UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2003 |
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE |
| EXCHANGE ACT |
EAGLE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
| Virginia | 0-20146 | 54-1601306 | ||
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
2 East Main Street, Berryville, Virginia 22611
(Address of principal executive offices, including zip code)
(540) 955-2510
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents and 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The number of shares of the Registrant’s Common Stock ($2.50 par value) outstanding as of August 8, 2003 was 1,487,319.
EAGLE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION | ||||
| Item 1. | 3 | |||
Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 | 3 | |||
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002 | 4 | |||
Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2003 and 2002 | 5 | |||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 | 6 | |||
| 7 | ||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||
| Item 3. | 10 | |||
| Item 4. | 10 | |||
PART II. OTHER INFORMATION | ||||
| Item 1. | 11 | |||
| Item 2. | 11 | |||
| Item 3. | 11 | |||
| Item 4. | 11 | |||
| Item 5. | 11 | |||
| Item 6. | 12 | |||
2
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Eagle Financial Services, Inc. and Subsidiary
As of June 30, 2003 and December 31, 2002
| Unaudited | ||||||
| Jun 30, 2003 | Dec 31, 2002 | |||||
Assets | ||||||
Cash and due from banks | $ | 10,703,242 | $ | 14,341,473 | ||
Federal funds sold | 4,763,000 | 1,857,000 | ||||
Securities available for sale, at fair value | 27,369,719 | 25,068,025 | ||||
Securities held to maturity (fair value: 2003, $16,001,579; 2002, $15,861,743) | 15,401,717 | 15,266,757 | ||||
Loans, net allowance for loan losses of $2,681,563 in 2003 and $2,376,463 in 2002 | 251,076,650 | 223,601,868 | ||||
Bank premises and equipment, net | 8,174,486 | 7,653,104 | ||||
Other assets | 5,346,605 | 4,779,344 | ||||
Total assets | $ | 322,835,419 | $ | 292,567,571 | ||
Liabilities and Shareholders’ Equity | ||||||
Liabilities | ||||||
Deposits: | ||||||
Noninterest bearing demand deposits | $ | 55,854,739 | $ | 50,635,337 | ||
Savings and interest bearing demand deposits | 136,991,791 | 113,371,665 | ||||
Time deposits | 70,498,851 | 72,584,706 | ||||
Total deposits | $ | 263,345,381 | $ | 236,591,708 | ||
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings | 4,286,523 | 2,909,443 | ||||
Federal Home Loan Bank advances | 20,000,000 | 20,000,000 | ||||
Trust preferred capital notes | 7,000,000 | 7,000,000 | ||||
Other liabilities | 1,853,982 | 1,664,629 | ||||
Commitments and contingent liabilities | 0 | 0 | ||||
Total liabilities | $ | 296,485,886 | $ | 268,165,780 | ||
Shareholders’ Equity | ||||||
Preferred Stock, $10 par value; 500,000 shares authorized and unissued | $ | 0 | $ | 0 | ||
Common Stock, $2.50 par value; authorized 5,000,000 shares; issued 2003, 1,487,320; issued 2002, 1,478,770 shares | 3,718,299 | 3,696,926 | ||||
Surplus | 3,754,629 | 3,545,408 | ||||
Retained Earnings | 18,376,157 | 17,012,437 | ||||
Accumulated other comprehensive income | 500,448 | 147,020 | ||||
Total shareholders’ equity | $ | 26,349,533 | $ | 24,401,791 | ||
Total liabilities and shareholders’ equity | $ | 322,835,419 | $ | 292,567,571 | ||
3
Eagle Financial Services, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)
For the Periods Ended June 30, 2003 and 2002
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
Interest Income | ||||||||||||
Interest and fees on loans | $ | 3,787,099 | $ | 3,474,724 | $ | 7,355,957 | $ | 6,741,781 | ||||
Interest on federal funds sold | 10,280 | 242 | 29,695 | 242 | ||||||||
Interest on securities held to maturity: | ||||||||||||
