-----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, TsKb8u1dt2vNvaUZeF4XjO7V6iVW/YeVCSQtubgCBCFNJPg7h50I2AnNzPDyVUlz RNbatZptlAkqwtvS49jsBA== 0000916641-99-000261.txt : 19990331 0000916641-99-000261.hdr.sgml : 19990331 ACCESSION NUMBER: 0000916641-99-000261 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578111 BUSINESS ADDRESS: STREET 1: 2 E MAIN ST CITY: BERRYVILLE STATE: VA ZIP: 22611 BUSINESS PHONE: 540-955-2510 MAIL ADDRESS: STREET 1: PO BOX 391 CITY: BERRYVILLE STATE: VA ZIP: 22611 10-K 1 EAGLE FINANCIAL SERVICES, INC. 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, 1998 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 of principal executive offices) (Zip Code) (540) 955-2510 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, Par Value $2.50 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] PAGE 1 OF 62 PAGES. Exhibit index on page 35 . ------ ------ ------ The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 25, 1999 was $35,970,928. The aggregate market value of the stock was computed using a market rate of $28.00 per share. The number of shares of Registrant's Common Stock outstanding as of March 25, 1999 was 1,420,287. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's 1998 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 1999 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 Shareholder 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.............................................. 31 Item 8. Financial Statements and Supplementary Data.............. 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 31 PART III Item 10. Directors and Executive Officers of the Registrant....... 32 Item 11. Executive Compensation................................... 32 Item 12. Security Ownership of Certain Beneficial Owners and Management.... ................................... 32 Item 13. Certain Relationships and Related Transactions........... 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 33 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 and commercial banking services, including demand, savings and time deposits and consumer, mortgage and commercial 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, Picadilly Street 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-nine officers, fifty-two other full-time and twelve part-time employees as of December 31, 1998. 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)
1998 1997 --------------------------------- --------------------------------- Average Income/ Average Average Income/ Average Balances Expense Rate Balances Expense Rate --------- --------- --------- --------- --------- --------- ASSETS: Loans Taxable $ 83,536 $ 7,189 8.61% $ 81,525 $ 7,184 8.81% Tax-exempt (1) 1,440 109 7.57% 1,389 107 7.70% Non-accrual 352 0 0.00% 495 0 0.00% --------- --------- --------- --------- Total Loans $ 85,328 $ 7,298 $ 83,409 $ 7,291 8.74% --------- --------- --------- --------- Securities Taxable $ 35,765 $ 2,149 6.01% $ 28,671 $ 1,809 6.13% Tax-Exempt (1) 4,966 333 6.71% 3,106 219 7.05% --------- --------- --------- --------- Total Securities $ 40,731 $ 2,482 6.09% $ 31,777 $ 2,028 6.38% --------- --------- --------- --------- Deposits in banks $ 41 $ 2 4.88% $ 0 $ 0 0.00% --------- --------- --------- --------- Federal funds sold $ 2,090 $ 114 5.45% $ 1,793 $ 101 5.63% --------- --------- --------- --------- Total Earning Assets $128,190 $ 9,896 7.72% $116,979 $ 9,420 8.05% ========= ========= Less: Reserve for loan losses (800) (817) Cash and due from banks 4,985 4,643 Bank premises and equipment, net 4,127 4,122 Other assets 3,413 3,209 --------- --------- Total Assets $139,915 $128,136 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits Demand deposits $ 18,443 $ 0 $ 15,846 $ 0 --------- --------- --------- --------- NOW accounts $ 16,365 $ 325 1.99% $ 15,062 $ 309 2.05% Money market accounts 17,488 553 3.16% 16,709 520 3.11% Savings accounts 13,773 330 2.40% 13,956 341 2.44% Time deposits 56,604 2,971 5,25% 50,655 2,729 5.39% --------- --------- --------- --------- Total Interest- Bearing Deposits $104,230 $ 4,179 4.01% $ 96,382 $ 3,899 4.05% Fed funds purchased 305 14 4.59% 115 5 4.35% Federal Home Loan Bank advances 233 12 5.15% 0 0 0.00% --------- --------- --------- --------- Total Interest- Bearing Liabilities $104,768 $ 4,205 4.01% $ 96,497 $ 3,904 4.05% --------- --------- --------- --------- Other Liabilities $ 1,160 $ 1,143 --------- --------- Shareholders' Equity $ 15,544 $ 14,650 --------- --------- Total Liabilities & Shareholders' Equity $139,915 $128,136 ========= ========= Net interest spread 3.71% 4.00% Interest expense as a percent of average earning assets 3.28% 3.34% Net interest margin 4.44% 4.72% (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) 1996 --------------------------------- Average Income/ Average Balances Expense Rate --------- --------- --------- ASSETS: Loans Taxable $ 84,772 $ 7,660 9.04% Tax-exempt (1) 1,410 138 9.79% Non-accrual 0 0 0.00% --------- --------- Total Loans $ 86,182 $ 7,798 9.05% --------- --------- Securities Taxable $ 23,528 $ 1,443 6.13% Tax-Exempt (1) 3,289 239 7.27% --------- --------- Total Securities $ 26,817 $ 1,682 6.27% --------- --------- Deposits in banks $ 0 $ 0 0.00% --------- --------- Federal funds sold $ 918 $ 51 5.56% --------- --------- Total Earning Assets $113,917 $ 9,531 8.37% ========= Less: Reserve for loan losses (853) Cash and due from banks 4,197 Bank premises and equipment, net 4,097 Other assets 2,858 --------- Total Assets $124,216 ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits Demand deposits $ 12,900 $ 0 --------- --------- NOW accounts $ 15,262 $ 321 2.10% Money market accounts 17,393 535 3.08% Savings accounts 13,594 342 2.52% Time deposits 49,349 2,656 5,38% --------- --------- Total Interest- Bearing Deposits $ 95,598 $ 3,854 4.03% Fed funds purchased 974 57 5.85% Federal Home Loan Bank advances 0 0 0.00% --------- --------- Total Interest- Bearing Liabilities $ 96,572 $ 3,911 4.05% --------- --------- Other Liabilities $ 1,053 --------- Shareholders' Equity $ 13,691 --------- Total Liabilities & Shareholders' Equity $124,216 ========= Net interest spread 4.32% Interest expense as a percent of average earning assets 3.43% Net interest margin 4.93% (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)
1998 Compared to 1997 1997 Compared to 1996 -------------------------------------------------------------------- Due to Due to Due to Due to Change Volume Rate Change Volume Rate -------- -------- -------- -------- -------- -------- INTEREST INCOME: Loans; taxable $ (9) $ 729 $ (738) $ (476) $ (286) $ (190) Loans; tax-exempt 24 4 20 (31) (2) (29) Securities; taxable 340 421 (81) 366 323 43 Securities; tax-exempt 114 124 (10) (20) (13) (7) Deposits in banks 2 2 0 0 0 0 Federal funds sold 13 16 (3) 50 49 1 -------- -------- -------- -------- -------- -------- Total Interest Income $ 484 $ 1,296 $ (812) $ (111) $ 71 $ (182) -------- -------- -------- -------- -------- -------- INTEREST EXPENSE: NOW accounts $ 16 $ 24 $ (8) $ (12) $ (4) $ (8) Money market accounts 33 25 8 (15) (20) 5 Savings accounts (11) (5) (6) (1) 5 (6) Time deposits 242 311 (69) 73 68 5 Federal funds purchased 9 9 0 (52) (40) (12) Federal Home Loan Bank advances 12 12 0 (3) (3) 0 -------- -------- -------- -------- -------- -------- Total Interest Expense $ 301 $ 376 $ (75) $ (7) $ 9 $ (16) -------- -------- -------- -------- -------- -------- Net Interest Income $ 183 $ 920 $ (737) $ (104) $ 62 $ (166) -------- -------- -------- -------- -------- --------
6 Table 3 - Analysis of Allowance for Loans Losses (In Thousands)
Year Ended December 31 ------------------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Allowance for Loan Losses, January 1 $ 749 $ 914 $ 828 $ 808 $ 744 Loans Charged-Off: Commercial, financial and agricultural $ 1 $ 4 $ 0 $ 144 $ 52 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 7 42 0 0 48 Consumer 286 640 267 130 122 ------ ------ ------ ------ ------ Total Loans Charged-Off $ 294 $ 686 $ 267 $ 274 $ 174 ------ ------ ------ ------ ------ Recoveries: Commercial, financial and agricultural $ 0 $ 1 $ 6 $ 10 $ 11 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 4 4 0 0 0 Consumer 94 39 57 44 24 ------ ------ ------ ------ ------ Total Recoveries $ 98 $ 44 $ 63 $ 54 $ 35 ------ ------ ------ ------ ------ Net Charge-Offs $ 196 $ 642 $ 204 $ 220 $ 139 ------ ------ ------ ------ ------ Provision for Loan Losses $ 372 $ 477 $ 290 $ 240 $ 203 ------ ------ ------ ------ ------ Allowance for Loan Losses, December 31 $ 925 $ 749 $ 914 $ 828 $ 808 ====== ====== ====== ====== ====== Ratio of Net Charge-Offs to Average Loans: 0.23% 0.77% 0.24% 0.26% 0.18% ====== ====== ====== ====== ======
