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 September 30, 2002
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 54-1601306
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Post Office Box 391
Berryville, Virginia 22611
(Address of principal executive offices) (Zip Code)
(540) 955-2510
(Registrant's telephone number, including area code)
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 [ ]
The number of shares of the Registrant's Common Stock ($2.50 par value)
outstanding as of November 8, 2002 was 1,472,389.
1
EAGLE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) ............................ 3
Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001 ................ 3
Consolidated Statements of Income for the Three
and Nine Months Ended September 30, 2002 and 2001 ........ 4
Consolidated Statements of Shareholders' Equity for the Nine
Months Ended September 30, 2002 and 2001 ................ 5
Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 2002 and 2001 ....... 6
Notes to Consolidated Financial Statements .............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 8
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ........................................... 9
Item 4. Controls and Procedures ..................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................... 11
Item 2. Changes in Securities and Use of Proceeds ................... 11
Item 3. Defaults Upon Senior Securities ............................. 11
Item 4. Submission of Matters to a Vote of Security Holders ......... 11
Item 5. Other Information ........................................... 11
Item 6. Exhibits and reports on Form 8-K ............................ 12
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Eagle Financial Services, Inc. and Subsidiary
Consolidated Balance Sheets
As of September 30, 2002 and December 31, 2001
Unaudited
Sept 30, 2002 Dec 31, 2001
--------------- ---------------
Assets
Cash and due from banks $ 15,617,992 $ 13,105,622
Federal funds sold 103,000 0
Securities available for sale,
at fair value 16,546,015 16,713,595
Securities held to maturity
(fair value: 2002,$17,509,996;
2001,$20,519,159) 16,750,865 20,259,234
Loans, net allowance for loan losses
of $2,304,372 in 2002 and
$1,797,263 in 2001 217,927,175 177,871,629
Bank premises and equipment, net 7,304,594 5,422,574
Other assets 4,502,313 4,269,285
--------------- ---------------
Total assets $ 278,751,954 $ 237,641,939
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest bearing demand deposits $ 46,175,068 $ 36,718,703
Interest bearing demand deposits,
money market and savings accounts 105,845,831 83,597,263
Time deposits 72,530,049 77,032,485
--------------- ---------------
Total deposits $ 224,550,948 $ 197,348,451
Federal funds purchased, securities
sold under agreements to repurchase
and other short-term borrowings 2,208,586 7,816,807
Federal Home Loan Bank advances 20,000,000 10,000,000
Trust preferred capital notes 7,000,000 0
Other liabilities 1,040,680 1,003,974
Commitments and contingent liabilities 0 0
--------------- ---------------
Total liabilities $ 254,800,214 $ 216,169,232
--------------- ---------------
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 2002, 1,472,389; issued
2001, 1,461,395 shares 3,680,973 3,653,487
Surplus 3,407,197 3,178,848
Retained Earnings 16,400,736 14,407,901
Accumulated other comprehensive income 462,834 232,471
--------------- ---------------
Total shareholders' equity $ 23,951,740 $ 21,472,707
--------------- ---------------
Total liabilities and
shareholders' equity $ 278,751,954 $ 237,641,939
=============== ===============
3
Eagle Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
For the Periods Ended September 30, 2002 and 2001
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Interest and Dividend Income
Interest and fees on loans $ 3,651,403 $ 3,185,509 $ 10,393,184 $ 9,154,592
Interest on federal funds sold 4,763 636 5,005 9,891
Interest on securities held to maturity:
Taxable interest income 127,057 189,814 420,430 672,405
Interest income exempt from
federal income taxes 88,989 97,372 277,755 297,960
Interest and dividends on securities
available for sale:
Taxable interest income 189,342 201,576 591,203 528,244
Interest income exempt from
federal income taxes 16,048 18,377 49,834 55,132
Dividends 37,491 34,981 110,086 106,000
Interest on deposits in banks 232 362 507 1,282
--------------- --------------- --------------- ---------------
Total interest and
dividend income $ 4,115,325 $ 3,728,627 $ 11,848,004 $ 10,825,506
--------------- --------------- --------------- ---------------
Interest Expense
Interest on deposits $ 887,414 $ 1,350,437 $ 2,768,564 $ 4,252,084
Interest on federal funds purchased,
securities sold under agreements
