UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
-------------
For the fiscal year ended Commission File Number 0-20146
December 31, 1997
EAGLE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1601306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 391
Berryville, Virginia 22611
(Address or principal executive offices) (Zip Code)
(540) 955-2510
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $2.50
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
PAGE 1 OF 68 PAGES. Exhibit index on page 39 .
------ ------ ------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 20, 1998 was $31,787,400. The aggregate market value of
the stock was computed using a market rate of $25.00 per share.
The number of shares of Registrant's Common Stock outstanding as of March
20, 1998 was 1,410,432.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1997 Annual Report to Shareholders are
incorporated by reference in Parts I, II, and IV of this Form 10-K.
(2) Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Form 10-K.
1
EAGLE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-K
Page
------
PART I
Item 1. Business.................................................. 3
Item 2. Properties............................................... 17
Item 3. Legal Proceedings........................................ 17
Item 4. Submission of Matters to a Vote of Security Holders...... 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................ 18
Item 6. Selected Financial Data................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 20
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8. Financial Statements and Supplementary Data.............. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant....... 36
Item 11. Executive Compensation.................................. 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 36
Item 13. Certain Relationships and Related Transactions.......... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 37
2
PART I
Item 1. Business.
General
The Registrant was incorporated October 2, 1991 by the Bank of Clarke
County, Berryville, Virginia (the "Bank"), for the purpose of establishing a one
bank holding company upon consummation of a Plan of Share Exchange between the
Registrant and the Bank. The Bank is a Virginia banking corporation chartered on
April 1, 1881. On December 31, 1991, the Share Exchange was consummated
resulting in the Bank becoming a wholly-owned subsidiary of the Registrant. The
Registrant has no other subsidiaries.
The Registrant is regulated by the Board of Governors of the Federal
Reserve System under the Bank Holding Company Act of 1956, which limits the
Registrant's activities to managing or controlling banks and engaging in other
activities closely related to banking. The Bank is a member of the Federal
Deposit Insurance Corporation and is a state member bank of the Federal Reserve
System. The Bank is supervised and regulated by the Federal Reserve Board and
the Virginia Bureau of Financial Institutions.
The Bank offers a wide range of retail commercial banking services,
including demand and time deposits and installment, mortgage and other consumer
lending services. The Bank makes seasonal and term commercial loans, both alone
and in conjunction with other banks or governmental agencies. The Bank also
offers a wide variety of trust services to customers. During 1997 the Bank
formed Eagle Investment Services, a division of the Bank which sells non-deposit
investment products through a third party provider, UVEST Investment Services.
During 1997 the Bank also formed Eagle Home Funding, a wholly owned subsidiary
of the Bank, which offers secondary market mortgage products.
The Bank's main office is located in Berryville, Clarke County,
Virginia, and it operates branch offices in Boyce, Jubal Early Drive in
Winchester, Senseny Road in Frederick County and in Stephens City. Clarke and
Frederick Counties and the City of Winchester are the Bank's primary trade area.
Within its primary trade area, the Bank competes with numerous large and small
financial institutions, credit unions, insurance companies and other non-bank
competitors. Eagle Home Funding is located at 615 Jubal Early Drive in
Winchester, in the same retail center as the Jubal Early branch.
The Bank had twenty officers, 55 other full-time and 19 part-time
employees as of December 31, 1997. None of the Bank's employees are represented
by a union or covered under a collective bargaining agreement. Employee
relations have been good.
The Bank's loan portfolio is primarily comprised of real estate loans,
particularly those secured by 1-4 family residential properties. The Bank also
offers many other types of loans including consumer loans, commercial real
estate loans, commercial and industrial loans (not secured by real estate),
agricultural production loans, and construction loans. See the respective
sections in Items 6, 7, and 8 for additional discussion and analysis of the
Bank's loan portfolio.
The loss of any one depositor or the failure by any one borrower to
repay a loan would not have a material adverse effect on the Bank.
3
Statistical Information
The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.
INDEX
Table 1 Average Balances, Income/Expenses and Average Rates
Table 2 Rate/Volume Variance
Table 3 Analysis of Allowance for Loans Losses
Table 4 Allocation of Allowance for Loan Losses
Table 5 Loan Portfolio
Table 6 Maturity Schedule of Selected Loans
Table 7 Non-Performing Assets
Table 8 Maturity Distribution and Yields of Securities
Table 9 Deposits and Rates Paid
Table 10 Maturities of Certificates of Deposit of $100,000 and More
Table 11 Risk Based Capital Ratios
Table 12 Interest Rate Sensitivity Schedule
4
Table 1 - Average Balances, Income/Expenses and Average Rates
(In Thousands) (Fully Taxable Equivalent)
1997 1996
---------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate
--------- --------- --------- --------- --------- --------
ASSETS:
Loans
Taxable $81,525 $7,184 8.81% $84,772 $7,660 9.04%
Tax-exempt (1) 1,389 107 7.70% 1,410 138 9.79%
Non-accrual 495 0 0% 0 0 0%
--------- --------- --------- ---------
Total Loans $83,409 $7,291 8.74% $86,182 $7,798 9.05%
--------- --------- --------- ---------
Securities
Taxable $28,671 $1,809 6.13% $23,528 $1,443 6.13%
Tax-Exempt (1) 3,106 219 7.05% 3,289 239 7.27%
--------- --------- --------- ---------
Total Securities $31,777 $2,028 6.38% $26,817 $1,682 6.27%
--------- --------- --------- ---------
Federal funds sold $1,793 $101 5.63% $918 $51 5.56%
--------- --------- --------- ----------
Total Earning Assets $116,979 $9,420 8.05% $113,917 $9,531 8.37%
========= =========
Less: Reserve for
loan losses (817) (853)
Cash and due from banks 4,643 4,197
Bank premises and
equipment, net 4,122 4,097
Other assets 3,209 2,858
--------- ---------
Total Assets $128,136 $124,216
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT:
Deposits
Demand deposits $15,846 $ 0 $12,900 $ 0
--------- --------- --------- ---------
NOW accounts $15,062 $309 2.05% $15,262 $321 2.10%
Money market accounts 16,709 520 3.11% 17,393 535 3.08%
Savings accounts 13,956 341 2.44% 13,594 342 2.52%
Time deposits 50,655 2,729 5.39% 49,349 2,656 5.38%
--------- --------- --------- ---------
Total Interest-
Bearing Deposits $96,382 $3,899 4.05% $95,598 $3,854 4.03%
Fed funds purchased 115 5 4.35% 974 57 5.85%
Federal Home Loan
Bank advances 0 0 0% 0 0 0%
--------- --------- --------- ---------
Total Interest-
Bearing Liabilities $96,497 $3,904 4.05% $96,572 $3,911 4.05%
--------- --------- --------- ---------
Other Liabilities $1,143 $1,053
--------- ---------
Stockholders' Equity $14,650 $13,691
--------- ---------
Total Liabilities &
Shareholders' Equity $128,136 $124,216
========= =========
Net interest spread 4.00% 4.32%
Interest expense as a percent
of average earning assets 3.34% 3.43%