7 Table 4 - Allocation of Allowance for Loan Losses (In Thousands)
1998 1997 1996 ---------------------- ---------------------- ---------------------- 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 $ 352 8.8% $ 323 8.8% $ 365 10.6% Real Estate: mortgage 110 77.2% 125 74.0% 75 68.4% Consumer 463 14.0% 301 17.2% 474 21.0% ---------- ---------- ---------- $ 925 $ 749 $ 914 ========== ========== ==========
8 Table 5 - Loan Portfolio (In Thousands)
December 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Loans secured by real estate: Construction and land development $ 2,168 $ 588 $ 1,434 $ 0 $ 0 Secured by farmland 3,565 3,700 4,013 4,112 3,888 Secured by 1-4 family residential 51,444 44,863 45,156 41,411 35,803 Nonfarm, nonresidential loans 16,902 11,141 9,518 10,372 13,698 Loans to farmers (except secured by real estate) 745 770 1,446 1,605 1,777 Commercial and industrial loans (except those secured by real estate) 6,463 5,116 6,145 6,349 6,247 Loans to individuals (except those secured by real estate) 13,603 14,458 19,633 22,508 19,547 All other loans 1,193 1,251 1,732 1,239 1,239 -------- -------- -------- -------- -------- Total loans 96,083 81,887 89,077 87,596 82,199 Less: Unearned discount (150) (462) (1,207) (1,725) (1,565) -------- -------- -------- -------- -------- Total Loans, Net $95,933 $81,425 $87,870 $85,871 $80,634 ======== ======== ======== ======== ========
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 $14,308 $48,183 $13,588 $74,079 Agricultural production loans 452 282 0 734 Commercial and industrial loans 3,530 2,912 18 6,460 Consumer loans 2,775 9,474 1,218 13,467 All other loans 1,193 0 0 1,193 ------- ------- ------- ------- $22,258 $58,851 $14,824 $95,933 ======= ======= ======= ======= For maturities over one year: Interest rates - floating $ 1,521 $ 3,249 $ 4,770 Interest rates - fixed 57,330 11,575 68,905 ------- ------- ------- $58,851 $14,824 $73,675 ======= ======= =======
10 Table 7 - Non-Performing Assets (In Thousands)
December 31, ------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Nonaccrual loans $ 227 $ 437 $ 0 $ 430 $ 0 Restructured loans 0 0 0 0 0 Other real estate owned 0 190 47 47 47 ------ ------ ------ ------ ------ Total Non-Performing Assets $ 227 $ 627 $ 47 $ 477 $ 47 ====== ====== ====== ====== ====== Loans past due 90 days accruing interest $ 372 $ 614 $ 967 $1,694 $ 683 ====== ====== ====== ====== ====== Allowance for loan losses to period end loans 0.96% 0.92% 1.04% 0.96% 1.00% Non-performing assets to period end loans and other real estate owned 0.24% 0.77% 0.05% 0.52% 0.06%
The amount of gross interest income that would have been recorded during the periods if the non-accrual loans had been current in accordance with their original terms is incorporated by reference to Note 4 of the Consolidated Financial Statements which are contained herein as Exhibit 99.1. A discussion of the Company's policy for placing loans on non-accrual status is incorporated by reference to Note 1 of the Consolidated Financial Statements which are contained herein as Exhibit 99.1. 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 $ 0 0.00% $ 0 0.00% $ 122 7.63% Obligations of U.S. government corporations and agencies 1,987 5.02% 4,504 6.28% 0 0.00% Mortgage-backed securities 0 0.00% 2,629 7.12% 4,972 6.73% Obligations of states and political subdivisions, taxable 0 0.00% 2,727 6.40% 375 6.18% ------- ------- ------- Total taxable 1,987 9,860 5,469 Obligations of states and political subdivisions, tax-exempt (1) 355 7.60% 2,732 6.74% 5,006 6.33% ------- ------- ------- Total $ 2,342 $12,592 $10,475 ------- ------- ------- Securities available for sale: Obligations of U.S. government corporations and agencies $ 1,401 5.76% $ 3,825 5.94% $ 0 0.00% Mortgage-backed securities 1,171 6.21% 4,200 5.94% 2,067 6.21% Other taxable securities 0 0.00% 0 0.00% 0 0.00% ------- ------- ------- Total taxable $ 2,572 $ 8,025 $ 2,067 ------- ------- ------- Obligations of states and Political subdivision Tax-exempt 0 0.00% 0 0.00% 498 6.56% ------- ------- ------- Total $ 2,572 $ 8,025 $ 2,565 ------- ------- ------- Total securities: $ 4,914 $20,617 $13,040 ======= ======= ======= (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% $ 122 7.63% Obligations of U.S. government corporations and agencies 0 0.00% 6,491 5.89% Mortgage-backed securities 3,009 0.00% 10,610 6.75% Obligations of states and political subdivisions, taxable 0 0.00% 3,102 6.37% ------- ------- Total taxable 3,009 20,325 Obligations of states and political subdivisions, tax-exempt (1) 250 6.63% 8,343 6.53% ------- ------- Total $ 3,259 $28,668 ------- ------- Securities available for sale: Obligations of U.S. government corporations and agencies $ 0 0.00% $ 5,226 5.89% Mortgage-backed securities 0 0.00% 7,438 6.06% Other taxable securities 1,252 6.70% 1,252 6.70% ------- ------- Total taxable $ 1,252 $13,916 ------- ------- Obligations of state and Political subdivisions Tax-exempt 0 0.00% 498 6.56% ------- ------- Total $ 1,252 $14,414 ------- ------- Total securities: $ 4,511 $43,082 ======= ======= (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 --------------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- Amount Rate Amount Rate Amount Rate -------- ------ -------- ------ -------- ------ Noninterest-bearing $ 21,289 $ 17,774 $ 15,175 -------- -------- -------- Interest-bearing: NOW accounts 18,053 1.99% 15,796 2.05% 16,773 2.10% Money market accounts 18,922 3.16% 16,232 3.11% 17,172 3.08% Regular savings accounts 13,959 2.40% 13,572 2.44% 13,421 2.52% Certificates of deposit: Less than $100,000 37,540 5.16% 38,743 5.39% 37,204 5.38% $100,000 and more 20,477 5.46% 14,962 5.49% 11,343 5.40% -------- -------- -------- Total interest-bearing $108,921 4.01% $ 99,305 4.05% $ 95,913 4.03% -------- -------- -------- Total deposits $130,210 $117,079 $111,088 ======== ======== ========
13 Table 10 - Maturities of Certificates of Deposit and Other Time Deposits 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, 1998 $ 12,129 $ 4,609 $ 3,168 $ 541 $ 0 $ 20,447 ======== ======== ======== ======== ======== ========
14 Table 11 - Risk Based Capital Ratios (In Thousands)
December 31 ---------------------------------- 1998 1997 -------- -------- Tier 1 Capital: Shareholders' Equity $ 15,563 $ 14,445 Tier 2 Capital: Allowable Allowance for Loan Losses 925 749 -------- -------- Total Capital: $16,488 $ 15,194 ======== ======== Risk Adjusted Assets: $102,313 $ 82,443 ======== ======== Risk Based Capital Ratios: Tier 1 to Risk Adjusted Assets 15.21% 17.52% Total Capital to Risk Adjusted Assets 16.12% 18.43%
15 Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
December 31, 1998 ------------------------------------------------------ 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) $ 15,062 $ 11,966 $ 57,330 $ 11,575 $ 95,933 Securities and other interest-earning assets 2,110 2,803 20,724 17.445 43,082 Federal funds sold 2,323 0 0 0 2,323 --------- --------- --------- --------- --------- Total interest-earning assets $ 19,495 $ 14,769 $ 78,054 $ 29,020 $141,338 --------- --------- --------- --------- --------- INTEREST-BEARING LIABILITIES: Certificates of deposit: $100,000 and more $ 12,129 $ 7,777 $ 541 $ 0 $ 20,447 less than $100,000 11,284 18,729 7,524 3 37,540 Other deposits 50,934 0 0 0 50,934 --------- --------- --------- --------- --------- Total interest-bearing liabilities $ 74,347 $ 26,506 $ 8,065 $ 3 $108,921 --------- --------- --------- --------- --------- Interest sensitivity gap: Asset sensitive (Liability sensitive) ($54,852) ($11,737) $ 69,989 $ 29,017 $ 32,417 ========= ========= ========= ========= ========= Cumulative interest rate gap: $(54,852) $(66,589) $ 3,400 $ 32,417 ========= ========= ========= ========= Ratio of cumulative gap to total interest earning assets: -38.81% -47.11% 2.41% 22.94% ========= ========= ========= =========
16 Item 2. Properties. The present headquarters building of the Registrant and the Bank, which is owned, 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, Virginia. The Bank also presently operates leased branches at 625 East Jubal Early Drive, Winchester, Virginia and 40 West Piccadilly Street, Winchester, Virginia. The Bank also purchased a 1.5 acre parcel of land located adjacent to the Food Lion north of Berryville on Route 340. The site will house a branch in the future. The Bank also owns a building at 18 North Church Street in Berryville for future expansion. This site is currently leased and used for offices. 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 Shareholder 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.