Taxable interest income | 94,679 | 136,741 | 187,692 | 293,373 | ||||||||
Interest income exempt from federal income taxes | 82,370 | 93,800 | 164,980 | �� | 188,766 | |||||||
Interest and dividends on securities available for sale: | ||||||||||||
Taxable interest income | 250,833 | 198,959 | 502,339 | 401,861 | ||||||||
Interest income exempt from federal income taxes | 16,048 | 16,048 | 32,096 | 33,786 | ||||||||
Dividends | 33,610 | 36,802 | 67,217 | 72,595 | ||||||||
Interest on deposits in banks | 211 | 149 | 386 | 275 | ||||||||
Total interest income | $ | 4,275,130 | $ | 3,957,465 | $ | 8,340,362 | $ | 7,732,679 | ||||
Interest Expense | ||||||||||||
Interest on deposits | $ | 731,434 | $ | 874,510 | $ | 1,527,353 | $ | 1,881,150 | ||||
Interest on federal funds purchased and securities sold under agreements to repurchase | 11,885 | 50,363 | 20,108 | 91,845 | ||||||||
Interest on Federal Home Loan Bank advances | 199,314 | 163,884 | 396,439 | 308,182 | ||||||||
Interest on trust preferred capital notes | 83,598 | 5,189 | 168,345 | 5,189 | ||||||||
Total interest expense | $ | 1,026,231 | $ | 1,093,946 | $ | 2,112,245 | $ | 2,286,366 | ||||
Net interest income | $ | 3,248,899 | $ | 2,863,519 | $ | 6,228,117 | $ | 5,446,313 | ||||
Provision For Loan Losses | 245,000 | 157,500 | 370,000 | 421,900 | ||||||||
Net interest income after provision for loan losses | $ | 3,003,899 | $ | 2,706,019 | $ | 5,858,117 | $ | 5,024,413 | ||||
Noninterest Income | ||||||||||||
Trust Department income | $ | 111,779 | $ | 102,600 | $ | 268,746 | $ | 218,770 | ||||
Service charges on deposits | 312,281 | 261,106 | 611,620 | 505,601 | ||||||||
Other service charges and fees | 514,569 | 450,458 | 943,647 | 765,732 | ||||||||
Securities gains | 0 | 0 | 0 | 36,036 | ||||||||
Other operating income | 33,363 | 28,658 | 56,443 | 58,557 | ||||||||
| $ | 971,992 | $ | 842,822 | $ | 1,880,456 | $ | 1,584,696 | |||||
Noninterest Expenses | ||||||||||||
Salaries and wages | $ | 1,189,707 | $ | 951,040 | $ | 2,352,516 | $ | 1,950,129 | ||||
Pension and other employee benefits | 282,194 | 324,648 | 583,744 | 466,169 | ||||||||
Occupancy expenses | 161,041 | 117,327 | 314,887 | 228,979 | ||||||||
Equipment expenses | 210,733 | 196,919 | 394,697 | 359,763 | ||||||||
Credit card expense | 25,771 | 72,345 | 59,364 | 129,254 | ||||||||
Stationary and supplies | 61,781 | 71,923 | 126,387 | 121,522 | ||||||||
Other operating expenses | 624,582 | 511,389 | 1,183,603 | 952,461 | ||||||||
| $ | 2,555,809 | $ | 2,245,591 | $ | 5,015,198 | $ | 4,208,277 | |||||
Income before income taxes | $ | 1,420,082 | $ | 1,303,250 | $ | 2,723,375 | $ | 2,400,832 | ||||
Income Tax Expense | 436,635 | 399,455 | 826,637 | 727,287 | ||||||||
Net Income | $ | 983,447 | $ | 903,795 | $ | 1,896,738 | $ | 1,673,545 | ||||
Net income per common share, basic and diluted | $ | 0.66 | $ | 0.62 | $ | 1.28 | $ | 1.14 | ||||
4
Eagle Financial Services, Inc. and Subsidiary
Consolidated Statements of Shareholders’ Equity
For the Six Months Ended June 30, 2003 and 2002
Unaudited
Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income(Loss) | Comprehensive Income | Total | ||||||||||||||||||
Balance, December 31, 2001 | $ | 3,653,487 | $ | 3,178,848 | $ | 14,407,901 | $ | 232,471 | $ | 21,472,707 | |||||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net income | 1,673,545 | $ | 1,673,545 | 1,673,545 | |||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||
Unrealized holding gains arising during the period, net of deferred income taxes of $66,014 | 128,145 | ||||||||||||||||||||||
Reclassification adjustment, net of deferred income taxes of $12,252 | (23,784 | ) | |||||||||||||||||||||
Other comprehensive income, net of deferred income taxes of $53,762 | 104,361 | 104,361 | 104,361 | ||||||||||||||||||||
Total comprehensive income | $ | 1,777,906 | |||||||||||||||||||||
