. The average interest rates for money market, savings, and N.O.W. accounts is the weighted average annual percentage yield as of December 31, 1997 for maturities during the period indicated. The average rate for certificates of deposits is the weighted average contractual rate of the certificates which mature during that period.
Principal Amount Maturing In - -------------------------------------------------------------------------------------------------------- Fair There- Value (In Thousands) 1998 1999 2000 2001 2002 after Total 12/31/97 - -------------------------------------------------------------------------------------------------------- Earning assets: Fixed rate loans $13,578 $12,446 $13,783 $16,235 $13,815 $4,599 $74,456 $74,072 Average interest rate 8.63% 8.84% 8.86% 8.06% 8.16% 8.76% 8.50% Variable rate loans $3,217 $279 $582 $488 $486 $1,917 $6,969 $5,195 Average interest rate 9.58% 9.86% 10.08% 9.91% 9.49% 9.50% 9.63% Taxable securities $2,022 $2,916 $5,953 $3,313 $9,566 $9,954 $33,724 $33,756 Average interest rate 6.02% 6.03% 6.16% 6.25% 6.47% 7.07% 6.50% Tax-exempt securities $550 $355 $615 $475 $405 $1,280 $3,680 $3,710 Average interest rate 7.03% 7.60% 6.54% 6.91% 7.55% 6.91% 7.00% Other interest-earning assets $2,300 - - - - - - - - - - $2,300 $2,300 Average interest rate 6.25% - - - - - - - - - - 6.25% Interest-bearing liabilities: Money market, savings, and N.O.W. accounts $14,666 $5,256 $5,256 $2,680 $2,680 $15,062 $45,600 $45,600 Average interest rate 2.67% 2.67% 2.67% 2.47% 2.47% 2.07% 2.45% Certificates of deposit $38,775 $10,113 $3,899 $720 $195 $3 $53,705 $54,753 Average interest rate 5.37% 5.62% 6.56% 5.33% 5.52% 5.29% 5.43% - --------------------------------------------------------------------------------------------------------
34 Item 8. Financial Statements and Supplementary Data Pursuant to General Instruction G(2) information required by this Item is incorporated by reference to Part IV, Item 14. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. 35 PART III Item 10. Directors and Executive Officers of the Registrant. The information required by Part III, Item 10., is incorporated herein by reference to the Company's proxy statement, dated April 1, 1998, for the Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998. Item 11. Executive Compensation. The information required by Part III, Item 11., is incorporated herein by reference to the Company's proxy statement, dated April 1, 1998, for the Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Part III, Item 12., is incorporated herein by reference to the Company's proxy statement, dated April 1, 1998, for the Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998. Item 13. Certain Relationships and Related Transactions. The information required by Part III, Item 13., is incorporated herein by reference to the Company's proxy statement, dated April 1, 1998, for the Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998 36 PART IV 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 on Form 10-K. (1) Financial Statements Financial statements of the registrant for the fiscal year ended December 31, 1997 are incorporated herein by reference to Exhibit 99.1. (2) Financial Statement Schedules All financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (3) Exhibits The following exhibits, when applicable, are filed with this Form 10-K or incorporated by reference to previous filings. Number Description --------- ----------------------------------------- Exhibit 2. Not applicable. Exhibit 3. (i) 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.) (ii) Bylaws of Registrant (incorporated herein by reference to Exhibit 3.2 of Registrant's Form S-4 Registration Statement, Registration No. 33-43681) Exhibit 4. Not applicable. Exhibit 9. Not applicable. Exhibit 10. Material Contracts. 10.1 Description of Executive Supplemental Income Plan (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). 10.2 Lease Agreement between Bank of Clarke County (tenant) and Winchester Development Company (landlord) dated August 1, 1992 for the branch office at 625 East Jubal Early Drive, Winchester, Virginia (incorporated herein by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.3 Lease Agreement between Bank of Clarke County (tenant) and Winchester Development Company (landlord) dated July 1, 1997 for an office at 615 East Jubal Early Drive, Winchester, Virginia (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.4 Lease Agreement between Bank of Clarke County (tenant) and Steven R. Koman(landlord) dated December 2, 1997 for the branch office at 40 West Piccadilly Street, Winchester, Virginia (incorporated herein as Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). Exhibit 11. Computation of Per Share Earnings (incorporated herein as Exhibit 11). Exhibit 12. Not applicable. Exhibit 13. Portions of the 1997 Annual Report to Shareholders for the year ended December 31, 1997 (filed herein). Exhibit 16. Not applicable. Exhibit 18. Not applicable. Exhibit 21. Subsidiaries of the Registrant (incorporated herein as Exhibit 21). Exhibit 22. Not applicable. Exhibit 23. Not applicable. Exhibit 24. Not applicable. Exhibit 27. Financial Data Schedule (incorporated herein as Exhibit 27). Exhibit 99. Additional Exhibits 99.1 The following consolidated financial statements of the Company including the related notes and the report of the independent auditors for the year ended December 31, 1997 (incorporated herein as Exhibit 99.1). 1. Independent Auditor's Report. 2. Consolidated Balance Sheets - At December 31, 1997 and 1996. 3. Consolidated Statements of Income - Years ended December 31, 1997, 1996, and 1995. 4. Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1997, 1996, and 1995. 5. Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995. 6. Notes to Consolidated Financial Statements. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the fourth quarter of 1997. 37 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 20th day of March, 1998. 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, Chief March 20, 1998 - ------------------------- Executive Officer Lewis M. Ewing and Director (principal executive officer) /s/ JOHN R. MILLESON Vice President, Secretary/ March 20, 1998 - ------------------------- Treasuer (principal financial John R. Milleson officer) /s/ JAMES W. MCCARTY, JR. Vice President, Chief March 20, 1998 - ------------------------- Financial Officer James W. McCarty, Jr. (principal accounting officer) /s/ JOHN D. HARDESTY Chairman of the Board March 20, 1998 - ------------------------- and Director John D. Hardesty /s/ J. FRED JONES Director March 20, 1998 - ------------------------- J. Fred Jones Director March 20, 1998 - ------------------------- Marilyn C. Beck Director March 20, 1998 - ------------------------- Thomas T. Byrd Director March 20, 1998 - ------------------------- Thomas T. Gilpin Director March 20, 1998 - ------------------------- Douglas McIntire /s / JOHN F. MILLESON, JR. Director March 20, 1998 - ------------------------- John F. Milleson, Jr. /s/ ROBERT W. SMALLEY, JR. Director March 20, 1998 - ------------------------- Robert W. Smalley, Jr. /s/ RANDALL G. VINSON Director March 20, 1998 - ------------------------- Randall G. Vinson