1998 1997 1996 Dividends Per Share --------------------------------------------------------------------------- High Low High Low High Low 1998 1997 1996 --------------------------------------------------------------------------- 1st Quarter $25.00 $24.00 $22.00 $20.50 $19.00 $18.75 $0.08 $0.08 $0.00 2nd Quarter 26.00 25.00 23.00 22.00 19.50 19.00 0.08 0.08 0.11 3rd Quarter 27.00 26.00 24.00 23.00 20.00 19.50 0.08 0.08 0.00 4th Quarter 27.00 27.00 24.00 24.00 20.50 20.00 0.09 0.08 0.19
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 at $2.50. 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 starting February 15, 1997. The company paid quarterly dividends during both 1997 and 1998. 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 1,042 holders of record of the Registrant's Common Stock as of March 25, 1999. 18 Item 6. Selected Financial Data. The following Selected Financial Data for the five fiscal years ended December 31, 1998 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 ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 Income Statement Data: ------------ ------------ ------------ ------------ ------------ Interest Income $9,746,590 $9,310,237 $9,402,870 $8,726,902 $7,896,082 Interest Expense 4,204,254 3,904,197 3,910,612 3,584,788 2,722,451 ------------ ------------ ------------ ------------ ------------ Net Interest Income $5,542,336 $5,406,040 $5,492,258 $5,142,114 $5,173,631 Less: Provision for Loan Losses 371,886 476,667 290,000 240,000 203,000 ------------ ------------ ------------ ------------ ------------ Net Interest Income after Provision for Loan Losses $5,170,450 $4,929,373 $5,202,258 $4,902,114 $4,970,631 Non-Interest Income 1,707,712 1,245,781 1,024,770 811,968 590,458 ------------ ------------ ------------ ------------ ------------ Net Revenue $6,878,162 $6,175,154 $6,227,028 $5,714,082 $5,561,089 Non-Interest Expense 5,099,167 4,690,999 4,378,387 3,976,155 3,626,679 ------------ ------------ ------------ ------------ ------------ Income before Income Taxes $1,778,995 $1,484,155 $1,848,641 $1,737,927 $1,934,410 Applicable Income Taxes 470,190 372,143 537,304 477,237 573,407 ------------ ------------ ------------ ------------ ------------ Net Income $1,308,805 $1,112,012 $1,311,337 $1,260,690 $1,361,003 ============ ============ ============ ============ ============ Performance Ratios: Return on Average Assets 0.94% 0.87% 1.06% 1.12% 1.25% Return on Average Equity 8.42% 7.59% 9.58% 9.94% 11.90% Dividend Payout Ratio 35.60% 40.38% 31.86% 30.18% 26.17% Per Share Data (1): Net Income, basic and diluted $0.93 $0.79 $0.94 $0.91 $0.99 Cash Dividends Declared 0.33 0.32 0.30 0.28 0.26 Book Value 11.42 10.69 10.14 9.44 8.67 Market Price * 27.00 24.00 20.50 18.75 17.50 Average Shares Outstanding 1,413,172 1,404,645 1,392,298 1,383,152 1,369,330 Balance Sheet Data: Assets $153,124,559 $133,239,401 $126,241,741 $121,492,853 $114,607,016 Loans (Net of Unearned Income) 95,933,498 81,425,186 87,870,194 85,871,203 80,634,132 Securities 43,081,952 37,418,780 26,089,574 26,618,148 23,833,408 Deposits 130,209,888 117,079,355 111,087,867 105,612,562 99,007,815 Shareholders' Equity 16,193,501 15,058,115 14,196,856 13,120,419 11,969,374 (1) Adjusted for a stock split effected in the form of a 100% stock dividend of Eagle Financial Services, Inc. stock on December 31, 1996. * The Company issues one class of stock, Common, which is not listed for trading on a registered exchange or quoted on the National Association of Securities Dealers Automated Quotation System (NASDAQ). Trades in the Company's stock occur sporadically on a local basis. Accordingly, there is no established public trade market for shares of the Company's stock, and quotations do not necessarily reflect the price that would be paid in an active and liquid market.
19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The purpose of this discussion is to focus on the important factors affecting the Company's financial condition and results of operations. This discussion should be read in conjunction with the Selected Financial Data and the Company's Consolidated Financial Statements (including the notes thereto). The tables which were contained in prior years' Annual Reports with Management's Discussion and Analysis can be found in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. OVERVIEW During 1998 total assets of the company increased $19.9 million or 14.92% from $133.2 million at December 31, 1997 to $153.1 at December 31, 1998. Growth in both loans and securities was funded through an increase in total deposits and an advance from the Federal Home Loan Bank. Net loans increased $14.3 million or 17.76% from $80.7 million to $95.0 million at year end 1997 and 1998, respectively. Securities increased $5.7 million or 15.13% from $37.4 million to $43.1 million at year 1997 and 1998, respectively. Total deposits of the Company increased from $117.1 million to $130.2 million, which represents an increase of $13.1 million or 11.22% from December 31, 1997 to December 31, 1998. Shareholders' equity increased $1.1 million or 7.54% during 1998 from $15.1 million to $16.2 million. For the year ended December 31, 1998, net income totaled $1.3 million, a $0.2 million or 17.70% increase over 1997 net income of $1.1 million. Earnings per share were $0.93, $0.79 and $0.94 for 1998, 1997 and 1996, respectively. This is a $0.15 or 15.96% decrease in 1997 and a $0.14 or 17.72% increase for 1998. Return of average equity for 1998 was 8.42% as compared to 7.59% for 1997 and 9.58% in 1996. Return on average assets for 1998 was 0.94% as compared to 0.87% for 1997 and 1.06% for 1996. During the past five years, the Company has earned $6.4 million, resulting in an increase in shareholders' equity of 49.18%. The market value of the Company has risen steadily over the same period. The market value of the stock has increased from $16.25 per share to $27.00 over the same five year period which represents an increase of 66.15% 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 $0.1 million or 1.57% in 1997 and increased $0.1 million or 2.52% in 1998 from $5.5 million in 1996, $5.4 million in 1997 and $5.5 million in 1998. 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 and 4.44% in 1998. Earning assets yielded 7.72% on a fully taxable equivalent basis in 1998 as compared to 8.05% in 1997 and 8.37% in 1996. The average rate on total loans decreased from 8.74% in 1997 to 8.55% in 1998 as compared to 9.05% in 1996. The total income earned on loans remained the same at $7.3 million in 1997 and 1998 despite an increase in average loans of $1.9 million or 2.30% as compared to a $0.5 million or 6.39% decrease in 1997 from $7.8 million in 1996. Interest earned on securities increased from $1.6 million in 1996 to $2.0 million in 1997 and $2.5 million in 1998, an increase of $0.4 million or 22.01% and $0.5 million or 22.4% in 1997 and 1998, respectively. The average balance of securities increased by $9.0 million or 28.18% in 1998 and $5.0 million or 18.50% in 1997. The average rate on securities increased from 6.27% in 1996 to 6.38% in 1997, then decreased to 6.09% in 1998. Interest expense remained the same at $3.9 million for 1996 and 1997 and increased $0.3 million or 7.71% to $4.2 million in 1998. Average balances on interest-bearing liabilities increased by $8.3 million or 8.57% from $96.5 million in 1997 to $104.8 million in 1998. The average rate on interest-bearing liabilities has changed only slightly from 4.05% in 1996 and 1997 to 4.01% in 1998. Interest expense as a percent of average earning assets has decreased from 3.43% in 1996 to 3.34% in 1997 and 3.28% in 1998 and net interest spread has decreased from 4.32% in 1996 to 4.00% in 1997 and 3.71% in 1998. 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 provision for loan losses decreased $104,781 from $476,667 in 1997 to $371,886 in 1998 as compared to an increase in 1997 of $186,667 from $290,000 in 1996. The ratio of net charge-offs to average loans was 0.23% for 1998 compared to 0.77% in 1997 and 0.24% in 1996. The allowance for loan losses as a percentage of loans decreased from 1.04% at the end of 1996 to 0.92% at the end of 1997, then increased to 0.96% at the end of 1998. Charged-off loans decreased $393,207 or 57.26% and recoveries increased $53,584 or 120.08% in 1998 compared to 1997, which resulted in net charge-offs of $195,273 for 1998 and $642,064 for 1997. The coverage for the allowance for loan losses over non-performing assets and loans 90 days past due and still accruing interest was 154.36% in 1998 as compared to 60.35% in 1997 and 90.14% in 1996. Loans 90 days past due and still accruing interest as a percentage of total loans, net unearned discount, decreased from 0.75% in 1997 to 0.39% in 1998. The amount of loans past due greater than 90 days decreased from $614,000 in 1997 to $372,000 in 1998. Of the $372,000, 89.75% are secured by real estate. The allowance for loan losses as of year end covered net charge-offs 4.74 times in 1998 as compared to only 1.17 times in 1997. 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 methods utilized consider 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 $0.5 million or 37.08% from $1.2 million in 1997 to $1.7 million in 1998 and increased $0.2 million or 21.57% in 1997 from $1.0 million in 1996. Other operating income realized an increase of $291,092 or 148.71% from $195,739 in 1997 to $486,831 in 1998. This increase can be attributed to commissions received from the sale of non-deposit investment products through Eagle Investment Services and commissions received from the origination of mortgages for the secondary market through Eagle Home Funding. Total other expenses increased $0.4 million or 8.70% from $4.7 million in 1997 to $5.1 million in 1998 and increased $0.3 million or 7.14% in 1997 from $4.4 million in 1996. Salaries and wages realized an increase of $366,748 or 18.79% from $1,951,569 in 1997 to $2,318,317 in 1998. This increase can be attributed to the hiring of personnel necessary to operate the Bank's Old Post Office Branch and performance salary adjustments received by employees. The efficiency ratio of the Company, a measure of its performance based upon the relationship between non-interest expense and operating income, was 69.46% in 1997 and 68.90% in 1998. It is management's objective to maintain an efficiency ratio at or below 68.00% for the Company. 23 LOAN PORTFOLIO 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. The ratio of loans to deposits increased 4.13% from 69.55% in 1997 to 73.68% in 1998. Loans, net of unearned income increased $14.5 million or 17.82% from $81.4 million to $95.9 million at year end 1997 and 1998, respectively. 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 $74.1 million or 77.10% of total loans in 1998 and $60.3 million or 73.63% of total loans in 1997 which represents an increase of $13.8 million or 22.87% 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. 