Issuance of common stock, dividend investment plan (7,383 shares) | 18,458 | 149,892 | 168,350 | ||||||||||||||||||||
Dividends declared ($0.31 per share) | (453,601 | ) | (453,601 | ) | |||||||||||||||||||
Fractional shares purchased | (15 | ) | (134 | ) | (149 | ) | |||||||||||||||||
Balance, June 30, 2002 | $ | 3,671,930 | $ | 3,328,606 | $ | 15,627,845 | $ | 336,832 | $ | 22,965,213 | |||||||||||||
Balance, December 31, 2002 | $ | 3,696,926 | $ | 3,545,408 | $ | 17,012,437 | $ | 147,020 | $ | 24,401,791 | |||||||||||||
Comprehensive income: | |||||||||||||||||||||||
Net Income | 1,896,738 | $ | 1,896,738 | 1,896,738 | |||||||||||||||||||
Other comprehensive income: | |||||||||||||||||||||||
Unrealized holding gains arising during the period, net of deferred income taxes of $182,069 | 353,428 | 353,428 | 353,428 | ||||||||||||||||||||
Total comprehensive income | $ | 2,250,166 | |||||||||||||||||||||
Issuance of common stock, employee benefit plan (1,284 shares) | 3,210 | 32,357 | 35,567 | ||||||||||||||||||||
Issuance of common stock, dividend investment plan (7,267 shares) | 18,167 | 176,902 | 195,069 | ||||||||||||||||||||
Dividends declared ($0.36 per share) | (533,018 | ) | (533,018 | ) | |||||||||||||||||||
Fractional shares purchased | (4 | ) | (38 | ) | (42 | ) | |||||||||||||||||
Balance, June 30, 2003 | $ | 3,718,299 | $ | 3,754,629 | $ | 18,376,157 | $ | 500,448 | $ | 26,349,533 | |||||||||||||
5
Eagle Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2003 and 2002
| Six Months Ended June 30 | ||||||||
| 2003 | 2002 | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 1,896,738 | $ | 1,673,545 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 240,443 | 210,660 | ||||||
Amortization of intangible and other assets | 111,718 | 93,819 | ||||||
(Gain)loss on equity investment | (1,293 | ) | 3,706 | |||||
Provision for loan losses | 370,000 | 421,900 | ||||||
(Gain) on sale of securities | 0 | (36,036 | ) | |||||
Premium amortization on securities, net | 86,434 | 25,387 | ||||||
Changes in assets and liabilities: | ||||||||
(Increase) in other assets | (677,686 | ) | (441,027 | ) | ||||
Increase (decrease) in other liabilities | 7,285 | (223,023 | ) | |||||
Net cash provided by operating activities | $ | 2,033,639 | $ | 1,728,931 | ||||
Cash Flows from Investing Activities | ||||||||
Proceeds from maturities and principal payments on securities held to maturity | $ | 2,473,286 | $ | 2,560,802 | ||||
Proceeds from maturities and principal payments on securities available for sale | 4,486,730 | 1,878,478 | ||||||
Proceeds from sales of securities available for sale | 0 | 306,108 | ||||||
Purchases of securities held to maturity | (2,621,231 | ) | (346,500 | ) | ||||
Purchases of securities available for sale | (6,326,377 | ) | (1,155,812 | ) | ||||
Purchases of bank premises and equipment | (761,825 | ) | (1,182,982 | ) | ||||
Net (increase) in loans | (27,844,782 | ) | (30,315,550 | ) | ||||
Net cash (used in) investing activities | $ | (30,594,199 | ) | $ | (28,255,456 | ) | ||
Cash Flows from Financing Activities | ||||||||
Net increase in demand deposits, money market and savings accounts | $ | 28,839,528 | $ | 26,322,463 | ||||
Net (decrease) in certificates of deposit | (2,085,855 | ) | (6,157,306 | ) | ||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings | 1,377,080 | (4,446,654 | ) | |||||
Proceeds from Federal Home Loan Bank advances | 0 | 8,000,000 | ||||||
Proceeds from trust preferred capital notes | 0 | 7,000,000 | ||||||
Proceeds from issuance of common stock to ESOP | 35,567 | 0 | ||||||
Cash dividends paid | (337,949 | ) | (285,251 | ) | ||||
Fractional shares purchased | (42 | ) | (149 | ) | ||||
Net cash provided by financing activities | $ | 27,828,329 | $ | 30,433,103 | ||||