38 EAGLE FINANCIAL SERVICES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 EXHIBIT NUMBER DESCRIPTION -------------- ---------------------------------------- 10.4 Lease Agreement between Bank of Clarke County (tenant) and Steven R. Koman(landlord) dated December 2, 1997 for the branch office at 40 West Piccadilly Street, Winchester, Virginia. 11 Computation of Per Share Earnings . 21 Subsidiaries of the Registrant. 27 Financial Data Schedule. 99.1 The following consolidated financial statements of the Company including the related notes and the report of the independent auditors for the year ended December 31, 1997. 1. Independent Auditor's Report. 2. Consolidated Balance Sheets - At December 31, 1997 and 1996. 3. Consolidated Statements of Income - Years ended December 31, 1997, 1996, and 1995. 4. Consolidated Statements of Changes in Stockholders' Equity Years ended December 31, 1997, 1996, and 1995. 5. Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995. 6. Notes to Consolidated Financial Statements. 39 EX-10.4 2 LEASE AGREEMENT EXHIBIT 10.4 THIS LEASE AGREEMENT, made this 2nd day of December, 1997, by Steven R. Koman (herein Lessor) and Bank of Clarke County (herein Lessee): WITNESSETH: That for valuable consideration, Lessee does hereby lease from Lessor and Lessor does hereby lease to Lessee the property located at 40 West Piccadilly Street in Winchester, Virginia, containing 3,317 Square Feet, more or less, as more particularly described by the attached drawings, together with the exclusive right of entrance to the property from the Piccadilly Street entrance and the eight (8) parking spaces closest to Piccadilly Street. The parties hereto agree to the following terms: 1. Term of Lease. The term of the lease shall be five (5) years, commencing January 1, 1998 and terminating at midnight, December 31, 2002. 2. Rental. Lessee shall pay to Lessor the sum of Two Thousand Six Hundred Dollars ($2,600.00) per month, payable in advance on or before the 1st day of each month, with the first payment being due on or before January 1, 1998, towards which a deposit of One Hundred Dollars ($100.00) has this day been paid. 3. RENEWAL OPTION. Provided Lessee is not then in default hereunder, the Lessee shall have the right to exercise an option for a second five (5) year term on the same terms and conditions as contained herein, except that the monthly rent shall be increased to Two Thousand Eight Hundred Dollars ($2,800.00), if Lessee notifies Lessor in writing at least ninety (90) days prior to the termination of the original five (5) year term that Lessee intends to exercise its renewal option. 4. ADDITIONS AND ALTERATIONS. Lessee shall have the right to make additions and alterations to the premises for the purpose of making the premises useable for banking purposes, including the installation of security devises, equipment, a vault, an ATM machine and a drive-in facility (the location and design for the latter two (2) items has not been agreed upon and has not been approved by the City, but the parties agree to work together in good faith in an attempt to find a location for each and to secure the City approval. Inability to secure a location for either or to secure City approval will not invalidate the lease.) At the termination of the lease, Lessee shall remove all additions and alterations, together with all trade fixtures and personal property owned or installed by the Lessee. In addition, the Lessee shall return the premises at the end of the lease in as good an order and repair as when received, reasonable wear and tear excepted. All additions and alterations will be completed in a workmanlike manner. 5. POSSESSION. Lessee shall be entitled to the immediate possession of the premises. 6. TAXES AND UTILITIES. Lessor shall pay all real estate taxes assessed against the premises and all water and sewer supplied to the premises, unless the Lessee's premises are separately metered. All other utility expenses, including electricity, heat and telephone, shall be paid by the Lessee. 7. DAMAGE TO PREMISES. Lessee shall save harmless Lessor from all claims for damage to property or to persons, arising from Lessee's use and occupancy of the leased premises, or asserted by any employees, customers or invitees of the Lessee, except to the extent such claims arise from the negligence of Lessor, its employees, agents, invitees or licensees or as otherwise covered by insurance. 8. Maintenance of the Leased Premises. Lessor covenants and agrees to keep the structural portion of the leased premises, including but not limited to the roof and walls, in good condition and repair and shall maintain the parking lot, including the removal of snow. Lessee shall maintain the interior of the leased premises, including any breakage of glass in exterior windows and doors and shall maintain (including the removal of snow and debris) from the steps leading to the leased premises from Piccadilly Street and the sidewalk along Piccadilly Street. 9. Use and Enjoyment. Lessor covenants that it has the right to enter into this lease and that it will fully perform all obligations hereunder; the Lessor has title to the leased premises hereby demised and that Lessee shall have peaceful possession and quiet enjoyment of the leased premises so long as the Lessee pays the rent and other charges as herein provided and observes and performs all of its covenants and obligations hereunder. 