Net interest margin 4.72% 4.93%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
Average Balances, Income/Expenses and Average Rates (continued)
(In Thousands) (Fully Taxable Equivalent)
1995
---------------------------------
Average Income/ Average
Balances Expense Rate
--------- --------- --------
ASSETS:
Loans
Taxable $81,855 $7,407 9.05%
Tax-exempt (1) 1,334 116 8.70%
Non-accrual 36 0 0%
--------- ---------
Total Loans $83,225 $7,523 9.04%
--------- ---------
Securities
Taxable $17,102 $1,030 6.02%
Tax-Exempt (1) 3,073 240 7.81%
--------- ---------
Total Securities $20,175 $1,270 6.29%
--------- ---------
Federal funds sold $951 $55 5.78%
--------- ----------
Total Earning Assets $104,351 $8,848 8.48%
=========
Less: Reserve for
loan losses (847)
Cash and due from banks 3,849
Bank premises and
equipment, net 3,295
Other assets 2,228
---------
Total Assets $112,876
=========
LIABILITIES AND SHAREHOLDERS' INVESTMENT:
Deposits
Demand deposits $11,548 $ 0
--------- ---------
NOW accounts $12,761 $318 2.49%
Money market accounts 16,932 542 3.20%
Savings accounts 12,699 351 2.76%
Time deposits 44,496 2,315 5.20%
--------- ---------
Total Interest-
Bearing Deposits $86,888 $3,526 4.06%
Fed funds purchased 908 56 6.17%
Federal Home Loan
Bank advances 25 3 12.00%
--------- ---------
Total Interest-
Bearing Liabilities $87,821 $3,585 4.08%
--------- ---------
Other Liabilities $820
---------
Stockholders' Equity $12,686
---------
Total Liabilities &
Shareholders' Equity $112,875
=========
Net interest spread 4.40%
Interest expense as a percent
of average earning assets 3.44%
Net interest margin 5.04%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
5
Table 2 - Rate/Volume Variance (In Thousands)
1997 Compared to 1996 1996 Compared to 1995
---------------------------------------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
---------- -------- ------- --------- ------- ---------
INTEREST INCOME:
Loans; taxable ($476) ($286) ($190) $253 $253 $0
Loans; tax-exempt (31) (2) (29) 22 7 15
Securities; taxable 366 323 43 413 394 19
Securities; tax-exempt (20) (13) (7) (1) (60) 59
Federal funds sold 50 49 1 (4) (2) (2)
---------- -------- ------- --------- ------- ---------
Total Interest Income ($111) $71 ($182) $683 $592 $91
---------- -------- ------- --------- ------- ---------
INTEREST EXPENSE:
NOW accounts ($12) ($4) ($8) $3 $15 ($12)
Money market accounts (15) (20) 5 (7) 19 (26)
Savings accounts (1) 5 (6) (9) 38 (47)
Time deposits 73 68 5 341 259 82
Federal funds purchased (52) (40) (12) 1 4 (3)
Federal Home Loan
Bank Advances 0 0 0 (3) (3) 0
---------- -------- ------- --------- ------- ---------
Total Interest Expense ($7) $9 ($16) $326 $332 ($6)
---------- -------- ------- --------- ------- ---------
Net Interest Income ($104) $62 ($166) $357 $260 $97
---------- -------- ------- --------- ------- ---------
6
Table 3 - Analysis of Allowance for Loans Losses
(In Thousands)
Year Ended
December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Allowance for Loan
Losses, January 1 $914 $828 $808 $744 $761
Loans Charged-Off:
Commercial, financial
and agricultural $4 $0 $144 $52 $75
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 42 0 0 0 48
Consumer 640 267 130 122 151
------ ------ ------ ------ ------
Total Loans Charged-Off $686 $267 $274 $174 $274
------ ------ ------ ------ ------
Recoveries:
Commercial, financial
and agricultural $1 $6 $10 $11 $25
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 4 0 0 0 9
Consumer 39 57 44 24 60
------ ------ ------ ------ ------
Total Recoveries $44 $63 $54 $35 $94
------ ------ ------ ------ ------
Net Charge-Offs $642 $204 $220 $139 $180
------ ------ ------ ------ ------
Provision for Loan Losses $477 $290 $240 $203 $163
------ ------ ------ ------ ------
Allowance for Loan
Losses, December 31 $749 $914 $828 $808 $744
====== ====== ====== ====== ======
Ratio of Net Charge-Offs
to Average Loans: 0.77% 0.24% 0.26% 0.18% 0.25%
====== ====== ====== ====== ======
7
Table 4 - Allocation of Allowance for Loan Losses
(In Thousands)
1997 1996 1995
--------------------- --------------------- ---------------------
Allowance Percentage Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total for Loan of Total
Losses Loans Losses Loans Losses Loans
--------- ---------- --------- ---------- --------- ----------
Commercial, financial,
and agricultural $323 8.8% $365 10.6% $323 10.8%
Real Estate: mortgage 125 74.0% 75 68.4% 55 65.1%
Consumer 301 17.2% 474 21.0% 450 24.1%
--------- --------- ---------
$749 $914 $828
========= ========= =========
8
Table 5 - Loan Portfolio (In Thousands)
December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Loans secured by real estate:
Construction and land development $588 $1,434 $0 $0 $0
Secured by farmland 3,700 4,013 4,112 3,888 3,410
Secured by 1-4 family residential 44,863 45,156 41,411 35,803 33,363
Nonfarm, nonresidential loans 11,141 9,518 10,372 13,698 13,297
Loans to farmers (except secured
by real estate) 770 1,446 1,605 1,777 1,462
Commercial and industrial loans
(except those secured by real estate) 5,116 6,145 6,349 6,247 5,563
Loans to individuals (except those
secured by real estate) 14,458 19,633 22,508 19,547 16,186
All other loans 1,251 1,732 1,239 1,239 1,382
------ ------ ------ ------ ------
Total loans 81,887 89,077 87,596 82,199 74,663
Less: Unearned discount (462) (1,207) (1,725) (1,565) (1,019)
------ ------ ------ ------ ------
Total Loans, Net $81,425 $87,870 $85,871 $80,634 $73,644
====== ====== ====== ====== ======
9
Table 6 - Maturity Schedule of Selected Loans
(In Thousands)
After
1 Year
Within Within After
1 Year 5 Years 5 Years Total
------- ------- ------- -------
Loans secured by real estate $10,127 $45,034 $5,131 $60,292
Agricultural production loans 297 473 0 770
Commercial and industrial loans 2,528 2,588 0 5,116
Consumer loans 2,559 10,557 880 13,996
All other loans 1,154 97 0 1,251
------- ------- ------- -------
$16,665 $58,749 $6,011 $81,425
======= ======= ======= =======
For maturities over one year:
Interest rates - floating $1,835 $1,917 $3,752
Interest rates - fixed 56,914 4,094 61,008
------- ------- -------
$58,749 $6,011 $64,760
======= ======= =======
10
Table 7 - Non-Performing Assets (In Thousands)
December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Nonaccrual loans $437 $0 $430 $0 $30
Restructured loans 0 0 0 0 0
Other real estate owned 190 47 47 47 150
------ ------ ------ ------ ------
Total Non-Performing Assets $627 $47 $477 $47 $180
====== ====== ====== ====== ======
Loans past due 90 days
accruing interest $614 $967 $1,694 $683 $219
====== ====== ====== ====== ======
Allowance for loan losses to
period end loans 0.92% 1.04% 0.96% 1.00% 1.01%
Non-performing assets to
period end loans and other
real estate owned 0.77% 0.05% 0.52% 0.06% 0.24%
11
Table 8 - Maturity Distribution and Yields of Securities
(In Thousands)
Due in one year Due after 1 Due after 5
or less through 5 years through 10 years
---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- -----
Securities held to maturity:
U.S. Treasury securities $250 5.34% $0 0.00% $122 7.63%
Obligations of U.S. government
corporations and agencies 500 6.06% 9,148 6.30% 500 6.90%
Mortgage-backed securities 507 7.30% 8,161 6.14% 8,590 7.11%
Obligations of states and
political subdivisions,
taxable 0 0.00% 1,703 6.68% 0 0.00%
------- ------- -------
Total taxable 1,257 19,012 9,212
Obligations of states and
political subdivisions,
tax-exempt (1) 550 7.03% 1,850 7.06% 1,030 6.98%
------- ------- -------
Total $1,807 $20,862 $10,242
------- ------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $749 5.22% $2,767 6.47% $0 0.00%
Other taxable securities 0 0.00% 0 0.00% 0 0.00%
------- ------- -------
Total $749 $2,767 $0
------- ------- -------
Total securities: $2,556 $23,629 $10,242
======= ======= =======
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a federal tax rate of 34%.