Increase (decrease) in cash and cash equivalents | $ | (732,231 | ) | $ | 3,906,578 | |||
Cash and Cash Equivalents | ||||||||
Beginning | 16,198,473 | 13,105,622 | ||||||
Ending | $ | 15,466,242 | $ | 17,012,200 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash payments for: | ||||||||
Interest | $ | 1,910,567 | $ | 2,353,831 | ||||
Income taxes | $ | 847,075 | $ | 968,321 | ||||
Supplemental Schedule of Non-Cash Investing and Financing Activities: | ||||||||
Issuance of common stock, dividend investment plan | $ | 195,069 | $ | 168,350 | ||||
Unrealized gain(loss)on securities available for sale | $ | 535,496 | $ | 158,123 | ||||
6
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(1) The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America from interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America.
(2) In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2003 and December 31, 2002, the results of operations for the three and six months ended June 30, 2003 and 2002, and cash flows for the six months ended June 30, 2003 and 2002. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report for the year ended December 31, 2002.
(3) The results of operations for the six month period ended June 30, 2003, are not necessarily indicative of the results to be expected for the full year.
(4) Securities
The amortized costs and fair values of securities held to maturity as of June 30, 2003 and December 31, 2002 are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Loss) | Fair Value | ||||||||||
| June 30, 2003 | |||||||||||||
Held to Maturity: | |||||||||||||
Obligations of U.S. government corporations and agencies | $ | 1,999,748 | $ | 28,067 | $ | 0 | $ | 2,027,815 | |||||
Mortgage-backed securities | 2,970,342 | 85,758 | (25 | ) | 3,056,075 | ||||||||
Obligations of states and political subdivisions | 10,431,627 | 486,062 | 0 | 10,917,689 | |||||||||
| $ | 15,401,717 | $ | 599,887 | $ | (25 | ) | $ | 16,001,579 | |||||
| December 31, 2002 | |||||||||||||
Held to Maturity: | |||||||||||||
Obligations of U.S. government corporations and agencies | $ | 999,541 | $ | 36,864 | $ | 0 | $ | 1,036,405 | |||||
Mortgage-backed securities | 3,042,902 | 126,059 | (26 | ) | 3,168,935 | ||||||||
Obligations of states and political Subdivisions | 11,224,314 | 432,497 | (408 | ) | 11,656,403 | ||||||||
| $ | 15,266,757 | $ | 595,420 | $ | (434 | ) | $ | 15,861,743 | |||||
The amortized costs and fair values of securities available for sale as of June 30, 2003 and December 31, 2002 are as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | ||||||||||
| June 30, 2003 | |||||||||||||
Available for Sale: | |||||||||||||
Obligations of U.S. government corporations and agencies | $ | 6,525,162 | $ | 140,533 | $ | 0 | $ | 6,665,695 | |||||
Mortgage-backed securities | 6,673,994 | 62,711 | (1,718 | ) | 6,734,987 | ||||||||
Obligations of states and political subdivisions | 1,310,924 | 136,508 | 0 | 1,447,432 | |||||||||
Corporate debt securities | 10,162,656 | 1,032,249 | 0 | 11,194,905 | |||||||||
Restricted Stock | 1,326,700 | 0 | 0 | 1,326,700 | |||||||||
| $ | 25,999,436 | $ | 1,372,001 | $ | (1,718 | ) | $ | 27,369,719 | |||||
| December 31, 2002 | |||||||||||||
Available for Sale: | |||||||||||||
Obligations of U.S. government corporations and agencies | $ | 7,152,565 | $ | 107,685 | $ | 0 | $ | 7,260,250 | |||||
Mortgage-backed securities | 4,711,530 | 38,419 | 0 | 4,749,949 | |||||||||
Obligations of states and political subdivisions | 1,309,526 | 119,918 | 0 | 1,429,444 | |||||||||
Corporate debt securities | 9,668,817 | 666,033 | (97,268 | ) | 10,237,582 | ||||||||
Restricted Stock | 1,390,800 | 0 | 0 | 1,390,800 | |||||||||
| $ | 24,233,238 | $ | 932,055 | $ | (97,268 | ) | $ | 25,068,025 | |||||
7
| (5) | Loans |
Net loans at June 30, 2003 and December 31, 2002 are summarized as follows (In Thousands):