10. Destruction and Damage. In the event the leased premises are destroyed by fire or other cause, or so damaged as to render the leased premises untenantable, the Lessor shall: A. Restore the leased premises by rebuilding or making repairs within one hundred twenty (120) days from the date of such damage or destruction (provided such rebuilding or repair can be completed in one hundred twenty (120) days) in which event this lease shall continue in full force and effect, with an abatement of rent and all other charges to the Lessee for the period during which the leased premises are untenantable; or B. If the repairs and rebuilding cannot be completed within said one hundred twenty (120) days, then this lease shall terminate as of the date of said destruction or damage. The Lessor shall give Lessee written notice of its election under this paragraph within fifteen (15) days after the said destruction or damage on or to the leased premises. 11. Default. If Lessee defaults in any of its obligations under this agreement, including the payment of rent, payments for personal property and all other amounts due under this lease, and such failure shall continue for a period of ten (10) days after written notice thereof is given by Lessor to Lessee, then the Lessor shall have the immediate right to terminate this lease. If the lease is terminated, the rent for the entire term shall become due and payable, subject to set-off and mitigation on the part of the Lessor, and the Lessee shall deliver possession immediately of all the leased property to the Lessor. If, on four (4) separate occasions, Lessor gives Lessee written notice under this paragraph after Lessee is in default of its payment under this lease, then Lessee shall not be entitled to said ten (10) day written notice and any default in the payment of rent or other payments due hereunder shall immediately grant Lessor the right to terminate this lease as set forth above. 12. Sub-Lease. The Lessee shall not have the right to sub-lease the leased property nor to assign this lease without first obtaining the written consent of the Lessor, who shall not unreasonably withhold its consent. 13. Notices. Any notices or demands required or permitted by law or any provisions of this lease shall be in writing, and if the same is to be served upon Lessor or Lessee may be personally delivered to Lessor or my be deposited in the United States mail, registered or certified with return receipt requested, postage prepaid and addressed to Lessor at P. O. Box 411, Winchester, Virginia 22604, or to Lessee at P. O. Box 391, Berryville, Virginia 22611. Either party shall have the right to specify from time to time changes to its address for purposes of this lease upon giving the other party ten (10) days advance written notice of such change. 14. INSPECTIONS. The Lessor may inspect the premises at reasonable times during business hours and during the last three (3) months of the term, or the renewal thereof, the Lessor may show the premises to others and may post thereon a notice for re-renting the premises. Lessor may enter the premises before or after usual business hours if there is an emergency involving the health, welfare or safety of the building, its occupants or its neighbors. 15. Rental Restriction. Lessor will not permit any other portion of the building in which the leased premises is located to be used for banking or any other financial services nor to be used for a stock brokerage. 16. First Right of Refusal. Neither the Lessor nor any successor in title to the Lessor shall sell the above described real estate without first offering the property in writing to the Lessee upon certain terms and prices set forth in the written notice. The Lessee shall have an option to purchase the property for said price for a period of thirty (30) days after receiving notice. If the Lessee does not exercise its option, Lessor shall have the right to sell said property at said price and upon said terms for a period of ninety (90) days thereafter. If the property is not so sold, the property will continue to be subject to this restriction. 17. Miscellaneous. This lease agreement merges all understandings and agreements between the parties hereto with respect to the leased premises, constitutes the entire agreement between the parties with respect to the leased premises, and shall inure to the benefit and be binding upon the Lessor and the Lessee and their respective successors and permitted assigns. Both parties are aware that the property was constructed prior to 1970 and may or may not have been painted with paint that contained lead. IN WITNESS WHEREOF, the parties hereto have executed this lease as of the date first above written. LESSOR: /s/ Steven R. Koman ---------------------------- Steven R. Koman LESSEE: BANK OF CLARKE COUNTY By: /s/ John R. Milleson ------------------------- John R. Milleson Executive Vice President and Chief Administrative Officer 40 EX-11 3 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 EAGLE FINANCIIAL SERVICES, INC. AND SUBSIDIARY Computations of Weighted Average Shares Outstanding and Earnings Per Share (Shares Outstanding End of Month) 1997 1996 1995 Shares Shares Shares Outstanding Outstanding Outstanding (As Restated) (As Restated) ------------ ------------ ------------- 1,399,885 1,390,570 1,381,348 1,402,153 1,390,570 1,381,348 1,402,153 1,390,570 1,381,348 1,402,153 1,390,570 1,381,348 1,404,356 1,390,570 1,381,348 1,404,356 1,390,570 1,381,348 1,404,356 1,394,026 1,384,954 1,406,454 1,394,026 1,384,954 1,406,454 1,394,026 1,384,954 1,406,454 1,394,026 1,384,954 1,408,485 1,394,026 1,384,954 1,408,485 1,394,026 1,384,954 ------------ ------------- ------------- 16,855,744 16,707,576 16,597,812 12 12 12 - ------------ ------------ ------------- ------------- Weighted Average Shares Outstanding 1,404,645 1,392,298 1,383,152 - ------------ ------------ ------------- ------------- Net Income 1,112,012 1,311,337 1,260,690 - ------------ ------------ ------------- ------------- Earnings Per Share, Basic and Assuming Dilution 0.79 0.94 0.91 - ------------ ------------ ------------- ------------- 41 EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 The only subsidiary of the Registrant is Bank of Clarke County, a Virginia banking corporation, located in Berryville, Clarke County, Virginia. It is owned 100% by the Registrant. 42 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 5,194 48 2,300 0 4,258 33,161 33,208 81,425 749 133,239 117,079 0 1,102 0 0 0 3,521 11,537 133,239 7,255 1,953 102 9,310 3,900 3,904 5,406 477 0 4,691 1,484 1,484 0 0 1,112 0.79 0.79 4.72 437 614 0 668 914 687 45 749 500 0 249