24 RISK ELEMENTS AND NON-PERFORMING ASSETS Non-performing assets consist of nonaccrual loans, restructured loans, and other real estate owned (foreclosed properties). Total nonperforming assets and loans that are 90 days or more past due and still accruing interest was $0.6 million and $1.2 million on December 31, 1998 and 1997, respectively. This is a decrease of $0.6 million or 51.73%. 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. The amount of classified loans remained the same at $2.4 million for 1998 and 1997. These loans are primarily well-secured and in the process of collection and the allowance for loan losses includes $316,260 in specific allocations for these loans as well as percentage allocations for classified assets without specific allocations. 25 SECURITIES The total amount of securities as of December 31, 1998 was $43.1 million, compared to $37.4 million as of December 31, 1997. Securities increased $5.7 million or 15.13% in 1998 over 1997. The increase from 1997 to 1998 is primarily due to investments in Obligations of states and political subdivisions (municipal bonds). These securities increased $6.6 million or 121.88% from 1997 to 1998. During 1998 the Company adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective October 1, 1998. Paragraph 54 of this Standard allows a reallocation of securities among the categories established by FAS No. 115. As a result of adoption the Company transferred Obligations of U.S. government corporations and agencies and Mortgage-backed securities with a total book value of $12.1 million and a total fair value of $12.2 million from held to maturity to available for sale. As of result of adoption, 66.54% percent of the Company's securities were classified as held to maturity and 33.46% were classified as available for sale at December 31, 1998. The increase in available for sale securities provide additional liquidity to the Company due to their ability to be sold. This transfer would also allow the company to sell and replace certain securities if rates change rapidly and the opportunity to sell mortgage-backed securities when the pool becomes very small and the expected life of the security extends well beyond its original average life. The unrealized gain on available for sale securities increased from $14,864 to $118,075 at December 31, 1997 and 1998 respectively. This significant increase in fair value can be attributed to the adoption of FAS No. 133 due to many of the securities which were transferred having an unrealized gain. Unrealized gains or losses on available for sale securities are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect as Accumulated other comprehensive income. 26 DEPOSITS Total deposits increased $13.1 million or 11.21% from $117.1 million in 1997 to $130.2 million in 1998. Non-interest bearing demand deposits increased $3.5 million or 19.77% from $17.8 in 1997 to $21.3 in 1998. Savings and interest bearing demand deposits increased $5.3 million or 11.70% from $45.6 million in 1997 to $50.9 million in 1998. Time deposits increased $4.3 million or 7.97% from $53.7 million in 1997 to $58.0 in 1998. 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 $109.8 million or 84.30% of total deposits in 1998 as compared to $102.1 million or 87.22% of total deposits in 1997. Certificates of deposit of $100,000 or more totaled $20.4 million or 15.70% of total deposits in 1998 as compared to $15.0 million or 12.78% of total deposits in 1997. The Company neither purchases brokered deposits nor solicits deposits from sources outside of its primary market area. 27 CAPITAL RESOURCES The Company continues to be a well capitalized financial institution. Total shareholders' equity on December 31, 1998 was $16.2 million, reflecting a percentage of total assets of 10.58% compared to $15.1 million and 11.30% at year-end 1997. Shareholders' equity per share increased $0.73 or 6.83% from $10.69 per share in 1997 to $11.42 per share in 1998. The return on average shareholders' equity increased from 7.59% in 1997 to 8.42% in 1998. During 1998 the Company paid $0.33 per share in dividends as compared to $0.32 per share in 1997. The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock. 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 shareholders' 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 shareholders' equity to average assets must be maintained. On December 31, 1998, the Company's Tier I capital ratio was 15.21% compared to 17.52% in 1997, the Tier II capital ratio was 16.12% compared to 18.43% in 1997 and the leverage ratio was 11.17% compared to 11.06% in 1996. See Note 12 to the Consolidated Financial Statements as of December 31, 1998 for additional discussion and analysis of regulatory capital requirements. 28 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. In January 1998, the Bank's Board of Directors approved a Year 2000 Compliance Plan which identifies 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, and data processing. The Bank is now well into testing its systems and renovating areas with known deficiencies. The overall test objective of the Bank is to utilize proxy testing of systems rather than attempting to simulate future date periods using production equipment. During October 1998 an employee of the Bank was sent to the site of our core processing vendor to participate in regional user group testing for the software. Actual data from a bank was used to test the critical dates identified by the Federal Financial Institutions Examination Council (F.F.I.E.C.). A representative from the Bank returned to the vendor's site during February 1999 to complete testing of the auxiliary products of the software which the Bank uses. Proxy testing was also utilized to test the software used for the Bank's Trust Department. Other softwares, which operate in a microcomputer environment, will be installed on a stand-alone test computer and tested using future critical dates. During March 1999 the company had its ATM machines evaluated for Year 2000 readiness. The Bank's maintenance vendor will be able to upgrade parts and software to ensure these machines will be Year 2000 ready. The overall cost of preparing for the Year 2000 is not expected to have a material effect on the Company's consolidated financial statements. The Bank has incurred nominal fees for participating in proxy testing which cover the cost of using the vendor's equipment, supplies, and personnel. The Bank will incur hardware and software costs to upgrade ATM's to be Year 2000 ready. The Bank is utilizing existing personnel to perform testing and document Year 2000 efforts, therefore, no outside consulting fees will be incurred in achieving Year 2000 readiness. Although the Company has no reason to conclude that a failure will occur, the most likely worst-case Year 2000 scenario would entail a disruption or failure of the Company's power supplier's or voice and data transmission supplier's capability to provide power or data transmission services to a computer system or facility. If such a failure were to occur, the Company would implement its contingency plan. While it is impossible to quantify the impact of such a scenario, the most reasonably likely worst-case scenario would entail diminishment of service levels, some customer inconvenience and additional costs associated with implementing the contingency plan. Although the Bank is confident that its efforts will result in a seamless transition into the Year 2000, a contingency plan has been prepared which addresses carrying on normal operations despite any Year 2000 problems which may be encountered. Through a careful plan for processing at the end of the year, all of the Bank's data and system files will be protected by performing Year 2000 back-up procedures, in addition to normal back-up procedures, onto magnetic tapes which will be stored in a designated area. All year-end reports will be printed for access to account and customer information in the event that the systems are unable to operate due to a program or utility company problem which hinders normal processing procedures. 29 LIQUIDITY AND MARKET RISK 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 December 31, 1998, liquid assets totaled $44.3 million, which represents 32.38% of total deposits, federal funds purchased and securities sold under agreements to repurchase, long-term borrowings, and other liabilities. The Company minimizes liquidity demand by relying on core deposits, which represent 84.30% of total deposits. Securities provide 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 attempts to maintain an interest sensitive position that maximizes the net interest margin. As the holding company of Bank of Clarke County, 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 until maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. It is the responsibility of senior management to enact appropriate interest rate risk management procedures. The loan portfolio's primary volatility is due to the concentration of loans made 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, 1998, 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. Senior 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 Company had negative cumulative twelve month gaps of $37.4 million or 26.23% of total interest earning assets at December 31, 1998 and $31.8 million or 26.47% of total interest earning assets at December 31, 1997. The increase of $5.6 million in the negative cumulative twelve month gap can be attributed to the shifting of certificates of deposit into terms of twelve months or less along with an increase in fixed and variable loans which mature within one year. The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1997 and 1998. The expected maturities for loans, securities, and certificates of deposit are the based on the contractual maturity of the instruments. The expected maturities of money market, savings, and N.O.W. accounts are based on the Bank's internal interest rate sensitivity analysis which considers the amount of these accounts which would remain if rates increased or decreased. The average interest rate for loans is the weighted average contractual rate of the loans maturing during the period indicated. The average interest rate for taxable securities is the weighted average yield of the securities maturing during the period indicated. The average interest rate for tax-exempt securities is the weighted average tax-equivalent yield assuming a federal tax rate of 34% for the securities maturing during the period indicated. The average interest rate for money market, savings, and N.O.W. accounts is the weighted average annual percentage yield as of December 31, 1997 and 1998 for the amount maturing during the period indicated. The average rate for certificates of deposit is the weighted average contractual rate of the certificates maturing during the period indicated.