| Jun 30, 2003 | Dec 31, 2002 | |||||||
Mortgage loans on real estate: | ||||||||
Construction and land development | $ | 22,667 | $ | 12,081 | ||||
Secured by farmland | 2,607 | 2,892 | ||||||
Secured by 1-4 family residential | 125,342 | 111,273 | ||||||
Secured by nonfarm,nonresidential | 49,386 | 48,459 | ||||||
Loans to farmers | 1,167 | 1,071 | ||||||
Commercial and industrial loans | 20,005 | 18,671 | ||||||
Consumer installment loans | 32,193 | 31,377 | ||||||
All other loans | 391 | 154 | ||||||
Gross loans | $ | 253,758 | $ | 225,978 | ||||
Less: | ||||||||
Allowance for loan losses | (2,682 | ) | (2,376 | ) | ||||
Loans, net | $ | 251,076 | $ | 223,602 | ||||
| (6) | Allowance for Loan Losses |
Changes in the allowance for loan losses are as follows:
| Jun 30, 2003 | Jun 30, 2002 | Dec 31, 2002 | ||||||||||
Balance, beginning | $ | 2,376,463 | $ | 1,797,263 | $ | 1,797,263 | ||||||
Provision charged to operating expense | 370,000 | 421,900 | 700,000 | |||||||||
Recoveries added to the allowance | 37,741 | 39,324 | 67,332 | |||||||||
Loan losses charged to the allowance | (102,641 | ) | (63,017 | ) | (188,132 | ) | ||||||
Balance, ending | $ | 2,681,563 | $ | 2,195,470 | $ | 2,376,463 | ||||||
| (7) | Recent Accounting Pronouncements |
In April 2003, the Financial Accounting Standards Board issued Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Company’s consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of this Statement did not result in an impact on the Company’s consolidated financial statements.
8
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
CRITICAL ACCOUNTING POLICIES
The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one element in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors that are used. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.
The allowance for loan losses is an estimate of the losses that may be sustained in the Company’s loan portfolio. The allowance for loan losses is based on two accounting principles: (1) Statement of Financial Accounting Standards (SFAS) No. 5 Accounting for Contingencies, which requires that losses be accrued when their occurrence is probable and they are estimable, and (2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the loan balance and the value of its collateral, the present value of future cash flows, or the price established in the secondary market. The Company’s allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The formula allowance uses historical experience factors to estimate future losses and, as a result, the estimated amount of losses can differ significantly from the actual amount of losses which would be incurred in the future. However, the potential for significant differences is mitigated by continuously updating the loss history of the Company. The specific allowance is based upon the evaluation of specific loans on which a loss may be realized. Factors such as past due history, ability to pay, and collateral value are used to identify those loans on which a loss may be realized. Each of these loans is then classified as to how much loss would be realized on their disposition. The sum of the losses on the individual loans becomes the Company’s specific allowance. This process is inherently subjective and actual losses may be greater than or less than the estimated specific allowance. The unallocated allowance captures losses that are attributable to various economic events which may affect a certain loan type within the loan portfolio or a certain industrial or geographic sector within the Company’s market. As the loans are identified which are affected by these events or losses are experienced on the loans which are affected by these events, they will be recognized within the specific or formula allowances.