Maturity Distribution and Yields of Securities (continued)
(In Thousands)
Due after
10 years and
Equity Securities Total
---------------- ----------------
Amount Yield Amount Yield
------- ----- ------- -----
Securities held to maturity:
U.S. Treasury securities $0 0.00% $372 6.09%
Obligations of U.S. government
corporations and agencies 0 0.00% 10,148 6.32%
Mortgage-backed securities 0 0.00% 17,258 6.66%
Obligations of states and
political subdivisions,
taxable 0 0.00% 1,703 6.68%
------- -------
Total taxable 0 29,481
Obligations of states and
political subdivisions,
tax-exempt (1) 250 4.38% 3,680 7.00%
------- -------
Total $250 $33,161
------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $0 5.22% $3,516 6.20%
Other taxable securities 742 6.69% 742 6.69%
------- -------
Total $742 $4,258
------- -------
Total securities: $992 $37,419
======= =======
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a federal tax rate of 34%.
12
Table 9 - Deposits and Rates Paid (In Thousands)
December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Amount Rate Amount Rate Amount Rate
--------- ------ --------- ------ --------- ------
Noninterest-bearing $17,774 $15,175 $11,972
--------- --------- ---------
Interest-bearing:
NOW accounts 15,796 2.05% 16,773 2.10% 14,089 2.49%
Money market accounts 16,232 3.11% 17,172 3.08% 16,932 3.20%
Regular savings accounts 13,572 2.44% 13,421 2.52% 12,325 2.76%
Certificates of deposit:
Less than $100,000 38,743 5.39% 37,204 5.38% 39,116 5.11%
$100,000 and more 14,962 5.49% 11,343 5.40% 11,179 5.57%
--------- --------- ---------
Total interest-bearing $99,305 4.05% $95,913 4.03% $93,641 4.06%
--------- --------- ---------
Total deposits $117,079 $111,088 $105,613
========= ========= =========
13
Table 10 - Maturities of Certificates of Deposit of $100,000 and More
(In Thousands)
Within Three to Six to One to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
-------- -------- -------- -------- -------- --------
At December 31, 1997 $6,524 $3,925 $2,531 $1,882 $100 $14,962
======== ======== ======== ======== ======== ========
14
Table 11 - Risk Based Capital Ratios (In Thousands)
December 31,
--------------------------------------
1997 1996
---------- ----------
Tier 1 Capital:
Stockholders' Equity $14,445 $13,540
Tier 2 Capital:
Allowable Allowance for Loan Losses 749 914
---------- ----------
Total Capital: $15,194 $14,454
---------- ----------
Risk Adjusted Assets: $82,443 $83,712
---------- ----------
Risk Based Capital Ratios:
Tier 1 to Risk Adjusted Assets 17.52% 16.17%
Total Capital to Risk Adjusted Assets 18.43% 17.27%
15
Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
December 31, 1997
------------------------------------------------------
Mature or Reprice Within
------------------------------------------------------
Over Three
Months Over
Three Through One Year Over
Months Twelve To Five Five
Or Less Months Years Years Total
--------- --------- --------- -------- --------
INTEREST-EARNING ASSETS:
Loans (net of unearned income) $13,228 $7,333 $56,727 $4,599 $81,887
Securities and other
interest-earning assets 4,404 4,225 18,343 10,447 37,419
Federal funds sold 2,300 0 0 0 2,300
--------- --------- --------- -------- --------
Total interest-earning assets $19,932 $11,558 $75,070 $15,046 $121,606
--------- --------- --------- -------- --------
INTEREST-BEARING LIABILITIES:
Certificates of deposit:
$100,000 and more $6,524 $6,456 $1,982 $0 $14,962
less than $100,000 13,092 13,144 12,507 0 38,743
Other deposits 45,429 171 0 0 45,600
--------- --------- --------- -------- --------
Total interest-bearing
liabilities $65,045 $19,771 $14,489 $0 $99,305
--------- --------- --------- -------- --------
Interest sensitivity gap:
Asset sensitive
(Liability sensitive) ($45,113) ($8,213) $60,581 $15,046 $22,301
========= ========= ========= ======== ========
Cumulative interest rate gap: ($45,113) ($53,326) $7,255 $22,301
========= ========= ========= ========
Ratio of cumulative gap to total
interest earning assets: -37.10% -43.85% 5.97% 18.34%
========= ========= ========= ========
16
Item 2. Properties.
The present headquarters building of the Registrant and the Bank was
substantially enlarged and remodeled in 1983-84 and again in 1993. The building
now consists of a two-story building of brick construction, with approximately
20,000 square feet of floor space located at 2 East Main Street, Berryville,
Virginia. This office has seven teller stations in the lobby, a remote drive-
through facility with a walk-up window, and a 24 hour automated teller machine.
The Bank also owns and operates branch offices at 108 West Main Street, Boyce,
Virginia, 1508 Senseny Road, Winchester, Virginia, and 382 Fairfax Pike,
Stephens City, Viringia. The Bank also presently operates a leased branch at 625
East Jubal Early Drive in Winchester and has leased a site at 40 West Piccadilly
Street in downtown Winchester, Virginia to open a branch location during January
1998.
The Bank also purchased a 1.5 acre lot located adjacent to the Food
Lion north of Berryville on Route 340. The site will house a branch on this site
in the future. The Bank also owns a building at 18 North Church Street in
Berryville for future expansion. This site is currently leased.
Item 3. Legal Proceedings.
There are no material pending legal proceedings against the Registrant
or the Bank and no material proceedings to which any director, officer or
affiliate of the Registrant, any beneficial owner of more than 5% of the Common
Stock of the Registrant, or any associate of such director, officer or affiliate
of the Registrant, is a party adverse to the Registrant or the Bank or has a
material interest adverse to the Registrant or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock of the Registrant is not listed for trading on a
registered exchange or any automated quotation system. Accordingly, there is no
established public trading market for shares of the Registrant's Common Stock.
Trades in shares of the Registrant's Common Stock occur sporadically on a local
basis. Based on information available to the Registrant concerning such trading,
the following table shows the trading ranges of the Common Stock of the
Registrant and dividends for the periods indicated.
Dividends
Per Share
1997 1996 1995 1997 1996 1995
High Low High Low High Low
1st Quarter $22.00 $20.50 $19.00 $18.75 $18.00 $17.50 $0.08 $0.00 $0.00
2nd Quarter 23.00 22.00 19.50 19.00 18.00 18.00 0.08 0.11 0.11
3rd Quarter 24.00 23.00 20.00 19.50 18.50 18.00 0.08 0.00 0.00
4th Quarter 24.00 24.00 20.50 20.00 18.75 18.50 0.08 0.19 0.17
The Registrant declared a 100% stock dividend effected in the form of
a two for one split as of December 31, 1996. The par value remained unchanged.
The share prices above have been restated to reflect the stock split.
The Registrant paid semiannual dividends in 1996 and 1995. Dividends
per share have been restated to reflect the 100% stock dividend. The dividend
policy was changed to begin paying quarterly dividends beginning February 15,
1997.