EX-99.1 6 FINANCIAL REPORT EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Berryville, Virginia FINANCIAL REPORT DECEMBER 31, 1997 C O N T E N T S INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets Consolidated statements of income Consolidated statements of changes in stockholders' equity Consolidated statements of cash flows Notes to consolidated financial statements 44 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, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 1997, 1996, and 1995. 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, 1997 and 1996, and the results of its operations and its cash flows for the years ended December 31, 1997, 1996, and 1995, in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 22, 1998 45 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 1997 and 1996
Assets 1997 1996 ---------------- ---------------- Cash and due from banks $ 5 242 309 $ 4 409 250 Securities (fair value: 1997, $37,466,068; 1996, $25,786,814) (Note 2) 37 418 780 26 089 574 Federal funds sold 2 300 000 1 553 000 Loans, net of unearned discounts (Notes 3 and 11) 81 425 186 87 870 194 Less allowance for loan losses (Note 4) (748 558) (913 955) ---------------- ---------------- Net loans 80 676 628 86 956 239 Bank premises and equipment, net (Note 5) 4 060 501 4 251 675 Other real estate owned 189 688 46 605 Other assets 3 351 495 2 935 398 ---------------- ---------------- Total assets $ 133 239 401 $ 126 241 741 ================ ================ Liabilities and Stockholders' Equity Liabilities Deposits: Noninterest bearing demand deposits $ 17 774 480 $ 15 175 041 Savings and interest bearing demand deposits 45 600 236 47 365 648 Time deposits (Note 6) 53 704 639 48 547 178 ---------------- ---------------- Total deposits $ 117 079 355 $ 111 087 867 Other liabilities 1 101 931 957 018 Commitments and contingent liabilities (Notes 10, 15 and 17) - - - - ---------------- ---------------- Total liabilities $ 118 181 286 $ 112 044 885 ================ ================ Stockholders' Equity Preferred stock, $10 par value; 500,000 shares authorized and unissued $ - - $ - - Common stock, $2.50 par value; authorized 1,500,000 shares; issued 1997, 1,408,485 shares; issued 1996, 1,399,885 shares 3 521 213 3 499 714 Surplus 2 107 826 1 945 891 Retained earnings (Note 13) 9 419 266 8 756 281 Unrealized gain (loss) on securities available for sale, net 9 810 (5 030) ---------------- ---------------- Total stockholders' equity $ 15 058 115 $ 14 196 856 ---------------- ---------------- Total liabilities and stockholders' equity $ 133 239 401 $ 126 241 741 ================ ================ See Notes to Consolidated Financial Statements. 46 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 1997, 1996, and 1995 1997 1996 1995 ------------- ------------- -------------- Interest Income Interest and fees on loans $ 7 255 085 $ 7 750 646 $ 7 483 952 Interest on federal funds sold 101 842 51 219 54 740 Interest on securities held to maturity: Taxable interest income 1 617 097 1 308 152 833 620 Interest income exempt from federal income taxes 145 016 158 070 158 409 Interest and dividends on securities available for sale: Taxable interest income 142 480 90 459 158 215 Dividends 48 717 44 324 37 966 ------------- ------------- -------------- Total interest income $ 9 310 237 $ 9 402 870 $ 8 726 902 ------------- ------------- -------------- Interest Expense Interest on deposits $ 3 899 598 $ 3 853 810 $ 3 525 861 Interest on federal funds purchased 4 599 56 802 56 144 Interest on Federal Home Loan Bank advances - - - - 2 783 ------------- ------------- -------------- Total interest expense $ 3 904 197 $ 3 910 612 $ 3 584 788 ------------- ------------- -------------- Net interest income $ 5 406 040 $ 5 492 258 $ 5 142 114 Provision for loan losses (Note 4) 476 667 290 000 240 000 ------------- ------------- -------------- Net interest income after provision for loan losses $ 4 929 373 $ 5 202 258 $ 4 902 114 ------------- ------------- -------------- Other Income Trust Department income $ 233 180 $ 199 587 $ 145 318 Service charges on deposit accounts 532 277 522 436 374 082 Other service charges and fees 289 465 196 232 181 853 Income (loss) on equity investment (4 880) 595 (18 689) Other operating income 195 739 105 920 129 404 ------------- ------------- -------------- $ 1 245 781 $ 1 024 770 $ 811 968 ------------- ------------- -------------- See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Income (Continued) Years Ended December 31, 1997, 1996, and 1995 1997 1996 1995 ------------- ------------- -------------- Other Expenses Salaries and wages $ 1 951 569 $ 1 732 542 $ 1 492 105 Pension and other employee benefits (Notes 8, 9 and 16) 491 913 478 669 443 291 Occupancy expenses 332 916 323 962 241 353 Equipment expenses 468 785 472 462 378 102 FDIC assessment 13 362 2 000 111 904 Stationery and supplies 190 154 150 313 154 605 Postage 119 713 126 724 125 253 Credit card expense 101 156 93 637 99 004 Bank franchise tax 95 344 113 484 124 865 ATM network fees 119 827 129 385 89 723 Other operating expenses 806 260 755 209 715 950 ------------- ------------- -------------- $ 4 690 999 $ 4 378 387 $ 3 976 155 ------------- ------------- -------------- Income before income taxes $ 1 484 155 $ 1 848 641 $ 1 737 927 Income Tax Expense (Note 7) 372 143 537 304 477 237 ------------- ------------- -------------- Net income $ 1 112 012 $ 1 311 337 $ 1 260 690 ============= ============= ============== Earnings Per Share Net income per common share, basic and diluted $ .79 $ .94 $ .91 ============= ============= ============== See Notes to Consolidated Financial Statements. 47 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1997, 1996, and 1995 Unrealized Gain (Loss) on Securities Common Retained Available for Stock Surplus Earnings Sale, Net Total ------------ ------------ ------------- ------------ ------------- 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 ($.28 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 ------------ ------------ ------------- ------------ ------------- 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 ($.30 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 87 (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 Changes in Stockholders' Equity (Continued) Years Ended December 31, 1997, 1996, and 1995 Unrealized Gain (Loss) on Securities Common Retained Available for Stock Surplus Earnings Sale, Net Total ------------ ------------ ------------- ------------ ------------- Balance, December 31, 1996 $ 3 499 714 $ 1 945 891 $ 8 756 281 $ (5 030) $ 14 196 856 Net income - 1997 - - - - 1 112 012 - - 1 112 012 Issuance of common stock - dividend investment plan (8,603 shares) (Note 14) 21 507 161 992 - - - - 183 499 Dividends declared ($0.32 per share) - - - - (449 027) - - (449 027) Change in unrealized gain (loss) on securities available for sale, net of deferred income taxes of $7,645 - - - - - - 14 840 14 840 Fractional shares purchased (8) (57) - - - - (65) ------------ ------------ ------------- ------------ ------------- Balance, December 31, 1997 $ 3 521 213 $ 2 107 826 $ 9 419 266 $ 9 810 $ 15 058 115 ============= ============= ============= ============ ============= See Notes to Consolidated Financial Statements. 