At December 31, 1998 Principal Amount Maturing In - ------------------------------------------------------------------------------------------------------ There- Fair (In Thousands) 1999 2000 2001 2002 2003 after Total Value - ------------------------------------------------------------------------------------------------------ Earning assets: Fixed rate loans $16,495 $10,074 $17,154 $11,581 $18,521 $11,575 $85,400 $88,309 Average interest rate 7.99% 8.82% 8.09% 8.27% 7.48% 7.94% 8.03% Variable rate loans $5,763 $442 $434 $322 $323 $3,249 $10,533 $10,533 Average interest rate 8.57% 8.71% 8.45% 8.47% 8.61% 8.01% 8.40% Taxable securities $4,559 $4,021 $5,686 $4,704 $3,474 $11,797 $34,241 $34,357 Average interest rate 5.55% 5.98% 6.06% 6.45% 6.69% 6.56% 6.27% Tax-exempt securities $355 $735 $674 $892 $431 $5,754 $8,841 $8,883 Average interest rate 7.60% 6.49% 6.72% 6.90% 6.90% 6.36% 6.53% Other interest-earning assets $2,323 0 0 0 0 0 $2,323 $2,323 Average interest rate 4.62% 0 0 0 0 0 4.62% Interest-bearing liabilities: Money market, savings, and N.O.W. accounts $17,412 $5,878 $5,878 $2,791 $2,791 $16,184 $50,934 $50,934 Average interest rate 2.69% 2.73% 2.73% 2.25% 2.25% 1.75% 2.36% Certificates of deposit $48,805 $7,466 $1,081 $275 $357 $3 $57,987 $58,500 Average interest rate 4.98% 5.80% 5.02% 5.28% 4.92% 5.27% 5.09% Long-term borrowings 0 0 0 0 0 $5,000 $5,000 $5,030 Average interest rate 0 0 0 0 0 5.01% 5.01% Other interest-bearing Liablities $696 0 0 0 0 0 $696 $696 Average interest rate 3.98% 0 0 0 0 0 3.98% - ------------------------------------------------------------------------------------------------------ At December 31, 1997 Principal Amount Maturing In - ------------------------------------------------------------------------------------------------------ There- Fair (In Thousands) 1998 1999 2000 2001 2002 after Total Value - ------------------------------------------------------------------------------------------------------ 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 0 0 0 0 0 $2,300 $2,300 Average interest rate 6.25% 0 0 0 0 0 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% - ------------------------------------------------------------------------------------------------------
30 Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by Part II, Item 7A., is incorporated herein by reference to the section titled LIQUIDITY AND MARKET RISK within Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation." 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. 31 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 March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999. Item 11. Executive Compensation. The information required by Part III, Item 11., is incorporated herein by reference to the Company's proxy statement, dated March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999. 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 March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999. 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 March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999 32 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, 1998 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 1998 Annual Report to Shareholders for the year ended December 31, 1998 (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, 1998 (incorporated herein as Exhibit 99.1). 1. Independent Auditor's Report. 2. Consolidated Balance Sheets - At December 31, 1998 and 1997. 3. Consolidated Statements of Income Years ended December 31, 1998, 1997, and 1996. 4. Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1998, 1997, and 1996. 5. Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996. 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 1998. 33 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 25th 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 25, 1998 - ------------------------- Executive Officer Lewis M. Ewing and Director (principal executive officer) /s/ JOHN R. MILLESON Vice President, Secretary/ March 25, 1998 - ------------------------- Treasuer (principal financial John R. Milleson officer) /s/ JAMES W. MCCARTY, JR. Vice President, Chief March 25, 1998 - ------------------------- Financial Officer James W. McCarty, Jr. (principal accounting officer) /s/ JOHN D. HARDESTY Chairman of the Board March 25, 1998 - ------------------------- and Director John D. Hardesty /s/ J. FRED JONES Director March 25, 1998 - ------------------------- J. Fred Jones Director March 25, 1998 - ------------------------- Marilyn C. Beck Director March 25, 1998 - ------------------------- Thomas T. Byrd Director March 25, 1998 - ------------------------- Thomas T. Gilpin /s/ MARY BRUCE GLAIZE Director March 25, 1999 - ------------------------- Mary Bruce Glaize /s/ JOHN F. MILLESON, JR. Director March 25, 1998 - ------------------------- John F. Milleson, Jr. /s/ ROBERT W. SMALLEY, JR. Director March 25, 1998 - ------------------------- Robert W. Smalley, Jr. /s/ RANDALL G. VINSON Director March 25, 1998 - ------------------------- Randall G. Vinson Director March 25, 1999 - ------------------------- James R. Wilkins, Jr.
34 EAGLE FINANCIAL SERVICES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 EXHIBIT NUMBER DESCRIPTION -------------- ---------------------------------------- 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, 1998. 1. Independent Auditor's Report. 2. Consolidated Balance Sheets At December 31, 1998 and 1997. 3. Consolidated Statements of Income Years ended December 31, 1998, 1997, and 1996. 4. Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1998, 1997, and 1996. 5. Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996. 6. Notes to Consolidated Financial Statements. 35 EX-11 2 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) 1998 1997 1996 Shares Shares Shares Outstanding Outstanding Outstanding (As Restated) ------------- ------------- ------------- 1,408,485 1,399,885 1,390,570 1,410,433 1,402,153 1,390,570 1,410,433 1,402,153 1,390,570 1,410,433 1,402,153 1,390,570 1,412,320 1,404,356 1,390,570 1,412,320 1,404,356 1,390,570 1,412,320 1,404,356 1,394,026 1,414,165 1,406,454 1,394,026 1,414,165 1,406,454 1,394,026 1,416,310 1,406,454 1,394,026 1,418,341 1,408,485 1,394,026 1,418,341 1,408,485 1,394,026 ------------- ------------- ------------- 16,958,066 16,855,744 16,707,576 12 12 12 - ------------ ------------- ------------- ------------- Weighted Average Shares Outstanding 1,413,172 1,404,645 1,392,298 - ------------ ------------- ------------- ------------- Net Income 1,308,805 1,112,012 1,311,337 - ------------ ------------- ------------- ------------- Earnings Per Share, Basic and Assuming Dilution 0.93 0.79 0.94 - ------------ ------------- ------------- ------------- 36 EX-21 3 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. 37 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1998 DEC-31-1998 5,306 7 2,323 0 14,414 28,668 28,825 95,933 925 153,125 130,210 696 1,025 5,000 3,546 0 0 12,648 153,125 7,261 2,369 116 9,746 4,179 4,204 5,542 372 0 5,099 1,779 1,779 0 0 1,309 0.93 0.93 4.45 227 372 0 1,042 749 294 98 925 316 0 609
EX-99.1 5 FINANCIAL REPORT EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Berryville, Virginia FINANCIAL REPORT DECEMBER 31, 1998 CONTENTS INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets Consolidated statements of income Consolidated statements of shareholders' equity Consolidated statements of cash flows Notes to consolidated financial statements 39 INDEPENDENT AUDITOR'S REPORT To the Shareholders 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for the years ended December 31, 1998, 1997, and 1996. 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 have 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, 1998 and 1997, and the results of their operations and their cash flows for the years ended December 31, 1998, 1997, and 1996, in conformity with generally accepted accounting principles. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 22, 1999 40 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Balance Sheets December 31, 1998 and 1997
1998 1997 --------------- --------------- Assets Cash and due from banks $ 5,313,475 $ 5,242,309 Federal funds sold 2,323,000 2,300,000 Securities held to maturity (fair value: 1998, $43,239,752; 1997, $37,466,068) 43,081,952 37,418,780 Loans, net of unearned discounts 95,933,498 81,425,186 Less allowance for loan losses (925,171) (748,558) --------------- --------------- Net loans $ 95,008,327 80,676,628 Bank premises and equipment, net 4,117,903 4,060,501 Other real estate owned 0 189,688 Other assets 3,279,902 3,351,495 --------------- --------------- Total assets $ 153,124,559 $ 133,239,401 =============== =============== Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest bearing $ 21,289,370 $ 17,774,480 Savings and Interest bearing 50,933,486 45,600,236 Time deposits 57,987,032 53,704,639 --------------- --------------- Total deposits $ 130,209,888 $ 117,079,355 Federal funds purchased and securities sold under agreements to repurchase 695,915 0 Federal Home Loan Bank advances 5,000,000 0 Other liabilities 1,025,255 1,101,931 Commitments and contingent liablities 0 0 --------------- --------------- Total liabilities $ 136,931,058 $ 118,181,286 --------------- --------------- Shareholders' Equity Preferred Stock, $10 par value; 500,000 shares authorized and unissued $ 0 $ 0 Common Stock, $2.50 par value; authorized 1,500,000 shares; issued 1998, 1,418,341; issued 1997, 1,408,485 shares 3,545,853 3,521,213 Surplus 2,307,615 2,107,826 Retained Earnings 10,262,104 9,419,266 Accumulated other comprehensive income 77,929 9,810 --------------- --------------- Total shareholders' equity $ 16,193,501 $ 15,058,115 --------------- --------------- Total liabilities and shareholders' equity $ 153,124,559 $ 133,239,401 =============== =============== See Notes to Consolidated Financial Statements.
41 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 --------------- --------------- --------------- Interest Income Interest and fees on loans $ 7,261,271 $ 7,255,085 $ 7,750,646 Interest on federal funds sold 114,207 101,842 51,219 Interest on securities held to maturity: Taxable interest income 1,308,419 1,617,097 1,308,152 Interest income exempt from federal income taxes 217,573 145,016 158,070 Interest and dividends on securities available for sale: , Taxable 766,511 142,480 90,459 Interest income exempt from Federal income taxes 2,215 0 0 Dividends 74,612 48,717 44,324 Interest on deposits in banks 1,782 0 0 --------------- --------------- --------------- Total interest income $ 9,746,590 $ 9,310,237 $ 9,402,870 --------------- --------------- --------------- Interest Expense Interest on deposits $ 4,178,511 $ 3,899,598 $ 3,853,810 Interest on federal funds purchased and securities sold under agreements to repurchase 14,079 4,599 56,802 Interest on Federal Home Loan Bank advances 11,664 0 0 --------------- --------------- --------------- Total interest expense $ 4,204,254 $ 3,904,197 $ 3,910,612 --------------- --------------- --------------- Net interest income $ 5,542,336 $ 5,406,040 $ 5,492,258 Provision For Loan Losses 371,886 476,667 290,000 --------------- --------------- --------------- Net interest income after provision for loan losses $ 5,170,450 $ 4,929,373 $ 5,202,258 --------------- --------------- --------------- Other Income Trust Department income $ 342,769 $ 233,180 $ 199,587 Service charges on deposits 545,782 532,277 522,436 Other service charges and fees 336,682 289,465 196,232 Gain (loss) on equity investment (4,352) (4,880) 595 Other operating income 486,831 195,739 105,920 --------------- --------------- --------------- $ 1,707,712 $ 1,245,781 $ 1,024,770 --------------- --------------- --------------- Other Expenses Salaries and wages $ 2,318,317 $ 1,951,569 $ 1,732,542 Pension and other employee benefits 508,343 491,913 478,669 Occupancy expenses 355,468 332,916 323,962 Equipment expenses 485,775 468,785 472,462 Stationary and supplies 179,543 190,154 150,313 Postage 127,784 119,713 126,724 Credit card expense 152,647 101,156 93,637 Bank franchise tax 103,586 95,344 113,484 ATM network fees 71,188 119,827 129,385 Other operating expenses 796,516 819,622 757,209 --------------- --------------- --------------- $ 5,099,167 $ 4,690,999 $ 4,378,387 --------------- --------------- --------------- Income before income taxes $ 1,778,995 $ 1,484,155 $ 1,848,641 Income Tax Expense 470,190 372,143 537,304 --------------- --------------- --------------- Net Income $ 1,308,805 $ 1,112,012 $ 1,311,337 =============== =============== =============== Earnings Per Share Net income per common share, basic and diluted $ 0.93 $ 0.79 0.94 =============== =============== =============== See Notes to Consolidated Financial Statements.