The Registrant's future dividends will depend upon its earnings and
financial condition and upon other factors not presently determinable. It is
anticipated that the Registrant will obtain the funds needed for the payment of
its dividends and expenses from the Bank in the form of dividends.
There were 938 holders of record of the Registrant's Common Stock as
of March 20, 1998.
18
Item 6. Selected Financial Data.
The following Selected Financial Data for the five fiscal years ended
December 31, 1997 should be read in conjunction with Item 7, Management's
Discussion & Analysis of Financial Condition and Results of Operations and
the Financial Statements of the Registrant incorporated by reference in
response to Item 8, Financial Statements and Supplementary Data.
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
Income Statement Data: ---------- ---------- ---------- ---------- ----------
Interest Income $9,310,237 $9,402,870 $8,726,902 $7,896,082 $7,713,898
Interest Expense 3,904,197 3,910,612 3,584,788 2,722,451 2,927,042
---------- ---------- ---------- ---------- ----------
Net Interest Income 5,406,040 5,492,258 5,142,114 5,173,631 4,786,856
Less: Provision for
Loan Losses 476,667 290,000 240,000 203,000 163,333
---------- ---------- ---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 4,929,373 5,202,258 4,902,114 4,970,631 4,623,523
Non-Interest Income 1,245,781 1,024,770 811,968 590,458 586,309
---------- ---------- ---------- ---------- ----------
Net Revenue 6,175,154 6,227,028 5,714,082 5,561,089 5,209,832
Non-Interest Expense 4,690,999 4,378,387 3,976,155 3,626,679 3,325,600
---------- ---------- ---------- ---------- ----------
Income before Income Taxes 1,484,155 1,848,641 1,737,927 1,934,410 1,884,232
Applicable Income Taxes 372,143 537,304 477,237 573,407 540,439
---------- ---------- ---------- ---------- ----------
Net Income 1,112,012 1,311,337 1,260,690 1,361,003 1,343,793
========== ========== ========== ========== ==========
Performance Ratios:
Return on Average Assets 0.87% 1.06% 1.12% 1.25% 1.25%
Return on Average Equity 7.59% 9.58% 9.94% 11.90% 12.93%
Dividend Payout Ratio 40.38% 31.86% 30.18% 26.17% 25.24%
Per Share Data (1):
Net Income, basic and diluted $0.79 $0.94 $0.91 $0.99 $0.98
Cash Dividends Declared 0.32 0.30 0.28 0.26 0.25
Book Value 10.69 10.14 9.44 8.67 7.94
Market Price * 24.00 20.50 18.75 17.50 16.25
Average Shares Outstanding 1,404,645 1,392,298 1,383,152 1,369,330 1,361,496
Balance Sheet Data:
Assets $133,239,401 $126,241,741 $121,492,853 $114,607,016 $110,804,265
Loans (Net of
Unearned Income) 81,425,186 87,870,194 85,871,203 80,634,132 73,643,768
Securities 37,418,780 26,089,574 26,618,148 23,833,408 20,374,505
Deposits 117,079,355 111,087,867 105,612,562 99,007,815 99,475,856
Stockholders' Equity 15,058,115 14,196,856 13,120,419 11,969,374 10,855,243
(1) Adjusted for a 100% stock dividend effected in the form of a two for
one split of Eagle Financial Services, Inc. stock on December 31, 1996.
* The Company issues one class of stock, Common, which is not listed for
trading on a registered exchange or quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ). Trades in the
Company's stock occur sporadically on a local basis. Accordingly, there
is no established public trade market for shares of the Company's stock,
and quotations do not necessarily reflect the price that would be paid in
an active and liquid market.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
PERFORMANCE SUMMARY
In 1997, the Company grew from total assets of $126.2 million to $133.2
million. This is an increase of $7.0 million or 5.5%. The investment portfolio
was responsible for the majority of the increase. Securities increased from
$26.1 million in 1996 to $37.4 million in 1997. Net loans fell from $87.0
million in 1996 to $80.7 million in 1997, resulting in a decrease of $6.3
million or 7.2%. The investment portfolio increase is due to the tightening of
credit in the loan portfolio. Paydowns resulting from the decreases in the loan
portfolio were invested in securities, primarily U.S. Agencies. Total deposits
grew $6.0 million or 5.4% from $111.1 million in 1996 to $117.1 million in 1997.
Stockholders' Equity has risen from $14.2 million in 1996 to $15.1 million in
1997, a 6.3% increase.
The net income of the company for 1997 was $1.11 million, down from
last year of $1.31 million. The decrease in net income can be attributed to the
increase in the provision for loan loss. The provision for loan loss increased
$187,000 or 64.5% from 1996 to 1997. Over the past five years, the Company has
earned $6.39 million, resulting in an increase in stockholders' equity of 54.0%
over those five years. The market value of the Company has risen steadily over
the same period. The market value of the stock has gone from $14.50 per share to
$24.00 over the same five year period, an increase of 65.5%
20
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the difference between total interest income and
total interest expense, is the Company's primary source of earnings. Net
interest income decreased by $0.08 million or 1.6% from $5.49 million in 1996 to
$5.41 million in 1997. The amount of net interest income is derived from the
volume of earning assets, the rates earned on those assets, and the cost of
funds. The difference between rates on earning assets and the cost of funds is
measured by the net interest margin, which decreased from 4.93% in 1996 to 4.72%
in 1997.
The earning assets yielded 8.05% on a fully taxable equivalent basis in
1997 as compared to 8.37% in 1996, a decrease of 0.33%. The average rate on
total loans decreased from 9.05% in 1996 to 8.74% in 1997. The total income
earned on loans decreased by $0.51 million or 6.5% primarily due to the decrease
in the average balances of total loans. Income on investment securities
increased from $1.68 million in 1996 to $2.01 million in 1997, an increase of
$0.33 million or 19.7%. The average balances increased by $5.0 million or 18.5%
on investment securities, while the average rate increased by 0.11% from 6.27%
in 1996 to 6.38% in 1997.
Interest expense decreased in 1997 as compared to 1996. Average
balances on interest-bearing liabilities decreased by $0.1 million or 0.08% from
$96.6 million in 1996 to $96.5 million in 1997 while the interest expense
decreased $7,000 or .02%. The average rate on interest-bearing liabilities
remained unchanged at 4.05% for 1996 and 1997. Average time deposits increased
by $1.3 million or 2.6% from $49.3 million in 1996 to $50.7 million in 1997. The
average rate on time deposits changed only slightly from 5.38% in 1996 to 5.39%
in 1997. Interest expense as a percent of average earning assets decreased from
3.43% in 1996 to 3.34% in 1997.
21
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's estimate of
the amount required to maintain an adequate allowance for loan losses reflective
of the risks in the loan portfolio. The ratio of net charge-offs to average
loans was 0.77% in 1997 compared to 0.24% and 0.26% during 1996 and 1995,
respectively. The provision for loan losses increased $187,000 or 64.5% in 1997
and $50,000 or 20.8% in 1996, while the allowance for loan losses as a
percentage of loans decreased from 1.04% at the end of 1996 to .92% in 1997.
Charged-off loans increased $419,000 or 156.9% and recoveries decreased $19,000
or 30.2% in 1997 compared to 1996. Net charge-offs increased by $438,000 or
214.7% from 1996 to 1997. During 1997 the loan department began the process of
tightening credit standards. The result of that effort was an increase in the
amount of net charge-offs. Along with the tightening of credit standards, an
increased focus on collection efforts was made during the year. The Bank hired
an experienced collector to coordinate the efforts of the entire loan
department.