PERFORMANCE SUMMARY
Net income of the Company for the first six months of 2002 and 2003 was $1,673,545 and $1,896,738, respectively. This is an increase of $223,193 or 13.34%. Net interest income after provision for loan losses for the first six months of 2002 and 2003 was $5,024,413 and $5,858,117, respectively. This is an increase of $833,704 or 16.59%. This increase can be attributed to continued loan growth during 2003 being funded with growth in noninterest bearing demand deposits, interest bearing demand deposits, and savings accounts. Total noninterest income increased $295,760 or 18.66% from $1,584,696 for the first six months of 2002 to $1,880,456 for the first six months of 2003. This change can be attributed to increases in commissions earned on the sale of nondeposit investment products, fees earned from the origination of secondary market mortgages, and an increase in fees earned by the Bank’s Trust Department. Total noninterest expenses increased $806,921 or 19.17% from $4,208,277 during the first six months of 2002 to $5,015,198 during the first six months of 2003. This change can be attributed to an increase in compensation and benefits expense from the hiring of additional personnel for the Bank’s ninth branch location and an increase in pension benefit expense.
Earnings per common share outstanding (basic and diluted) was $1.14 and $1.28 for the six months ended June 30, 2002 and 2003, respectively. Annualized return on average assets for the six month periods ended June 30, 2002 and 2003 was 1.32% and 1.24%, respectively. Annualized return on average equity for the six month periods ended June 30, 2002 and 2003 was 15.17% and 15.04%, respectively.
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 as discussed within the section CRITICAL ACCOUNTING POLICIES above. The provision for loan losses for the six month periods ended June 30, 2002 and 2003 was $421,900 and $370,000, respectively. The allowance for loan losses increased $305,100 or 12.84% during the first six months of 2003 from $2,376,463 at December 31, 2002 to $2,681,563 at June 30, 2003. The allowance as a percentage of total loans increased slightly from 1.05% as of December 31, 2002 to 1.06% as of June 30, 2003. Charged-off loans were $63,017 and $102,641 for the six months ended June 30, 2002 and 2003, respectively. Recoveries were $39,324 and $37,741 for the six months ended June 30, 2002 and 2003, respectively. This resulted in net charge-offs of $23,693 and $64,900 for the first six months of 2002 and 2003, respectively. The ratio of net charge-offs to average loans was 0.01% and 0.03% for the first six months of 2002 and 2003, respectively.
Loans past due greater than 90 days and still accruing interest increased from $26,674 at December 31, 2002 to $33,399 at June 30, 2003. Total nonaccrual loans were $75,008 as of June 30, 2003. There were no impaired loans as of June 30, 2003. There were no nonaccrual or impaired loans as of December 31, 2002.
Loans are viewed as potential problem loans when management questions the ability of the borrower to comply with current repayment terms. These loans are subject to constant review by management and their status is reviewed on a regular basis. The amount of problem loans as of December 31, 2002 and June 30, 2003 was $1,021,153 and $514,132, respectively. Most of these loans are well secured and management expects to incur only immaterial losses, if any, on their disposition.
BALANCE SHEET
Total assets increased $30.2 million or 10.35% from $292.6 million at December 31, 2002 to $322.8 million at June 30, 2003. Securities increased $2.5 million or 6.04% during the first six months of 2003 from $40.3 million at December 31, 2002 to $42.8 million at June 30, 2003. Loans, net of unearned discounts increased $27.8 million or 12.29% during the same period from $226.0 million at December 31, 2002 to $253.8 million at June 30, 2003. Total liabilities increased $28.3 million or 10.56% during the first six months of 2003 from $268.2 million at December 31, 2002 to $296.5 million at June 30, 2003. Total deposits increased $26.7 million or 11.31% during the same period from $236.6 at December 31, 2002 to $263.3 million at June 30, 2003. Total shareholders’ equity increased $1.9 million or 7.98% during the first six months of 2003 from $24.4 million at December 31, 2002 to $26.3 million at June 30, 2003.