42 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998, 1997, and 1996
Accumulated Other Common Retained Comprehensive Comprehensive Stock Surplus Earnings Income (Loss) Income Total ----------- ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1995 $ 1,738,212 $ 1,782,186 $ 9,612,627 $ (12,606) $13,120,419 Comprehensive income: Net income - 1996 1,311,337 1,311,337 1,311,337 Other comprehensive income: Unrealized gain on securities available for sale, net of deferred income taxes of $3,903 7,576 7,576 7,576 ----------- Total comprehensive income $ 1,318,913 =========== Issuance of common stock, dividend investment plan (4,662 shares) 11,656 163,875 175,531 Dividends declared ($0.30 per share) (417,826) (417,826) Issuance of common stock, stock split effected in the form of a 100% stock dividend (699,943 shares) 1,749,857 (1,749,857) 0 Discretionary transfer from retained earnings 1,749,857 (1,749,857) 0 Fractional shares purchased (11) (170) (181) ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1996 $ 3,499,714 $ 1,945,891 $ 8,756,281 $ (5,030) $14,196,856 Comprehensive income: Net income - 1997 1,112,012 $ 1,112,012 1,112,012 Other comprehensive income: Unrealized gain on securities available for sale, net of deferred income taxes of $7,645 14,840 14,840 14,840 ----------- Total comprehensive income $ 1,126,852 =========== Issuance of common stock, dividend investment plan (8,603 shares) 21,507 161,992 183,499 Dividends declared ($0.32 per share) (449,027) (449,027) Fractional shares purchased (8) (57) (65) ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1997 $ 3,521,213 $ 2,107,826 $ 9,419,266 $ 9,810 $15,058,115 Comprehensive income: Net income - 1998 1,308,805 $ 1,308,805 1,308,805 Other comprehensive income: Unrealized gain on securities available for sale, net of deferred income taxes of $35,092 68,119 68,119 68,119 ----------- Total comprehensive income $ 1,376,924 =========== Issuance of common stock to Employee Stock Ownership Plan (2,145 shares) 5,363 28,534 33,897 Issuance of common stock, dividend investment plan (7,715 shares) 19,288 171,357 190,645 Dividends declared ($0.33 per share) (465,967) (465,967) Fractional shares purchased (11) (102) (113) ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1998 $ 3,545,853 $ 2,307,615 $10,262,104 $ 77,929 $16,193,501 =========== =========== =========== ============ =========== See Notes to Consolidated Financial Statements
43 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 -------------- -------------- -------------- Cash Flows from Operating Activities Net income $ 1,308,805 $ 1,112,012 $ 1,311,337 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation amortization 344,249 389 ,742 399,076 Amortization of intangible assets 50,817 50,675 52,496 (Income) loss on equity investment 4,352 4,880 (595) Provision for loan losses 371,886 476,667 290,000 (Gain) on sale of other real estate owned (14,652) 0 0 Premium amortization (discount accretion) on securities, net 633 63,141 (2,854) Deferred tax (benefit) (27,506) 60,807 (891) Changes in assets and liabilities: (Increase) decrease in other assets 4,436 (540,104) (805,499) Increase (decrease) in other liabilities (111,768) 144,913 64,145 -------------- -------------- -------------- Net cash provided by operating activities $ 1,931,252 $ 1,762,733 $ 1,307,215 -------------- -------------- -------------- Cash Flows from Investing Activities Proceeds from maturities and principal payments of securities held to maturity $ 21,117,817 $ 5,995,036 $ 5,128,436 Proceeds from maturities and principal payments of securities available for sale 5,612,602 377,000 1,748,844 Purchases of securities held to maturity (25,295,813) (14,873,594) (6,178,873) Purchases of securities available for sale (6,995,200) (2,868,304) (155,500) Purchases of bank premises and equipment (362,157) (198,568) (1,157,029) Proceeds from sale of other real estate owned 204,340 0 0 Net (increase) decrease in loans (14,703,585) 5,659,861 (2,203,140) -------------- -------------- -------------- Net cash (used in) investing activities $ (20,421,996) $ (5,908,569) $ (2,817,262) -------------- -------------- -------------- Cash Flows from Financing Activities Net increase in demand deposits, money market, and savings accounts $ 8,848,140 $ 834,027 $ 7,222,447 Net increase (decrease) in certificates of deposits 4,282,393 5,157,461 (1,747,141) Net increase in federal funds purchased and securities sold under agreements to repurchase 695,915 0 (1,867,000) Proceeds from Federal Home Loan Bank advances 5,000,000 0 0 Proceeds from issuance of common stock to ESOP 33,897 0 0 Cash dividends paid (275,322) (265,528) (242,295) Fractional shares purchased (113) (65) (181) -------------- -------------- -------------- Net cash provided by financing activities $ 18,584,910 $ 5,725,895 $ 3,365,830 -------------- -------------- -------------- Increase in cash and cash equivalents $ 94,166 $ 1,580,059 $ 1,855,783 Cash and Cash Equivalents Beginning 7,542,309 5,962,250 4,106,467 -------------- -------------- -------------- Ending $ 7,636,475 $ 7,542,309 $ 5,962,250 ============== ============== ============== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 4,321,635 $ 3,907,348 $ 3,960,889 ============== ============== ============== Income taxes $ 295,522 $ 439,616 592,372 ============== ============== ============== Supplemental Schedule of Non-Cash Investing and Financing Activities: Issuance of common stock, dividend investment plan $ 190,645 $ 183,499 $ 175,531 ============== ============== ============== Unrealized gain on securities available for sale $ 103,211 $ 22,485 $ 11,479 ============== ============== ============== Other real estate acquired in settlement of loans $ 0 $ 143,083 $ 0 ============== ============== ============== See Notes to Consolidated Financial Statements
44 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 Department 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 a separate component of other comprehensive income, 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, 1998 and 1997. As of October 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Paragraph 54 of the Standard allows a reallocation of securities among the three categories outlined above. As a result of adoption, the Company transferred securities with an amortized cost of $12,135,479 and a fair value of $12,249,003 from Held to Maturity to Available for Sale. 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, forward, swap or option contract, or other financial instruments with similar characteristics. The Company does not have any derivative financial instruments as defined under this statement. Other Real Estate Owned Other real estate owned is carried at the lower of estimated market value or the carrying amount of the loan. A reserve for other real estate owned is maintained to recognize estimated selling costs or declines in value. Provisions for estimated selling costs or declines in value, net gains and losses on the sale of other real estate owned, and net direct expenses attributable to these properties are included in other operating expenses. Assets, other than real estate, acquired in the settlement of loans are recorded as other assets. Advertising The Company follows the policy of charging the costs of advertising to expense as incurred. Loans Loans are shown on the balance sheets net of unearned discounts and the allowance for loan losses. Interest is computed by methods which result in level rates of return on principal. Loans are charged off when in the opinion of management they are deemed to be uncollectible after taking into consideration such factors as the current financial condition of the customer and the underlying collateral and guarantees. Unearned interest on certain installment loans is amortized to income over the life of the loan, 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 loans. 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 No. 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 it is 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 judgement 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 No. 114 at December 31, 1998 and 1997. 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 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 amount 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 FASB No. 106, 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 defined benefit pension plan covering substantially all full-time employees. In 1998, the Company adopted FASB No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This pronouncement does not change the measurement or recognition of amounts in the Company's financial statements applicable to its defined benefit plan. FASB No. 132 standardizes the disclosure requirements for pensions by requiring certain additional information on changes in the benefit obligations and fair values of plan assets and by eliminating certain disclosures. 