The coverage for the allowance for loan losses over non-performing
assets and loans 90 days past due and still accruing interest has decreased from
90.1% in 1996 to 60.4% in 1997. Loans past due greater than 90 days decreased
during the year. At year end 1997, loans past due greater than 90 days was .75%
of total loans, net unearned discount. The amount of loans past due greater than
90 days decreased from $967,000 in 1996 to $615,000 in 1997. Of the $615,000,
84.6% are secured by real estate and management would expect only immaterial
losses from the balance of the past due loans. The allowance for loan losses as
of year end covered net charge-offs 1.17 times in 1997, 4.48 times in 1996, and
3.77 times in 1995.
The Company reviews the adequacy of the allowance for loan losses
monthly and utilizes the results of these evaluations to establish the provision
for loan losses. The allowance is maintained at a level believed by management
to absorb potential losses in the loan portfolio. The methodology considers
specific identifications, specific and estimate pools, trends in delinquencies,
local and regional economic trends, concentrations, commitments, off balance
sheet exposure and other factors.
22
OTHER INCOME AND EXPENSES
Total other income increased $221,011 or 21.6% from 1996 to 1997 and
$212,802 or 26.2% from 1995 to 1996. Total other expenses increased $312,612 or
7.1% from 1996 to 1997 and $402,232 or 10.1% from 1995 to 1996. The efficiency
ratio of the Company, a measure of its performance based upon the relationship
between non-interest expense and operating income, was 65.9% in 1995 and 65.8%
in 1996 and 69.5% in 1997.
Trust Department income increased $33,593 or 16.8% in 1997 over 1996
and increased $54,269 or 37.3% in 1996 over 1995. The increases in 1997 and 1996
can be attributed to restructuring the trust services fee schedule and overall
growth of the Trust Department. Trust Department income is expected to increase
in 1998 due to growth in the number of accounts and total assets administered by
the Trust Department.
Service charges on deposit accounts increased $9,841 or 1.9% in 1997
over 1996 and increased $148,354 or 39.7% in 1996 over 1995. Increases in
service charges on deposit accounts are expected to continue in the future due
to growth in the number of deposit accounts at the Bank and enhancements to the
deposit products currently being offered to our customers. Other service charges
and fees increased $93,233 or 47.5% and $14,379 or 7.9% in 1997 and 1996,
respectively. The increase in other service charges and fees during 1997 was due
to non-customer convenience fees received from transactions performed at our
ATM's, increased activity on credit card merchant accounts, and origination fees
received by Eagle Home Funding, the mortgage company subsidiary of the Bank
which was opened during July 1997. The 1998 amount of other service charges and
fees for 1998 is expected to increase over 1997 due to increasing ATM
non-customer convenience fees and a full year of operation by Eagle Home
Funding.
The Company had a loss on equity investment of $4,880 during 1997 and
income on equity investment of $595 during 1996. These amounts represent the
Company's share of the operating income or loss on its investment in the
Johnson-Williams Limited Partnership. This partnership is a low- to
moderate-income housing development for the elderly. The financial performance
in 1996 can be attributed to the facility remaining fully leased during the
year. Due to the status of the partnership, the Company receives substantial
income tax credits on the investment. The investment in this project is viewed
as a long term benefit to the Company both financially and for the good of the
community.
Other operating income increased $89,819 or 84.8% in 1997 and decreased
$23,484 or 18.2% in 1996. The increase during 1997 can be attributed to
commissions received from the sale of non-deposit investment products by Eagle
Investment Services. This amount is expected to increase during 1998 with
continued growth in sales by Eagle Investment Services.
Salaries and wages increased $219,027 or 12.64% in 1997 and $240,437 or
16.1% in 1996. The increase in 1997 reflects the hiring of additional personnel
for the Berryville branch and the increase in 1996 reflects the hiring of
additional personnel for the Stephens City branch. The amount of salaries and
wages for 1998 should increase over 1997 due to the addition of the Old Post
Office branch.
Pension and other employee benefits increased $13,244 or 2.8% in 1997
and increased $35,378 or 8.0% in 1996. The 1997 increase can be attributed to
the cost of benefits for personnel hired during 1996 and 1997. The 1998 amount
of pension and other employee benefits should increase slightly over 1997. See
Notes 8 and 9 to the Consolidated Financial Statements as of December 31, 1997
for a discussion of the defined benefit pension plan and employee benefits.
Occupancy expenses increased $8,954 or 2.8% in 1997 and $82,609 or
34.2% in 1996. Equipment expenses decreased $3,677 or 0.8% and increased $94,360
or 25.0% in 1997 and 1996, respectively. Management is pleased that total
occupancy and equipment expenses increased only $5,277 or 0.7% in 1997 over
1996. The increases in 1996 can be attributed to the opening and operation of
the Stephens City branch and upgrading the Bank=s computer system. The 1998
amounts are expected to increase over 1997 due to the investment in additional
computer equipment and the opening of the Old Post Office branch during January
1998.
The FDIC assessment increased $11,362 or 568% and decreased $109,904 or
98.2% in 1997 and 1996, respectively. The increase in 1997 was expected due to
increased deposits and the decrease in 1996 was due to the insurance fund
covering banks once again having sufficient reserves. The amount of FDIC
assessment should increase slightly during 1998 due to growth in deposits.
Stationary and supplies increased $39,841 or 26.5% in 1997 and
decreased $4,292 or 2.8% in 1996. The increase in 1997 was due to the opening
and operation of Eagle Home Funding and the purchase of supplies necessary to
open the Old Post Office branch in January 1998. The slight decrease in 1996 is
a result of an effort to cut supply costs despite additional purchases necessary
to open and operate the Stephens City branch. Stationary and supplies expense is
expected to increase slightly in 1998.
Postage expense decreased $7,011 or 5.5% and increased $1,471 or 1.2%
during 1997 and 1996, respectively. The amount of postage expense is expected to
increase slightly during 1998. Credit card expense increased $7,519 or 8.0%
during 1997 and decreased $5,367 or 5.4% during 1996. Fluctuations in credit
card expense are attributable to changes in the number of accounts and volume of
transactions for which we are billed by our credit card server. The amount of
credit card expense is expected to increase during 1998.
Bank franchise tax decreased $18,140 or 16.0% during 1997 and decreased
$11,381 or 9.1% during 1996. The increase in 1997 was expected due to growth of
the Bank=s capital. The 1998 amount of bank franchise tax is expected to be
slightly greater than the 1997 amount due to additional growth of the Bank's
capital.
ATM network fees decreased $9,558 or 7.4% during 1997 and increased
$39,662 or 44.2% during 1996. Fluctuations in the amount of ATM network fees can
be attributed to the number and type of transactions being performed at the
Bank's growing number of ATM locations.
Other operating expenses increased $51,051 or 6.8% in 1997 and $39,259
or 5.5% in 1996. The increase in 1997 over 1996 was due to increased spending on
education and training of employees and increased spending on marketing efforts,
particularly television advertising. The increase in 1996 can be attributed to
the amortization of intangible assets acquired during the acquisition of the
Stephens City branch. The amount of other operating expenses should not increase
significantly during 1998.
23
INCOME TAX EXPENSE
The Company adopted FASB Statement No. 109, "Accounting for Income
Taxes" on a prospective basis on January 1, 1993. The notes to the financial
statements discuss this method of accounting. The cumulative effect from the
change in accounting principle was deemed to be immaterial in determining net
income for 1994. Income tax expense was $372,143, $537,304 and $477,237 for
1997, 1996 and 1995, respectively. The average effective rate for the three-year
period is 27.35% and this is not expected to vary significantly during future
periods.