48 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996, and 1995 1997 1996 1995 ------------- ------------- -------------- Cash Flows from Operating Activities Net income $ 1 112 012 $ 1 311 337 $ 1 260 690 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 389 742 399 076 287 456 Amortization of intangible assets 50 675 52 496 12 600 (Income) loss on equity investment 4 880 (595) 18 689 Provision for loan losses 476 667 290 000 240 000 Premium amortization (discount accretion) on securities, net 63 141 (2 854) 8 532 Deferred tax (benefit) expense 45 917 (891) (37 710) Changes in assets and liabilities: (Increase) in other assets (525 214) (805 499) (86 106) Increase in other liabilities 144 913 64 146 263 045 ------------- ------------- -------------- Net cash provided by operating activities $ 1 762 733 $ 1 307 216 $ 1 967 196 ------------- ------------- -------------- Cash Flows from Investing Activities Proceeds from maturities and principal payments of securities held to maturity $ 5 995 036 $ 5 128 436 $ 5 820 188 Proceeds from maturities and principal payments of securities available for sale 377 000 1 748 844 496 000 Purchases of securities held to maturity (14 873 594) (6 178 873) (8 704 650) Purchases of securities available for sale (2 868 304) (155 500) (243 400) Purchases of bank premises and equipment (198 568) (1 157 029) (837 492) Net decrease (increase) in loans 5 659 861 (2 203 140) (5 456 584) ------------- ------------- -------------- Net cash (used in) investing activities $ (5 908 569) $ (2 817 262) $ (8 925 938) ------------- ------------- -------------- See Notes to Consolidated Financial Statements. EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 1997, 1996, and 1995 1997 1996 1995 ------------- ------------- -------------- Cash Flows from Financing Activities Net increase in demand deposits, money market and savings accounts $ 834 027 $ 7 222 447 $ 727 513 Net increase (decrease) in certificates of deposit 5 157 461 (1 747 141) 5 877 234 Increase (decrease) in federal funds purchased - - (1 867 000) 1 867 000 Net (decrease) in Federal Home Loan Bank advances - - - - (3 000 000) Cash dividends paid (265 528) (242 295) (220 137) Fractional shares purchased (65) (181) - - ------------- ------------- -------------- Net cash provided by financing activities $ 5 725 895 $ 3 365 830 $ 5 251 610 ------------- ------------- -------------- Increase (decrease) in cash and cash equivalents $ 1 580 059 $ 1 855 783 $ (1 707 132) Cash and Cash Equivalents Beginning 5 962 250 4 106 467 5 813 599 ------------- ------------- -------------- Ending $ 7 542 309 $ 5 962 250 $ 4 106 467 ============= ============= ============== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 3 907 348 $ 3 960 889 $ 3 412 668 ============= ============= ============== Income taxes $ 439 616 $ 592 372 $ 542 248 ============= ============= ============== Supplemental Schedule of Noncash Investing and Financing Activities Issuance of common stock - dividend investment plan $ 183 499 $ 175 531 $ 160 345 ============= ============= ============== Unrealized gain on securities available for sale $ 22 485 $ 11 479 $ 167 410 ============= ============= ============== Other real estate acquired in settlement of loans $ 143 083 $ - - $ - - ============= ============= ==============
See Notes to Consolidated Financial Statements. 49 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 Eagle Financial Services, Inc. owns 100% of Bank of Clarke County (the "Bank"). An additional subsidiary, Eagle Home Funding, Inc. is a wholly-owned subsidiary of the Bank. The consolidated financial statements include the accounts of Eagle Financial Services, Inc. and its wholly-owned subsidiary. All significant intercompany accounts have been eliminated. 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 Investments are to be 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, 1997 and 1996. Derivative Financial Instruments FASB No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" requires various disclosures for derivative financial instruments which are futures, forwards, swaps 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. The Company has 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. The Company considers all consumer installment loans and residential mortgage loans to be homogeneous loans. These loans are not subject to impairment under FASB 114. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and the current economic conditions. A performing loan may be considered impaired, if the factors above indicate a need for impairment. A loan on nonaccrual status may not be impaired if in the process of collection or there is an insignificant shortfall in payment. An insignificant delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payment generally does not indicate an impairment situation, if in management's judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualify as an impaired loan under FASB 114. Charge-offs for impaired loans occur when the loan, or portion of the loan is determined to be uncollectible, as is the case for all loans. The Company had no loans subject to FASB 114 at December 31, 1997 and 1996. 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 Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Weighted average shares were 1,404,645, 1,392,298 and 1,383,152 for the years ended 1997, 1996 and 1995, respectively after giving retroactive effect to the 100% stock dividend declared in 1996. The Corporation had no potential common stock as of December 31, 1997, 1996 and 1995. 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. 50 Note 2. Securities The amortized costs and fair values of securities being held to maturity as of December 31, 1997 and 1996, are as follows:
Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value -------------- --------- ---------- --------------- 1997 ---------------------------------------------------------------------- U.S. Treasury securities $ 371 922 $ 7 570 $ (1 037) $ 378 455 Obligations of U.S. government corporations and agencies 10 148 139 54 127 (23 805) 10 178 461 Mortgage-backed securities 17 257 777 56 959 (83 326) 17 231 410 Obligations of states and political subdivisions 5 382 820 41 677 (4 877) 5 419 620 -------------- --------- ---------- --------------- $ 33 160 658 $ 160 333 $ (113 045) $ 33 207 946 ============== ========= ========== =============== 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 ============== ========= ========== ===============
The amortized cost and fair value of securities being held to maturity as of December 31, 1997, 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 $ 1 299 941 $ 1 299 595 Due after one year through five years 12 700 837 12 740 723 Due after five years through ten years 1 652 103 1 685 148 Due after ten years 250 000 251 070 Mortgage-backed securities 17 257 777 17 231 410 ------------ ------------ $33 160 658 $ 33 207 946 ============ ============ Amortized costs and fair values of securities available for sale as of December 31, 1997 and 1996, are as follows: Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------ ----------- ------------ ------------ 1997 -------------------------------------------------------- Obligations of U.S. government corporations and agencies $ 3 501 058 $ 17 432 $ (2 568) $ 3 515 922 Other 742 200 - - - - 742 200 ------------ ----------- ------------ ------------ $ 4 243 258 $ 17 432 $ (2 568) $ 4 258 122 ============ =========== ============ ============ 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 ============ =========== ============ ============ The amortized cost and fair value of securities available for sale as of December 31, 1997, by contractual maturity, are shown below. Amortized Fair Cost Value ------------ ------------ Due in one year or less $ 750 000 $ 748 656 Due after one year through five years 2 751 058 2 767 266 Other 742 200 742 200 ------------ ------------ $ 4 243 258 $ 4 258 122 ============ ============
Proceeds from maturities and principal payments of securities being held to maturity during 1997, 1996 and 1995 were $5,995,036, $5,128,436 and $5,820,188. There were no sales of securities being held to maturity during 1997, 1996 and 1995. Proceeds from maturities and principal payments of securities available for sale during 1997, 1996 and 1995 were $377,000, $1,748,844 and $496,000. There were no sales of securities available for sale during 1997, 1996 and 1995. Securities having a book value of $8,473,317 and $6,967,840 at December 31, 1997 and 1996, were pledged to secure public deposits and for other purposes required by law. 51 Note 3. Loans, Net The composition of the net loans is as follows:
December 31, ----------------------------- 1997 1996 ---------- ---------- (thousands) Loans secured by real estate: Construction and land development $ 588 $ 1 434 Secured by farmland 3 700 4 013 Secured by 1-4 family residential 44 863 45 156 Nonfarm, nonresidential loans 11 141 9 518 Loans to farmers (except secured by real estate) 770 1 446 Commercial and industrial loans (except those secured by real estate) 5 116 6 145 Loans to individuals (except those secured by real estate) 14 458 19 633 Loans to U.S. state and political subdivisions 1 155 1 517 All other loans 97 215 ---------- ---------- Total loans $ 81 888 $ 89 077 Less: Unearned income (462) (1 207) Allowance for loan losses (749) (914) ---------- ---------- Loans, net $ 80 677 $ 86 956 ========== ========== 52 Note 4. Allowance for Loan Losses Changes in the allowance for loan losses are as follows: December 31, ------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Balance, beginning $ 913 955 $ 828 104 $ 807 617 Provision charged to operating expense 476 667 290 000 240 000 Recoveries added to the allowance 44 624 63 561 54 960 Loan losses charged to the allowance (686 688) (267 710) (274 473) ------------ ------------ ------------ Balance, ending $ 748 558 $ 913 955 $ 828 104 ============ ============ ============
Nonaccrual loans excluded from the impaired loan disclosure under FASB 114 amounted to $437,261 at December 31, 1997. If interest would have been accrued, such income would have been approximated $11,021 for 1997. There were no loans on which the accrual of interest was discontinued or reduced in 1996. 53 Note 5. Premises and Equipment, Net The major classes of premises and equipment and the total accumulated depreciation are as follows:
December 31, ---------------------------- 1997 1996 ------------ ------------ Land $ 787 918 $ 787 918 Land held for future branch site 150 587 150 587 Buildings and improvements 3 546 330 3 534 056 Furniture and equipment 2 668 100 2 685 566 ------------ ------------ $ 7 152 935 $ 7 158 127 Less accumulated depreciation 3 092 434 2 906 452 ------------ ------------ Bank premises and equipment, net $ 4 060 501 $ 4 251 675 ============ ============
Depreciation expense was $389,742, $399,076 and $287,456 for the years ended December 31, 1997, 1996 and 1995, respectively. 54 Note 6. Deposits The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000, was approximately $14,961,859 and $11,343,027 in 1997 and 1996, respectively. At December 31, 1997, the scheduled maturities of time deposits are as follows: 1998 $ 38 770 989 1999 10 112 647 2000 3 899 483 2001 723 400 2002 and thereafter 198 120 ------------ $ 53 704 639 ============ 55 Note 7. Income Taxes Net deferred tax assets consist of the following components as of December 31, 1997 and 1996: December 31, ------------------------ 1997 1996 ----------- ----------- Deferred tax assets: Allowance for loan losses $ 164 159 $ 224 213 Deferred compensation 101 039 86 082 Accrued postretirement benefits 91 189 72 915 Reserve for other real estate owned 2 040 2 040 Securities available for sale - - 2 591 Non-accrual interest 6 908 - - ----------- ----------- $ 365 335 $ 387 841 ----------- ----------- Deferred tax liabilities: Property and equipment $ 305 804 $ 294 407 Prepaid pension costs 82 637 53 142 Securities available for sale 5 054 - - ----------- ----------- $ 393 495 $ 347 549 ----------- ----------- $ (28 160) $ 40 292 =========== =========== The provision for income taxes charged to operations for the years ended December 31, 1997, 1996 and 1995 consists of the following:
December 31, ------------------------------------- 1997 1996 1995 ---------- ----------- ----------- Current tax expense $ 311 336 $ 538 195 $ 514 947 Deferred tax (benefit) 60 807 (891) (37 710) ---------- ----------- ----------- $ 372 143 $ 537 304 $ 477 237 ========== =========== =========== 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, 1997, 1996 and 1995, due to the following: 1997 1996 1995 ---------- ------------ ------------ Computed "expected" tax expense $ 504 613 $ 628 538 $ 590 895 (Decrease) increase in income taxes resulting from: Tax-exempt interest (63 985) (74 765) (75 477) Nontaxable life insurance (8 712) - - - - Low income housing credits (44 454) (48 000) (46 227) Other (15 319) 31 531 8 046 ---------- ------------- ----------- $ 372 143 $ 537 304 $ 477 237 ========== ============= ===========
56 Note 8. Defined Benefit Pension Plan The amount of expense recognized for the Company's pension plan totaled $64,522, $69,426 and $66,884 for the years ended December 31, 1997, 1996, and 1995, respectively. The components of the pension cost charged against expense for 1997, 1996 and 1995, consisted of the following:
1997 1996 1995 ------------- ------------- ------------- Service cost (benefits earned) $ 62 353 $ 57 734 $ 51 682 Interest cost on projected benefit obligation 95 716 87 942 82 421 Actual return on plan assets (233 696) (108 168) (66 948) Gain or loss to the extent recognized 2 271 5 109 - - Net amortization and deferral 137 878 26 809 (271) ------------- ------------- ------------- $ 64 522 $ 69 426 $ 66 884 ============= ============= ============= The following table sets forth the plan's funded status as of December 31, 1997 and 1996, respectively. 1997 1996 ------------- ------------- Actuarial present value of benefit obligations: Vested benefits $ 1 121 406 $ 1 025 392 ============= ============= Accumulated benefits $ 1 137 819 $ 1 040 589 ============= ============= Projected benefits $ (1 331 265) $ ( 1 219 706) Plan assets at fair value 1 469 557 1 127 104 ------------- ------------- Funded status $ 138 292 $ (92 602) Unrecognized net loss 14 591 156 039 Prior service costs attributable to plan amendments 126 418 137 963 Unrecognized (net asset) at date of initial application (51 383) (64 227) ------------- ------------- Prepaid pension cost $ 227 918 $ 137 173 ============= =============
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 in 1997 and 1996. The expected long-term rate of return on plan assets was 8% in 1997 and 1996. 57 Note 9. Employee Benefits The Company has established an Employee Stock Ownership Plan (ESOP) to provide additional retirement benefits to substantially all employees. There were no contributions in 1997, 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 was leveraged to the extent that money was borrowed during 1995 to purchase available stock. The debt related to these borrowings was guaranteed by the Company. At December 31, 1997 and 1996, 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 $8,160 in 1997 and 1996, respectively. 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 1997, 1996 and 1995 based on the present value of the retirement benefits, amounted to $47,590, $38,499 and $34,899, 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. 58 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 leases certain facilities under operating leases which expire at various dates through 2002. These leases require payment of certain operating expenses and contain renewal options. The total minimum rental commitment at December 31, 1997 under these leases is $319,548, which is due as follows: Due in the year ending December 31, 1998 $ 91 111 1999 91 763 2000 74 274 2001 31 200 2002 31 200 ----------- $ 319 548 =========== The total rental expense was $45,576, $49,035 and $43,669 in 1997, 1996 and 1995, 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, 1997 and 1996, the amount of daily average required balances was approximately $752,000 and $744,000, respectively. See Note 15 with respect to financial instruments with off-balance sheet risk. 59 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 $1,069,521 and $808,061 at December 31, 1997 and 1996, respectively. During 1997, total principal additions were $1,297,259 and total principal payments were $1,035,799. 60 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, 1997, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Federal Reserve Bank 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 Purposes Action Provisions --------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- --------- ------- --------- ------- (Amount in Thousands) As of December 31, 1997: Total Capital (to Risk Weighted Assets) Consolidated $ 15 194 18.43% <=$ 6 595 = 8.00% N/A Bank of Clarke County $ 14 872 18.10% <=$ 6 574 = 8.00% <=$ 8 217 <=10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated $ 14 445 17.52% <=$ 3 298 = 4.00% N/A Bank of Clarke County $ 14 123 17.19% <=$ 3 287 = 4.00% <=$ 4 930 <= 6.00% Tier 1 Capital (to Average Assets) Consolidated $ 14 445 11.06% <=$ 5 222 = 4.00% N/A Bank of Clarke County $ 14 123 10.84% <=$ 5 210 = 4.00% <=$ 6 513 <= 5.00% As of December 31, 1996: Total Capital (to Risk Weighted Assets) Consolidated $ 14 454 17.27% <=$ 6 697 = 8.00% N/A 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% N/A 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% N/A Bank of Clarke County $ 13 202 10.66% <=$ 4 955 = 4.00% <=$ 6 194 <= 5.00%
61 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, 1997, the aggregate amount of unrestricted funds, which could be transferred from the Bank to the Parent Company without prior regulatory approval, amounted to $2,985,374 or 19.8% of the consolidated net assets. 62 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. 63 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, 1997 and 1996, is as follows:
1997 1996 ------------- ------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 9 651 769 $ 10 160 277 Standby letters of credit $ 139 631 $ 46 631
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, 1997, 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, 1997 exceeded the insurance limits of the Federal Deposit Insurance Corporation by approximately $1,391,513. 64 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, 1997, 1996 and 1995.