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 exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share are very similar to the previously reported fully diluted earnings per share. Weighted average shares were 1,413,172, 1,404,645 and 1,392,298 for the years ended 1998, 1997 and 1996, respectively after giving retroactive effect to the 100% stock dividend declared in 1996. The Corporation had no potential dilution of common stock as of December 31, 1998, 1997 and 1996. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 established new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires other comprehensive income to include the unrealized gains or losses on available for sale securities, which prior to adoption were reported separately in shareholders' equity. The financial statements for previous periods have been reclassified to conform to the requirements of SFAS No. 130. 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. 45 Note 2. Securities The amortized costs and fair values of securities being held to maturity as of December 31, 1998 and 1997, are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------- ------------- 1998 ------------------------------------------------------------- U.S. Treasury securities $ 121,981 $ 10,275 $ 0 $ 132,256 Obligations of U.S. government corporations and agencies 6,490,582 89,380 (2,000) 6,577,962 Mortgage-backed securities 10,609,645 19,470 (40,705) 10,588,410 Obligations of states and political subdivisions 11,445,246 117,939 (36,559) 11,526,626 ------------- ------------- ------------- ------------- $ 28,667,454 $ 237,064 $ (79,264) $ 28,825,254 ============= ============= ============= ============= 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 ============= ============= ============= =============
The amortized cost and fair value of securities being held to maturity as of December 31, 1998, 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 $ 2,341,728 $ 2,344,257 Due after one year through five years 9,962,656 10,126,834 Due after five years through ten years 5,503,425 5,513,419 Due after ten years 250 000 252,334 Mortgage-backed securities 10,609,645 10,588,410 ------------- ------------ $ 28,667,454 $ 28,825,254 ============= ============ Amortized costs and fair values of securities available for sale as of December 31, 1998 and 1997, are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ------------- ------------- 1998 ------------------------------------------------------------- Obligations of U.S. government corporations and agencies $ 5,150,116 $ 80,943 $ (5,000) $ 5,226,059 Mortgage-backed securities 7,421,338 23,069 (5,961) 7,438,446 Obligations of states and Political subdivisions 497,157 1,111 0 498,268 Other 1,227,812 27,500 (3,587) 1,251,725 ------------- ------------- ------------- ------------- $ 4 243 258 $ 132,623 $ (14,548) $ 14,414,498 ============= ============= ============= ============= 1997 ------------------------------------------------------------- Obligations of U.S. government corporations and agencies $ 3,501,058 $ 17,432 $ (2,568) $ 3,515,922 Other 742,200 0 0 742,200 ------------- ------------- ------------- ------------- $ 4,243,258 $ 17,432 $ (2,568) $ 4,258,122 ============= ============= ============= ============= The amortized cost and fair value of securities available for sale as of December 31, 1998, 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 $ $ 1,400,035 $ 1,400,843 Due after one year through five years 3,750,081 3,825,216 Due after five years through ten years 497,157 498,268 Mortgage backed securities 7,421,338 7,438,446 Other 1,227,812 1,251,725 ------------- ------------- $ 14,296,423 $ 14,414,498 ============= =============
Proceeds from maturities and principal payments of securities being held to maturity during 1998, 1997 and 1996 were $21,117,817, $5,995,036 and $5,128,436. There were no sales of securities being held to maturity during 1998, 1997 and 1996. Proceeds from maturities and principal payments of securities available for sale during 1998, 1997 and 1996 were $5,612,602, $377,000 and $1,748,844. There were no sales of securities available for sale during 1998, 1997 and 1996. Securities having a book value of $11,423,378 and $8,473,317 at December 31, 1998 and 1997, were pledged to secure public deposits and for other purposes required by law. 46 Note 3. Loans, Net The composition of the net loans is as follows:
December 31 ------------------------------ 1998 1997 ----------- ----------- (thousands) Loans secured by real estate: Construction and land development $ 2,168 $ 588 Secured by farmland 3,565 3,700 Secured by 1-4 family residential 51,444 44,863 Nonfarm, nonresidential loans 16,902 11,141 Loans to farmers (except secured by real estate) 745 770 Commercial and industrial loans (except those secured by real estate) 6,463 5,116 Loans to individuals (except those secured by real estate) 13,603 14,458 Loans to U.S. state and political subdivisions 1,093 1,155 All other loans 100 97 ----------- ----------- Total loans $ 96,083 $ 81,888 Less: Unearned income (150) (462) Allowance for loan losses (925) (749) ----------- ----------- Loans, net $ 95,008 $ 80,677 =========== =========== 47 Note 4. Allowance for Loan Losses Changes in the allowance for loan losses are as follows: December 31 ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Balance, beginning $ 748,558 $ 913,955 $ 828,104 Provision charged to operating expense 371,886 476,667 290,000 Recoveries added to the allowance 98,208 44,624 63,561 Loan losses charged to the allowance (293,481) (686,688) (267,710) ------------- ------------- ------------- Balance, ending $ 925,171 $ 748,558 $ 913,955 ============= ============= =============
Nonaccrual loans excluded from the impaired loan disclosure under FASB 114 amounted to $227,256 and $437,261 at December 31, 1998 and 1997, respectively. If interest would have been accrued, such income would have been approximately $24,712 for 1998 and $11,021 for 1997. There were no loans on which the accrual of interest was discontinued or reduced in 1996. 48 Note 5. Bank Premises and Equipment, Net The major classes of bank premises and equipment and the total accumulated depreciation are as follows:
December 31 ----------------------------- 1998 1997 ------------- ------------- Land $ 787,918 $ 787,918 Land held for future branch site 150,587 150,587 Buildings and improvements 3,625,862 3,546,330 Furniture and equipment 2,950,633 2,668,100 ------------- ------------- $ 7,515,000 $ 7,152,935 Less accumulated depreciation 3,397,097 3,092,434 ------------- ------------- Bank premises and equipment, net $ 4,117,903 $ 4,060,501 ============= =============
Depreciation expense on furniture and equipment was $304,755, $351,058, and $370,450 for the years ended December 31, 1998, 1997, and 1996, respectively. 49 Note 6. Deposits The aggregate amount of jumbo time deposits, each with a minimum denomination of $100,000, was approximately $20,447,339 and $14,961,859 at December 31, 1998 and 1997, respectively. At December 31, 1998, the scheduled maturities of time deposits are as follows: 1999 $ 48,804,445 2000 7,466,794 2001 1,080,348 2002 274,271 2003 and thereafter 361,174 ------------- $ 57,987,032 ============= 50 Note 7. Income Taxes Net deferred tax (liabilities) consist of the following components as of December 31, 1998 and 1997. December 31 -------------------------- 1998 1997 ------------ ------------ Deferred tax assets: Allowance for loan losses $ 213,345 $ 164,159 Deferred compensation 111,526 101,039 Accrued postretirement benefits 76,648 91,189 Reserve for other real estate owned 0 2,040 Non-accrual interest 8,402 6,908 ------------ ------------ $ 409,921 $ 365,335 ------------ ------------ Deferred tax liabilities: Property and equipment $ 321,050 $ 305,804 Prepaid pension costs 84,471 82,637 Securities available for sale 40,146 5,054 ------------ ------------ $ 445,667 $ 393,495 ------------ ------------ $ (35,746) $ (28,160) ============ ============ The provision for income taxes charged to operations for the years ended December 31, 1998, 1997 and 1996 consists of the following:
December 31 ---------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Current tax expense $ 497,696 $ 311,336 $ 538,195 Deferred tax (benefit) (27,506) 60,807 (891) ------------ ------------ ------------ $ 470,190 $ 372,143 $ 537,304 ============ ============ ============ 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, 1998, 1997 and 1996, due to the following: 1998 1997 1996 ------------ ------------ ------------ Computed "expected" tax expense $ 604,858 $ 504,613 $ 628,538 (Decrease) increase in income taxes resulting from: Tax-exempt interest (86,684) (63,985) (74,765) Nontaxable life insurance (4,471) (8,712) 0 Low income housing credits (46,227) (44,454) (48,000) Other 2,714 (15,319) 31,531 ------------ ------------ ------------ $ 470,190 $ 372,143 $ 537,304 ============ ============ ============
51 Note 8. Pension and Postretirement Benefit Plan The following tables provide a reconciliation of the changes in the benefit obligation and fair value of assets for 1998 and 1997 and a statement of the funded status as of December 31, 1998 and 1997 for the pension plan and postretirement benefit plan of the Company.