24
BALANCE SHEET
The Company uses its funds primarily to support lending activities from
which it derives the greatest amount of income. The objective is to invest 70%
to 85% of total deposits in loans. With total loans decreasing $6.4 million or
7.3% and total deposits increasing by $6.0 million or 5.4%, the ratio of loans
to deposits decreased 9.6% from 79.1% in 1996 to 69.5% in 1997. The majority of
the remaining funds are invested in securities. In order to accommodate daily
fluctuations in deposit and loan demand, any additional funds are sold overnight
as federal funds. The Company's focus is upon safety and soundness, liquidity
and meeting the banking needs within our community as we manage our balance
sheet.
25
LOAN PORTFOLIO
Loans, net of unearned income decreased $6.4 million or 7.3% in 1997
after an increase of $2.0 million from 1995 to 1996. Net loans are expected to
increase slightly during 1998. The loan portfolio consists primarily of loans
for owner-occupied single family dwellings, loans to acquire consumer products
such as automobiles, and loans to small farms and businesses.
Loans secured by real estate were $60.3 million or 73.6% of total loans
in 1997 and $60.1 million or 67.5% of total loans in 1996, which represents an
increase of $.2 million or .3% during the year. These loans are well-secured and
based on conservative appraisals in a stable market. The Company generally does
not make real estate loans outside its primary market area which consists of
Clarke and Frederick Counties and the City of Winchester, all of which are
located in the Northern Shenandoah Valley in the state of Virginia.
Loans to individuals are the second largest element of the loan
portfolio. Total loans to individuals were $14.5 million or 17.7% of total loans
in 1997 and $19.6 million or 22.0% of total loans in 1996, which represents a
decrease of $5.1 million or 26.0% during the year. These loans are expected to
remain steady throughout 1998.
Commercial and agricultural loans were $5.9 million or 7.2% of total
loans in 1997 and $7.6 million or 8.5% of total loans in 1996, which represents
a decrease of $1.7 million or 22.5% during 1997. The amount of commercial and
agricultural loans is expected to increase significantly during 1998.
26
RISK ELEMENTS AND NON-PERFORMING ASSETS
The Company continues to minimize its risk and enhance its
profitability by focusing on providing community based financing and maintaining
policies and procedures ensuring safe and sound banking practices.
Non-performing assets consist of nonaccrual loans, restructured loans,
and other real estate owned (foreclosed properties). The total non-performing
assets and loans that are 90+ days past due and accruing interest was $1.24
million on December 31, 1997, and $1.01 million on December 31, 1996, an
increase of $0.23 million or 22.8%.
On January 1, 1996, the Company adopted FASB No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement has been amended by FASB No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the impairment of loans
that have been separately identified for evaluation is to be measured based on
the present value of expected future cash flows or, alternatively, the
observable market price of the loans or the fair value of the collateral. There
were no impaired loans as of December 31, 1997 and 1996.
The loans past due 90+ days and still accruing interest are primarily
well-secured and in the process of collection and therefore, are not classified
as nonaccrual. Any loan over 90 days past due without being in the process of
collection or where the collection of its principal or interest is doubtful
would be placed on nonaccrual status. Any accrued interest would then be
reversed and future accruals would be discontinued with interest income being
recognized on a cash basis.
The ratio of non-performing assets and other real estate owned to loans
is expected to remain at its low level relative to the Company's peers and
management expects this ratio to decrease in 1998. This expectation is based on
the potential problem loans on December 31, 1997. The amount of classified loans
has decreased by $0.26 million from $2.63 million in 1996 to $2.37 million
during 1997. These loans are primarily well-secured and in the process of
collection and the allowance for loan losses includes $267,225 in specific
allocations for these loans as well as percentage allocations for classified
assets without specific allocations.
27
SECURITIES
The book value of the securities portfolio as of December 31, 1997 was
$37.4 million, compared to $26.1 million as of December 31, 1996. Securities
increased $11.3 million or 43.3% in 1997 over 1996. The increase from 1996 to
1997 is primarily due to a $7.2 million or 111.0% increase of investment in
obligations of U.S. government corporations and agencies, a $2.4 million or
79.7% increase of investment in obligations of states and political
subdivisions, and a $2.3 million or 15.4% increase of investment in
mortgage-backed securities.
Due to the adoption of FASB No. 115, "Accounting For Certain
Investments in Debt and Equity Securities" as of January 1, 1994, the securities
portfolio was classified into one of two categories: securities held to maturity
and securities available for sale. Securities are classified as held to maturity
when the Company has the intent and ability at the time of purchase to hold the
securities until maturity. Securities held to maturity are disclosed at cost
adjusted for amortization of premiums and accretion of discounts. Securities
with a book value of $33.2 million and a fair value of $33.2 million were
classified as held to maturity as of December 31, 1997. Securities with a book
value of $24.3 million and a fair value of $24.0 million were classified as held
to maturity as of December 31, 1996. This represents an $8.8 million or 36.2%
increase in book value and a $9.2 million or 38.1% increase in fair value in
1997 over 1996.
Securities are classified as available for sale when the Company
intends to hold them for an indefinite period of time. These securities may be
sold due to: increased loan demand, liquidity needs, changes in market interest
rates, regulatory capital requirements, or other related factors. Available for
sale securities are disclosed at fair value. Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the related
deferred tax effect. Securities with a fair value of $4.3 million and a related
unrealized after tax gain of $9,810 were classified as available for sale as of
December 31, 1997. Securities with a fair value of $1.7 million and a related
unrealized after tax loss of $5,030 were classified as available for sale as of
December 31, 1996. This represents a $2.5 million or 144.1% increase in fair
value and a $14,840 or 295.0% increase in unrealized after tax gain in 1997
compared to 1996.
28
DEPOSITS
Total deposits increased $6.0 million or 5.4% from $111.0 million in
1996 to $117.0 million in 1997. Non-interest bearing demand deposits increased
$2.6 million or 17.1% in 1997 after a $3.2 million or 26.8% increase in 1996
from 1995. Interest checking decreased $1.0 million or 5.8% from $16.8 million
in 1996 to $15.8 million in 1997. Money market accounts decreased $1.0 million
or 5.5% from $17.2 million in 1996 to $16.2 million in 1997. Certificates of
deposit increased $5.2 million or 10.6% from $48.5 million in 1996 to $53.7
million in 1997. Total interest bearing deposits increased $3.4 million or 3.5%
from $95.9 million in 1996 to $99.3 million in 1997. Total deposits are expected
to grow during 1998 due to opening the Old Post Office branch in downtown
Winchester, Virginia and increased marketing efforts.
The Company will continue funding assets with deposit liability
accounts and focus upon core deposit growth as its primary source of liquidity
and stability. Core deposits consist of demand deposits, interest checking
accounts, money market accounts, savings accounts, and time deposits of less
than $100,000. Core deposits totaled $102.1 million or 87.2% of total deposits
in 1997 as compared to $99.7 million or 89.8% of total deposits in 1996.
Certificates of deposit of $100,000 or more totaled $15.0 million or 12.8% of
total deposits in 1997 as compared to $11.3 million or 10.2% of total deposits
in 1996. The Company neither purchases brokered deposits nor solicits deposits
from sources outside of its primary market area.