1997 1996 1995 ---------- ---------- ---------- Service cost-benefits attributable to service during the year $ 12 763 $ 11 818 $ 11 452 Interest on accumulated postretire- ment benefit obligation 36 239 33 567 35 701 Amortization of transition obligation 20 189 20 189 20 189 Net amortization and deferral (2 480) (2 896) (2 239) ---------- ---------- ---------- $ 66 711 $ 62 678 $ 65 103 ========== ========== ========== The following table sets forth the plan's obligation recognized in the accompanying balance sheets at December 31, 1997 and 1996: 1997 1996 ---------- ----------- Accumulated postretirement benefit obligation: Retirees $ 157 632 $ 157 743 Other fully eligible participants 81 488 75 452 Other active participants 243 685 213 817 ---------- ----------- $ 482 805 $ 447 012 ========== =========== Plan assets: Accumulated postretirement benefit obligation $ (482 805) $ (459 108) Unrecognized transition obligation 302 840 323 029 Unrecognized net experience (gains) (93 701) (83 116) ---------- ----------- Obligation included on balance sheet $ (273 666) $ (219 195) ========== ===========
For measurement purposes, a 10 percent annual rate of increase in per capita health care costs of covered benefits was assumed for 1997, 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, 1997 would be increased by $17,300 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997 would be increased by $1,300. The weighted average discount rate used in estimating the accumulated postretirement benefit obligation was 8% for 1997 and 1996. 65 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. 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, 1997 and 1996. The Company had unused lines of credit totaling $11,700,000 with nonaffiliated banks at December 31, 1997. 66 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, 1997 and 1996, 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:
1997 1996 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ (in thousands) (in thousands) Financial assets: Cash and short-term investments $ 7 542 309 $ 7 542 309 $ 5 962 250 $ 5 962 250 Securities 37 418 780 37 466 068 26 089 574 25 786 814 Loans 81 425 186 79 267 000 87 870 194 85 659 000 Less: allowance for loan losses (748 558) - - (913 955) - - ------------ ------------ ------------ ------------ Total financial assets $125 637 717 $124 275 377 $119 008 063 $117 408 064 ============ ============ ============ ============ Financial liabilities: Deposits $117 079 355 $118 113 000 $111 087 867 $111 186 000 ------------ ------------ ------------ ------------ Total financial liabilities $117 079 355 $118 113 000 $111 087 867 $111 186 000 ------------ ------------ ------------ ------------
67 Note 19. Condensed Financial Information - Parent Company Only EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Balance Sheets December 31, 1997 and 1996
Assets 1997 1996 ------------- ------------- Cash $ 50 278 $ 5 521 Prepaid expenses - - 453 Securities 5 000 60 000 Investment in subsidiary, at cost, plus undistributed net income 14 736 435 13 859 593 Equity investment in Johnson Williams Limited Partnership 266 409 271 289 ------------- ------------- Total assets $ 15 058 122 $ 14 196 856 ============= ============= Liabilities and Stockholders' Equity Liabilities Other liabilities $ 7 $ - - ------------- ------------ Stockholders' Equity Preferred stock $ - - $ - - Common stock 3 521 213 3 499 714 Surplus 2 107 826 1 945 891 Retained earnings 9 419 266 8 756 281 Unrealized gain (loss) on securities available for sale, net 9 810 (5 030) ------------- ------------ Total stockholders' equity $ 15 058 115 $ 14 196 856 ------------- ------------ Total liabilities and stockholders' equity $ 15 058 122 $ 14 196 856 ============= ============
EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Income Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 ------------ ------------ ------------ Income Dividends from subsidiary $ 223 000 $ 200 000 $ 200 000 Interest on securities 773 1 414 2 561 ------------ ------------ ------------ Total income $ 223 773 $ 201 414 $ 202 561 ------------ ------------ ------------ Expenses Amortization of organizational costs $ - - $ 13 023 $ 12 600 Legal expense 1 409 565 1 376 Other operating expenses 20 914 22 989 29 163 ------------ ------------ ------------ Total expenses $ 22 323 $ 36 577 $ 43 139 ------------ ------------ ------------ Other Income Income (loss) on equity investment $ (4 880) $ 595 $ (18 689) Other - - - - 25 064 ------------ ------------ ------------ Total other income $ (4 880) $ 595 $ 6 375 ------------ ------------ ------------ Income before allocated tax benefits and undistributed net income of subsidiary $ 196 570 $ 165 432 $ 165 797 Allocated Income Tax Benefit (53 440) (57 797) (59 629) ------------ ------------ ------------ Income before equity in undistributed net income of subsidiary $ 250 010 $ 223 229 $ 225 426 Equity in Undistributed Net Income of Subsidiary 862 002 1 088 108 1 035 264 ------------ ------------ ------------ Net income $ 1 112 012 $ 1 311 337 $ 1 260 690 ============ ============ ============
Notes to Consolidated Financial Statements EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Cash Flows Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 ------------ ------------ ----------- Cash Flows from Operating Activities Net income $ 1 112 012 $ 1 311 337 $ 1 260 690 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organizational costs - - 13 023 12 600 (Income) loss on equity investment 4 880 (595) 18 689 Undistributed earnings of subsidiary (862 002) (1 088 108) (1 035 264) Changes in assets and liabilities: (Increase) decrease in prepaid expenses 453 11 267 (11 630) (Increase) decrease in income tax credits receivable - - 48 000 (48 000) Increase in other liabilities 7 - - - - ------------ ------------ ----------- Net cash provided by operating activities $ 255 350 $ 294 924 $ 197 085 ------------ ------------ ----------- Cash Flows from Investing Activities Purchase of securities $ - - $ (51 000) $ (220 000) Proceeds from maturities of securities 55 000 - - 246 000 ------------ ------------ ----------- Net cash provided by (used in) investing activities $ 55 000 $ (51 000) $ 26 000 ------------ ------------ ----------- Cash Flows from Financing Activities Cash dividends paid $ (265 528) $ (242 295) $ (220 137) Fractional shares purchased (65) (181) - - ------------ ------------ ----------- Net cash (used in) financing activities $ 265 593) $ (242 476) $ (220 137) ------------ ------------ ----------- Increase in cash $ 44 757 $ 1 448 $ 2 948 Cash Beginning 5 521 4 073 1 125 ------------ ------------ ----------- Ending $ 50 278 $ 5 521 $ 4 073 ============ ============ =========== Supplemental Schedule of Noncash Financing Activities Issuance of common stock - dividend investment pla $ 183 499 $ 175 531 $ 160 345 ============ ============ =========== Unrealized gain on securities available for sale $ 22 485 $ 11 479 $ 167 410 ============ ============ ===========
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