Pension Benefits Postretirement Benefits ------------------------------ ------------------------------ 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Change in Benefit Obligation Benefit obligation, beginning $ 1,488,638 $ 1,219,706 $ 157,632 $ 157,743 Service cost 80,962 62,353 0 0 Interest cost 117,129 95,716 12,611 12,619 Actuarial (gain) loss 0 157,373 0 (490) Benefits paid (137,423) (46,510) (12,000) (12,240) ------------- ------------- ------------- ------------- Benefits obligation, ending $ 1,549,306 $ 1,488,638 $ 158,243 $ 157,632 ------------- ------------- ------------- ------------- Change in Plan Assets Fair value of plan assets, beginning $ 1,469,557 $ 1,127,104 $ 0 $ 0 Actual return on plan assets 220,610 233,696 0 0 Employer contributions 85,769 155,267 12,000 12,240 Benefits paid (137,423) (46,510) (12,000) (12,240) ------------- ------------- ------------- ------------- Fair value of plan assets, ending $ 1,638,513 $ 1,469,557 $ 0 $ 0 ------------- ------------- ------------- ------------- Funded status Funded status, beginning $ 89,207 $ (19,081) $ (158,243) $ (157,632) Unrecognized net actuarial loss 65,306 171,964 30,917 33,529 Unrecognized net obligation at transition (38,539) (51,383) (3,722) (3,722) Unrecognized prior service cost 114,873 126,418 0 0 ------------- ------------- ------------- ------------- Net amount recognized $ 230,847 $ 227,918 $ (131,048) $ (127,825) ============= ============= ============= ============= The following table provides the components of net periodic benefit cost for the years ended December 31, 1998, 1997 and 1996: Pension Benefits Postretirement Benefits ------------------------------------- --------------------------------- 1998 1997 1996 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- Components of Net Periodic Benefit Cost Service cost $ 80,962 $ 62,353 $ 57,734 $ 0 $ 0 $ 0 Interest cost 117,129 95,716 87,942 12,659 12,611 12,619 Expected return on plan assets (115,602) (94,519) (80,060) 0 0 0 Amortization of prior service costs 11,545 11,545 11,545 0 0 0 Amortization of net obligation at transition (12,844) (12,844) (12,844) 2,612 2,612 2,612 Recognized net actuarial gain 1,650 2,271 5,109 0 0 0 ---------- ---------- ---------- ---------- ---------- ---------- Net periodic benefit cost $ 82,840 $ 64,522 $ 69,426 $ 15,271 $ 15,223 $ 15,231 ========== ========== ========== ========== ========== ==========
The weighted average discount rates used for the pension calculations was 8.00%, the expected return on plans assets was 8.00% and the rate of compensation increase was 6.00% for all periods. For measurement purposes, a 9.38% annual rate of increase in per capita health care costs of covered benefits was assumed for 1998, 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, 1998 would be increased by $4,083 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998 would be increased by $325. The weighted average discount rate used in estimating the accumulated postretirement benefit obligation was 8.00% for 1998, 1997 and 1996. 52 Note 9. Employee Benefits 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 1998, 1997 or 1996. 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, 1998 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 $33,175 in 1998 and $8,160 in 1997 and 1996. 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 1998, 1997, and 1996 based on the present value of the retirement benefits, amounted to $43,589, $47,590 and $38,499, 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. 53 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, 1998 under these leases is $241,610, which is due as follows: Due in the year ending December 31, 1999 $ 98,046 2000 68,514 2001 37,800 2002 37,250 ------------ $ 241,610 ============ The total rental expense was $106,087, $52,955 and $49,035 in 1998, 1997 and 1996, 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, 1998 and 1997, the amount of daily average required balances were approximately $952,000 and $752,000, respectively. The Company is conducting a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 Issue, and is developing a remediation plan to resolve the issue. The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Company is heavily dependent on computer processing in the conduct of its business activities. Failure of these systems could have a significant impact on the Company's operations. See Note 15 with respect to financial instruments with off-balance-sheet risk. 54 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 shareholders (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 $3,697,036 and $916,493 at December 31, 1998 and 1997, respectively. During 1998, total principal additions were $4,316,861 and total principal payments were $1,536,318. 55 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, 1998, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1998, 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, 1998: Total Capital (to Risk Weighted Assets) Consolidated $ 16,488 16.12% >=$ 8,185 8.00% N/A Bank of Clarke County $ 15,229 15.01% >=$ 8,118 8.00% >=$ 10,148 10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated $ 15,563 15.21% >=$ 4,093 4.00% N/A Bank of Clarke County $ 14,304 14.10% >=$ 4,059 4.00% >=$ 6,089 6.00% Tier 1 Capital (to Average Assets) Consolidated $ 15,563 11.17% >=$ 5,575 4.00% N/A Bank of Clarke County $ 14,304 10.32% >=$ 5,546 4.00% >=$ 6,933 5.00% 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% >=$ 6,573 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% >=$ 5,224 4.00% N/A Bank of Clarke County $ 14,123 10,84% >=$ 5,211 4.00% >=$ 6,514 5.00%
56 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, 1998, the aggregate amount of unrestricted funds, which could be transferred from the Bank to the Parent Company without prior regulatory approval, amounted to $2,078,789 or 12.8% of the consolidated net assets. 57 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 shareholders. It is based on 95% of the stock's fair market value on each dividend record date. 58 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 contractual notional amount of the Company's exposure to off-balance-sheet risk as of December 31, 1998 and 1997, is as follows:
1998 1997 ------------- ------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 23,101,413 $ 9,651,769 Standby letters of credit 150,750 139,631
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 granting loans to customers. The Company holds real estate and bank deposits as collateral supporting those commitments for which collateral is deemed necessary. At December 31, 1998, 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, 1998 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $1,323,923. 59 Note 16. 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 (FHLB) of Atlanta. Advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available to the Company. These advances are secured by the Company's real estate loan portfolio. The unused line of credit totaled $8,000,000 and $13,000,000 at December 31, 1998 and 1997, respectively. A $5,000,000 advance was taken during 1998 which has a ten year term and a fixed rate of 4.94% for the first six years. After six years, FHLB may convert the advance to an indexed floating interest rate for the final four years of the term. If the advance converts to a floating interest rate, the Company may pay back all or part of the advance without a prepayment penalty. The Company had unused lines of credit totaling $12,200,000 with other nonaffiliated banks at December 31, 1998. 60 Note 17. 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. Deposits and Borrowings 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 all other deposits and borrowings is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products. 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, 1998 and 1997, the difference between 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:
1998 1997 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ (in thousands) (in thousands) Financial assets: Cash and short-term investments $ 7,636,475 $ 7,636,475 $ 7,542,309 $ 7,542,309 Securities 43,081,952 43,239,752 37,418,780 37,466,068 Loans 95,008,327 97,917,000 80,676,628 79,267,000 ------------ ------------ ------------ ------------ Total financial assets $145,726,754 $148,793,227 $125,637,717 $124,275,377 ============ ============ ============ ============ Financial liabilities: Deposits $130,209,888 $130,750,000 $117,079,355 $118,113,000 Federal funds purchased and securities sold under agree- ments to repurchase 695,915 696,000 0 0 Federal Home Loan Bank advances 5,000,000 5,030,000 0 0 ------------ ------------ ------------ ------------ Total financial liabilities $135,905,803 $136,476,000 $117,079,355 $118,113,000 ============ ============ ============ ============
61 Note 18. Condensed Financial Information - Parent Company Only EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Balance Sheets December 31, 1998 and 1997
1998 1997 -------------- -------------- Assets Cash held in subsidiary bank $ 27,093 $ 50,278 Securities 986,393 5,000 Investment in subsidiary, at cost, plus undistributed net income 14,916,718 14,736,435 Equity investment in Johnson Williams Limited Partnership 262,057 266,409 Other Assets 9,748 0 -------------- -------------- Total assets $ 16,202,009 $ 15,058,122 ============== ============== Liabilities and Shareholders' Equity Other liabilities $ 8,508 $ 7 -------------- -------------- Shareholders' Equity Preferred stock $ 0 $ 0 Common stock 3,545,853 3,521,213 Surplus 2,307,615 2,107,826 Retained earnings 10,262,104 9,419,266 Accumulated other comprehensive income 77,929 9,810 -------------- -------------- Total shareholders' equity $ 16,193,501 $ 15,058,115 -------------- -------------- Total liabilities and shareholders' equity $ 16,202,009 $ 15,058,122 ============== ==============
EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Income Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 ------------- ------------- ------------- Income Dividends from subsidiary $ 1,130,000 $ 223,000 $ 200,000 Interest and dividends on securities available for sale 27,514 773 1,414 ------------- ------------- ------------- Total income $ 1,157,514 $ 223,773 $ 201,414 ------------- ------------- ------------- Expenses Amortization of organizational costs $ 0 $ 0 $ 13,023 Legal expense 1,710 1,409 565 Other operating expenses 17,178 20,914 22,989 ------------- ------------- ------------- Total expenses $ 18,888 $ 22,323 $ 36,577 ------------- ------------- ------------- Other Income Income (loss) on equity investment $ (4,352) $ (4,880) $ 595 ------------- ------------- ------------- Income before allocated tax benefits and equity in undistributed net income of subsidiary $ 1,134,274 $ 196,570 $ 165,432 Allocated Income Tax Benefit (45,852) (53,440) (57,797) ------------- ------------- ------------- Income before equity in undistributed net income of subsidiary $ 1,180,126 $ 250,010 $ 223,229 Equity in Undistributed Net Income of Subsidiary 128,679 862,002 1,088,108 ------------- ------------- ------------- Net income $ 1,308,805 $ 1 112 012 $ 1 311 337 ============= ============= =============
EAGLE FINANCIAL SERVICES, INC. (Parent Company Only) Statements of Cash Flows Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 ------------- ------------- ------------- Cash Flows from Operating Activities Net income $ 1,308,805 $ 1,112,012 $ 1,311,337 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of organizational costs 0 0 13,023 (Income) loss on equity investment 4,352 4,880 (595) (Discount accretion) on securities (77) 0 0 Undistributed earnings of subsidiary (128,679) (862,002) (1,088,108) Changes in assets and liabilities: Decrease in prepaid expenses 0 453 11,267 Decrease in income tax credits receivable 0 0 48,000 (Increase) in other assets (9,748) 0 0 Increase (decrease) in other liabilities (7) 7 0 ------------- ------------- ------------- Net cash provided by operating activities $ 1,174,646 $ 255,350 $ 294,924 ------------- ------------- ------------- Cash Flows from Investing Activities Purchase of securities available for sale $ (1,255,293) $ 0 $ (51,000) Proceeds from maturities of securities available for sale 299,000 55,000 0 ------------- ------------- ------------- Net cash provided by (used in) investing activities $ (956,293) $ 55,000 $ (51,000) ------------- ------------- ------------- Cash Flows from Financing Activities Cash dividends paid $ (275,322) $ (265,528) $ (242,295) Fractional shares purchased (113) (65) (181) Proceeds from issuance of common Stock to ESOP 33,897 0 0 ------------- ------------- ------------- Net cash (used in) financing activities $ (241,538) $ (265,593) $ (242,476) ------------- ------------- ------------- Increase (decrease) in cash $ (23,185) $ 44,757 $ 1,448 Cash Beginning $ 50,278 $ 5,521 $ 4,073 ------------- ------------- ------------- Ending $ 27,093 $ 50,278 $ 5,521 ============= ============= ============= Supplemental Schedule of Noncash Financing Activities Issuance of common stock- dividend investment plan $ 190,645 $ 183,499 $ 175,531 ============= ============= ============= Unrealized gain on securities available for sale $ 103,211 $ 22,485 $ 11,479 ============= ============= =============
62 -----END PRIVACY-ENHANCED MESSAGE-----