to repurchase and other short-
term borrowings 34,123 79,794 125,968 201,672
Interest on Federal Home Loan
Bank advances 157,723 74,101 465,905 198,287
Interest on trust preferred
capital notes 95,381 0 100,570 0
--------------- --------------- --------------- ---------------
Total interest expense $ 1,174,641 $ 1,504,332 $ 3,461,007 $ 4,652,043
--------------- --------------- --------------- ---------------
Net interest income $ 2,940,684 $ 2,224,295 $ 8,386,997 $ 6,173,463
Provision For Loan Losses 163,100 270,000 585,000 505,000
--------------- --------------- --------------- ---------------
Net interest income after
provision for loan losses $ 2,777,584 $ 1,954,295 $ 7,801,997 $ 5,668,463
--------------- --------------- --------------- ---------------
Noninterest Income
Trust Department income $ 164,494 $ 131,360 383,264 409,982
Service charges on deposits 269,905 228,931 775,506 664,925
Other service charges and fees 460,264 371,476 1,225,996 963,555
Securities gains 0 29,224 36,036 84,614
Other operating income 67,306 42,799 125,863 69,025
--------------- --------------- --------------- ---------------
$ 961,969 $ 803,790 $ 2,546,665 $ 2,192,101
--------------- --------------- --------------- ---------------
Noninterest Expenses
Salaries and wages $ 1,094,333 $ 828,170 $ 3,044,462 $ 2,427,669
Pension and other employee benefits 269,368 222,379 735,537 627,773
Occupancy expenses 130,596 105,477 359,575 326,514
Equipment expenses 187,170 165,375 546,933 501,433
Credit card expense 77,819 61,780 207,073 164,576
Stationary and supplies 49,104 37,022 170,626 145,847
ATM network fees 46,690 42,094 138,817 118,159
Postage 42,563 33,063 120,571 102,862
Other operating expenses 410,176 366,687 1,192,502 1,039,397
--------------- --------------- --------------- ---------------
$ 2,307,819 $ 1,862,047 $ 6,516,096 $ 5,454,230
--------------- --------------- ---------------- ---------------
Income before income taxes $ 1,431,734 $ 896,038 $ 3,832,566 $ 2,406,334
Income Tax Expense 423,839 251,424 1,151,126 663,278
--------------- --------------- --------------- ---------------
Net Income $ 1,007,895 $ 644,614 $ 2,681,440 $ 1,743,056
=============== =============== =============== ===============
Net income per common share,
basic and diluted $ 0.69 $ 0.44 $ 1.83 $ 1.20
=============== =============== =============== ===============
4
Eagle Financial Services, Inc. and Subsidiary
Consolidated Statements of Shareholders' Equity
For the Nine Months Ended September 30, 2002 and 2001
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income Income Total
------------- ------------- ------------- ------------- ------------- ------------
Balance, December 31, 2000 $ 3,613,578 $ 2,873,924 $ 12,760,698 $ 17,286 $ 19,265,486
Comprehensive income:
Net income 1,743,056 $1,743,056 1,743,056
Other comprehensive income:
Unrealized holding gains arising
during the period, net of
deferred income taxes of $194,840 378,225
Reclassification adjustment, net
of deferred income taxes of $28,767 (55,847)
-------------
Other comprehensive income, net of
deferred income taxes of $166,073 322,378 322,378 322,378
-------------
Total comprehensive income $ 2,065,434
=============
Issuance of common stock, dividend
investment plan (9,337 shares) 23,342 189,540 212,882
Dividends declared ($0.40 per share) (579,266) (579,266)
Fractional shares purchased (13) (119) (132)
------------- ------------- ------------- ------------- -------------
Balance, September 30, 2001 $ 3,636,907 $ 3,063,345 $ 13,924,488 $ 339,664 $ 20,964,404
============= ============= ============= ============= =============
Balance, December 31, 2001 $ 3,653,487 $ 3,178,848 $ 14,407,901 $ 232,471 $ 21,472,707
Comprehensive income:
Net Income 2,681,440 $2,681,440 2,681,440
Other comprehensive income:
Unrealized holding gains arising
during the period, net of
deferred income taxes of $130,924 254,147
Reclassification adjustment, net
of deferred income taxes of $12,252 (23,784)
-------------
Other comprehensive income, net of
Deferred income taxes of $118,672 230,363 230,363 230,363
-------------
Total comprehensive income $ 2,911,803
=============
Issuance of common stock, dividend
investment plan (11,004 shares) 27,511 228,559 256,070
Dividends declared ($0.47 per share) (688,605) (688,605)
Fractional shares purchased (25) (210) (235)
------------- ------------- ------------- ------------- -------------
Balance, September 30, 2002 $ 3,680,973 $ 3,407,197 $ 16,400,736 $ 462,834 $ 23,951,740
============= ============= ============= ============= =============
5
Eagle Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2002 and 2001
Nine Months Ended
September 30
2002 2001
------------- -------------
Cash Flows from Operating Activities
Net income $ 2,681,440 $ 1,743,056