TRUST PREFERRED CAPITAL NOTES
On May 23, 2002, Eagle Financial Statutory Trust I (“the Trust”), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On June 26, 2002, $7 million of trust preferred securities were issued through a pooled underwriting totaling approximately $554 million. The securities have a LIBOR-indexed floating rate of interest. The interest rate at June 30, 2003 was 4.46%. The securities have a mandatory redemption date of June 26, 2032, and are subject to varying call provisions beginning June 26, 2007. The principal asset of the Trust is $7 million of the Company’s junior subordinated debt securities with maturities and interest rates like the capital securities.
The trust preferred securities may be included in Tier I capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier I capital, including total trust preferred securities. The portion of the trust preferred ecurities not considered as Tier I capital, if any, may be included in Tier 2 capital. The total amount ($7 million) of trust preferred securities issued by the Trust can be included in the Company’s Tier I capital.
SHAREHOLDERS’ EQUITY
Shareholders’ equity per common share outstanding (book value) increased $1.22 or 7.39% from $16.50 at December 31, 2002 to $17.72 at June 30, 2003. During 2002 the Company paid $0.65 per share in dividends. The Company’s total dividends for the first two quarters of 2003 were $0.36 per share. The Company has a Dividend Investment Plan that reinvests the dividends of participating shareholders in Company stock.
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. Total liquid assets were $93.2 million at December 31, 2002 and $101.9 million at June 30, 2003. These amounts represent 34.76% and 34.39% of total liabilities as of December 31, 2002 and June 30, 2003, respectively.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report that are not historical facts may be forward looking statements. The forward looking statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical or expected results. Readers are cautioned not to place undue reliance on these forward looking statements.
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| Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported at December 31, 2002 in the Company’s Form 10-K.
| Item 4. | Controls and Procedures |
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information, required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
| Item 1. | Legal proceedings. |
None.
| Item 2. | Changes in securities and use of proceeds. |
None.
| Item 3. | Defaults upon senior securities. |
None.
| Item 4. | Submission of matters to a vote of security holders. |
None.
| Item 5. | Other Information. |
None.
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| Item 6. | Exhibits and Reports on Form 8-K. |
| (a) | Exhibits |
The following exhibits, when applicable, are filed with this Form 10-Q 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 Form S-4 Registration Statement, Registrant’s 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 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 at625 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 Real Estate Management, Inc. (landlord) dated March 20, 2000 for the branch office at 190 Campus Boulevard, Suite 120, Winchester, Virginia (incorporated herein by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). | |
| 10.4 | Lease Agreement between Bank of Clarke County (lessee) and MBC, L.C. (lessor) dated October 25, 2002 for a parcel of land to be used as a branch site located on State Route 7 in Winchester, Virginia and described as Lot #1 on the lands of MBC, L.C. plat (incorporated herein by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). | |
| Exhibit 11. | Computation of Per Share Earnings (incorporated herein as Exhibit 11). | |
| Exhibit 15. | Not applicable. | |
| Exhibit 18. | Not applicable. | |
| Exhibit 19. | Not applicable. | |
| Exhibit 22. | Not applicable. | |
| Exhibit 23. | Not applicable. | |
| Exhibit 24. | Not applicable. | |
| Exhibit 27. | Not applicable | |
| Exhibit 31. | Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.1 | Certification by John R. Milleson | |
| 31.2 | Certification by James W. McCarty, Jr. | |
| Exhibit 32. | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification by John R. Milleson | |
| 32.2 | Certification by James W. McCarty, Jr. | |
| (b) | Reports on Form 8-K. |
On July 17, 2003 the Company filed a report on Form 8-K to disclose its results of operations for the six months ended June 30, 2003 and to disclose information regarding its third quarter dividend payable August 15, 2003 for shareholders of record on August 1, 2003.
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SIGNATURES
Pursuant to the requirements 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.
EAGLE FINANCIAL SERVICES, INC. | ||||||
| Date: | August 13, 2003 | /s/ JOHN R. MILLESON | ||||
John R. Milleson President and Chief Executive Officer | ||||||
| Date: | August 13, 2003 | /s/ JAMES W. MCCARTY, JR. | ||||
Vice President, Chief Financial Officer, and Secretary/Treasurer | ||||||
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