29
STOCKHOLDERS' EQUITY
The Company continues to be a strongly capitalized financial
institution. Total stockholders' equity on December 31, 1997 was $15.1 million,
reflecting a percentage of total assets of 11.3% compared to $14.2 million and
11.2% at year-end 1996. Stockholders' equity per share increased $0.55 or 5.4%
from $10.14 per share in 1996 to $10.69 per share in 1997. The return on average
stockholders' equity was 7.59% in 1997, down from 9.58% in 1996. During 1997 the
Company paid $0.32 per share in dividends as compared to $0.30 per share in
1996, an increase of 6.7% The Company has a Dividend Investment Plan that
reinvests the dividends of the shareholder in Company stock. The Dividend
Investment Plan had 41.3% and 42.3% of total outstanding shares at December 31,
1997 and 1996, respectively.
Federal regulatory risk-based capital guidelines were fully phased-in
on December 31, 1992. These guidelines require percentages to be applied to
various assets, including off-balance sheet assets, based on their perceived
risk. Tier I capital consists of total stockholders' equity. Tier II capital is
comprised of Tier I capital plus the allowable portion of the allowance for loan
losses. Financial institutions must maintain a Tier I capital ratio of at least
4% and a Tier II capital ratio of at least 8%. Additionally, a 4% minimum
leverage ratio of stockholders' equity to average assets must be maintained. On
December 31, 1997, the Company's Tier I capital ratio was 17.52% compared to
16.17% in 1996, the Tier II capital ratio was 18.43% compared to 17.27% in 1996
and the leverage ratio was 11.06% compared to 10.90% in 1996. See Note 12 to the
Consolidated Financial Statements as of December 31, 1996 for additional
discussion and analysis of regulatory capital requirements.
30
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset and liability management assures liquidity and maintains the
balance between rate sensitive assets and liabilities. Liquidity management
involves meeting the present and future financial obligations of the Company
with the sale or maturity of assets or through the occurrence of additional
liabilities. Liquidity needs are met with cash on hand, deposits in banks,
federal funds sold, securities classified as available for sale and loans
maturing within one year. At year end 1997, liquid assets totaled $28.6 million
which represents 24.2% of total deposits, federal funds purchased and other
liabilities. The Company minimizes liquidity demand by relying on core deposits
which comprise 87.2% of total deposits. With an average remaining life of 4.1
years, the securities portfolio provides a constant source of funds through
paydowns and maturities. As additional sources of liquidity, the Company
maintains short-term borrowing arrangements, namely federal funds lines, with
larger financial institutions. Finally, the Bank's membership in the Federal
Home Loan Bank provides a source of borrowings with a variety of maturities. The
Company's senior management monitors the liquidity position regularly and
formulates a strategy to maintain an interest sensitive position that maximizes
the net interest margin.
Interest rate sensitivity management involves stabilizing the net
interest margin to assure net income growth through various interest rate cycles
and fluctuations. The interest rate sensitivity analysis reflects the earlier of
the maturity or repricing date for interest sensitive assets and liabilities as
of December 31, 1997. The mismatching of the maturity or repricing dates of
interest sensitive assets and liabilities creates "gaps" which measure interest
rate sensitivity. At year end the Company had a negative cumulative twelve-month
gap of $53.3 million or 43.9% of total interest earning assets. A negative gap
normally impacts earnings favorably when interest rates decline and adversely
when interest rates rise. A weakness of the interest rate sensitivity analysis
is that it only provides a general indication of interest sensitivity at a
specific point in time. The Company's goal is to manage interest rate exposure
in order to hedge against interest rate fluctuations. Senior management and the
directorate monitor the interest rate gap regularly and implement strategies
such as maintaining a strong balance sheet with core deposit growth and
practicing conservative banking policies to accomplish this goal.
31
ACCOUNTING RULE CHANGES
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued in June 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", defers for one year the effective date
(a) of paragraph 15 of Statement 125 and (b) for repurchase agreement,
dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and
237(b) of Statement 125.
FASB Statement No. 130, "Reporting Comprehensive Income", establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Statement 130 is effective for financial statements
beginning after December 15, 1997.
During June of 1997, the FASB issued FASB No. 131, "Disclosure about
Segments of an Enterprise and Related Information." FASB No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement becomes effective for financial statements for periods beginning
after December 31, 1997.
32
YEAR 2000
During 1997 the Company's subsidiary (the Bank) began to assess the
effect of the Year 2000 on its systems, vendors, and customers. The assessment
of systems is accomplished through in-house testing and receipt of documentation
from manufacturers regarding their product's Year 2000 readiness. The assessment
of vendors is accomplished primarily through receipt of documentation regarding
their planning, testing, and implementation for Year 2000 compliance of their
product(s). The assessment of customers is accomplished through identifying and
assisting commercial customers whose operations may be negatively impacted by
the century date change. In January 1998, the Bank's Board of Directors approved
a Year 2000 Compliance Plan which identified particular steps necessary to
achieve Year 2000 readiness and a timeline for accomplishing these steps. The
plan also named the Bank's Year 2000 committee which includes members of senior
management, operations, data processing, and internal audit.
The Bank uses various hardware and software to conduct its business.
The core data processing applications of the Bank are run in-house and consist
of a mainframe computer and software licensed to the Bank by an outside vendor.
The Bank has received correspondence from its core processing application vendor
which indicates that their software will be Year 2000 ready.
The Bank also relies on a wide area network which allows personal
computers throughout the organization to share resources and centralizes the
administration of personal computer software applications. Vendors of
bank-related software which is installed on the network have sent correspondence
indicating that their software will be Year 2000 ready. Upgrading personal
computers throughout the organization has been a continuous project during 1997
and is expected to continue throughout 1998. These upgrades are expected to
solve any non-compliant personal computer hardware issues related to Year 2000
readiness. Based on the current status of the Bank's Year 2000 assessment, the
cost of Year 2000 readiness is not expected to have a material effect on the
Company's consolidated financial statements.
33
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As the holding company of Bank of Clarke County bank, the Company's
primary component of market risk is interest rate volatility. Fluctuations in
interest rates will impact the amount of interest income and expense the Bank
receives or pays on almost all of its assets and liabilities and the market
value of its interest earning assets and interest-bearing liabilities, excluding
those which have a very short term to maturity. Interest rate risk exposure of
the Company is, therefore, experienced at the Bank level. It is the
responsibility of Bank management to enact appropriate interest rate risk
management procedures.
The loan portfolio's primary volatility is due to the concentration of
loans made in in the Counties of Clarke and Frederick and the City of
Winchester. This subjects the portfolio to fluctuations in the local economy.
The Bank does not subject itself to foreign currency exchange or commodity price
risk due to prohibition through policy and the current nature of operations. As
of December 31, 1997, the Company does not have any hedging transactions in
place such as interest rate swaps or caps.
The Bank's interest rate management strategy is designed to stabilize
net interest income and preserve the capital of the Company. The Bank utilizes
several procedures to analyze the maturities of assets and liabilities along
with their associated rate or yield. Bank management also monitors the economy
closely in order to be knowledgeable of events which may immediately or
eventually effect the pricing of assets and liabilities. The Bank also uses
interest rate sensitivity analysis which measures the term to maturity or
repricing for the interest sensitive assets and liabilities of the Bank.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. The expected maturities for loans, securities, and certificates of deposit
are the based on the contractual maturity of the instruments. The expected
maturties of money market, savings, and N.O.W. accounts are based on the Bank's
internal interest rate sensitivity report which considers the amount of these
accounts which would remain if rates increased. The average interest rates for
loans is the weighted average contractual rate of the loans maturing during the
period indicated. The average interest rates for taxable securities is the
weighted average yield of the securities which mature during the period
indicated. The average interest rates for tax-exempt securities is the weighted
average tax- equivalent yield assuming a federal tax rate of 34% for the
securities which mature during the period indicated. The average interest rates
for money market, savings, and N.O.W. accounts is the weighted average annual
percentage yield as of December 31, 1997 for maturities during the period
indicated. The average rate for certificates of deposits is the weighted average
contractual rate of the certificates which mature during that period.
Principal Amount Maturing In
- --------------------------------------------------------------------------------------------------------
Fair
There- Value
(In Thousands) 1998 1999 2000 2001 2002 after Total 12/31/97
- --------------------------------------------------------------------------------------------------------
Earning assets:
Fixed rate loans $13,578 $12,446 $13,783 $16,235 $13,815 $4,599 $74,456 $74,072
Average interest rate 8.63% 8.84% 8.86% 8.06% 8.16% 8.76% 8.50%
Variable rate loans $3,217 $279 $582 $488 $486 $1,917 $6,969 $5,195
Average interest rate 9.58% 9.86% 10.08% 9.91% 9.49% 9.50% 9.63%
Taxable securities $2,022 $2,916 $5,953 $3,313 $9,566 $9,954 $33,724 $33,756
Average interest rate 6.02% 6.03% 6.16% 6.25% 6.47% 7.07% 6.50%
Tax-exempt securities $550 $355 $615 $475 $405 $1,280 $3,680 $3,710
Average interest rate 7.03% 7.60% 6.54% 6.91% 7.55% 6.91% 7.00%
Other interest-earning
assets $2,300 - - - - - - - - - - $2,300 $2,300
Average interest rate 6.25% - - - - - - - - - - 6.25%
Interest-bearing liabilities:
Money market, savings,
and N.O.W. accounts $14,666 $5,256 $5,256 $2,680 $2,680 $15,062 $45,600 $45,600
Average interest rate 2.67% 2.67% 2.67% 2.47% 2.47% 2.07% 2.45%
Certificates of deposit $38,775 $10,113 $3,899 $720 $195 $3 $53,705 $54,753
Average interest rate 5.37% 5.62% 6.56% 5.33% 5.52% 5.29% 5.43%
- --------------------------------------------------------------------------------------------------------
34
Item 8. Financial Statements and Supplementary Data
Pursuant to General Instruction G(2) information required by this Item
is incorporated by reference to Part IV, Item 14.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
35
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Part III, Item 10., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998.
Item 11. Executive Compensation.
The information required by Part III, Item 11., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Part III, Item 12., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998.
Item 13. Certain Relationships and Related Transactions.
The information required by Part III, Item 13., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998
36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed or incorporated by reference as part of
this report on Form 10-K.
(1) Financial Statements
Financial statements of the registrant for the fiscal year ended December
31, 1997 are incorporated herein by reference to Exhibit 99.1.
(2) Financial Statement Schedules
All financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
(3) Exhibits
The following exhibits, when applicable, are filed with this Form 10-K or
incorporated by reference to previous filings.
Number Description
--------- -----------------------------------------
Exhibit 2. Not applicable.
Exhibit 3. (i) Articles of Incorporation of Registrant
(incorporated herein by reference to
Exhibit 3.1 of Registrant's Form S-4
Registration Statement, Registration No.
33-43681.)
(ii) Bylaws of Registrant (incorporated
herein by reference to Exhibit 3.2 of
Registrant's Form S-4 Registration
Statement, Registration No. 33-43681)
Exhibit 4. Not applicable.
Exhibit 9. Not applicable.
Exhibit 10. Material Contracts.
10.1 Description of Executive Supplemental
Income Plan (incorporated by reference
to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1996).
10.2 Lease Agreement between Bank of Clarke
County (tenant) and Winchester
Development Company (landlord) dated
August 1, 1992 for the branch office at
625 East Jubal Early Drive, Winchester,
Virginia (incorporated herein by
reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.3 Lease Agreement between Bank of Clarke
County (tenant) and Winchester
Development Company (landlord) dated July
1, 1997 for an office at 615 East Jubal
Early Drive, Winchester, Virginia
(incorporated herein by reference to
Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997).
10.4 Lease Agreement between Bank of Clarke
County (tenant) and Steven R.
Koman(landlord) dated December 2, 1997
for the branch office at 40 West
Piccadilly Street, Winchester, Virginia
(incorporated herein as Exhibit 10.4 of
the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
Exhibit 11. Computation of Per Share Earnings
(incorporated herein as Exhibit 11).
Exhibit 12. Not applicable.
Exhibit 13. Portions of the 1997 Annual Report to
Shareholders for the year ended December
31, 1997 (filed herein).
Exhibit 16. Not applicable.
Exhibit 18. Not applicable.
Exhibit 21. Subsidiaries of the Registrant
(incorporated herein as Exhibit 21).
Exhibit 22. Not applicable.
Exhibit 23. Not applicable.
Exhibit 24. Not applicable.
Exhibit 27. Financial Data Schedule (incorporated
herein as Exhibit 27).
Exhibit 99. Additional Exhibits
99.1 The following consolidated financial
statements of the Company including the
related notes and the report of the
independent auditors for the year ended
December 31, 1997 (incorporated herein as
Exhibit 99.1).
1. Independent Auditor's Report.
2. Consolidated Balance Sheets -
At December 31, 1997 and 1996.
3. Consolidated Statements of Income -
Years ended December 31, 1997, 1996,
and 1995.
4. Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1997, 1996, and 1995.
5. Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996,
and 1995.
6. Notes to Consolidated Financial
Statements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1997.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 20th day of
March, 1998.
Eagle Financial Services, Inc.
By: /s/ LEWIS M. EWING
---------------------------------
Lewis M. Ewing, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ LEWIS M. EWING President, Chief March 20, 1998
- ------------------------- Executive Officer
Lewis M. Ewing and Director (principal
executive officer)
/s/ JOHN R. MILLESON Vice President, Secretary/ March 20, 1998
- ------------------------- Treasuer (principal financial
John R. Milleson officer)
/s/ JAMES W. MCCARTY, JR. Vice President, Chief March 20, 1998
- ------------------------- Financial Officer
James W. McCarty, Jr. (principal accounting officer)
/s/ JOHN D. HARDESTY Chairman of the Board March 20, 1998
- ------------------------- and Director
John D. Hardesty
/s/ J. FRED JONES Director March 20, 1998
- -------------------------
J. Fred Jones
Director March 20, 1998
- -------------------------
Marilyn C. Beck
Director March 20, 1998
- -------------------------
Thomas T. Byrd
Director March 20, 1998
- -------------------------
Thomas T. Gilpin
Director March 20, 1998
- -------------------------
Douglas McIntire
/s / JOHN F. MILLESON, JR. Director March 20, 1998
- -------------------------
John F. Milleson, Jr.
/s/ ROBERT W. SMALLEY, JR. Director March 20, 1998
- -------------------------
Robert W. Smalley, Jr.
/s/ RANDALL G. VINSON Director March 20, 1998
- -------------------------
Randall G. Vinson
38
EAGLE FINANCIAL SERVICES, INC.
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT NUMBER DESCRIPTION
-------------- ----------------------------------------
10.4 Lease Agreement between Bank of Clarke
County (tenant) and Steven R.
Koman(landlord) dated December 2, 1997
for the branch office at 40 West
Piccadilly Street, Winchester, Virginia.
11 Computation of Per Share Earnings .
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 The following consolidated financial
statements of the Company including the
related notes and the report of the
independent auditors for the year ended
December 31, 1997.
1. Independent Auditor's Report.
2. Consolidated Balance Sheets -
At December 31, 1997 and 1996.
3. Consolidated Statements of Income -
Years ended December 31, 1997, 1996,
and 1995.
4. Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1997, 1996, and 1995.
5. Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996,
and 1995.
6. Notes to Consolidated Financial
Statements.
39