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 443,145 413,150
Amortization of intangible assets 33,788 33,788
Loss on equity investment 3,840 9,732
Provision for loan losses 585,000 505,000
(Gain) on sale of securities (36,036) (84,614)
Premium amortization on securities, net 43,739 49,889
Changes in assets and liabilities:
(Increase) in other assets (383,666) (243,979)
(Decrease) in other liabilities (81,966) (107,332)
------------- -------------
Net cash provided by operating activities $ 3,289,284 $ 2,318,690
------------- -------------
Cash Flows from Investing Activities
Proceeds from maturities and principal
payments on securities held to maturity $ 3,827,049 $ 5,049,966
Proceeds from maturities and principal
payments on securities available for sale 2,570,616 2,732,488
Proceeds from sales of securities available
for sale 306,108 2,635,914
Purchases of securities held to maturity (346,500) 0
Purchases of securities available for sale (2,339,992) (9,362,363)
Purchases of bank premises and equipment (2,212,155) (604,278)
Net (increase) in loans (40,640,546) (26,725,529)
------------- -------------
Net cash (used in) investing activities $(38,835,420) $(26,273,802)
------------- -------------
Cash Flows from Financing Activities
Net increase in demand deposits,
money market and savings accounts $ 31,704,933 $ 15,102,061
Net (decrease) in certificates of deposit (4,502,436) (3,855,152)
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase and other short-term
borrowings (5,608,221) 7,860,049
Proceeds from Federal Home Loan Bank advances 10,000,000 5,000,000
Proceeds from trust preferred capital notes 7,000,000 0
Cash dividends paid (432,535) (366,384)
Fractional shares purchased (235) (132)
------------- -------------
Net cash provided by financing activities $ 38,161,506 $ 23,740,442
------------- -------------
Increase (decease) in cash and cash equivalents $ 2,615,370 $ (214,670)
Cash and Cash Equivalents
Beginning 13,105,622 8,504,765
------------- -------------
Ending $ 15,720,992 $ 8,290,095
============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,526,402 $ 4,692,317
============= =============
Income taxes $ 1,360,853 $ 732,995
============= =============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Issuance of common stock,
dividend investment plan $ 256,070 $ 212,882
============= =============
Unrealized gain on securities
available for sale $ 349,035 $ 488,451
============= =============
6
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(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 September 30,
2002 and December 31, 2001, the results of operations for the three and nine
months ended September 30, 2002 and 2001, and cash flows for the nine months
ended September 30, 2002 and 2001. 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, 2001.
(3) The results of operations for the nine month period ended September 30,
2002, are not necessarily indicative of the results to be expected for the full
year.
(4) Securities held to maturity and available for sale as of September 30, 2002
and December 31, 2001, are:
Sep 30, 2002 Dec 31, 2001
Held to Maturity Amortized Cost Amortized Cost
- ---------------- -------------- --------------
U.S. Treasury securities $ 0 $ 121,985
Obligations of U.S. government
corporations and agencies 999,440 1,998,678
Mortgage-backed securities 3,719,973 5,383,586
Obligations of states and political
subdivisions 12,031,452 12,754,985
-------------- --------------
$ 16,750,865 $ 20,259,234
============== ==============
Sep 30, 2002 Dec 31, 2001
Fair Value Fair Value
-------------- --------------
U.S. Treasury securities $ 0 $ 123,068
Obligations of U.S. government
corporations and agencies 1,039,219 2,053,910
Mortgage-backed securities 3,849,406 5,452,775
Obligations of states and political
subdivisions 12,621,371 12,889,406
-------------- --------------
$ 17,509,996 $ 20,519,159
============== ==============
Sep 30, 2002 Dec 31, 2001
Available for Sale Amortized Cost Amortized Cost
- ------------------ -------------- --------------
Obligations of U.S. government
corporations and agencies $ 2,095,699 $ 1,989,914
Mortgage-backed securities 1,229,125 2,009,049
Obligations of states and political
Subdivisions 1,308,826 1,498,807
Corporate securities 9,676,195 9,693,902
Other 1,534,906 1,169,694
-------------- --------------
$ 15,844,751 $ 16,361,366
============== ==============
Sep 30, 2002 Dec 31, 2001
Fair Value Fair Value
-------------- --------------
Obligations of U.S. government
corporations and agencies $ 2,180,813 $ 2,014,850
Mortgage-backed securities 1,264,121 2,054,114
Obligations of states and political
Subdivisions 1,437,957 1,545,255
Corporate securities 10,128,218 9,901,227
Other 1,534,906 1,198,149
-------------- --------------
$ 16,546,015 $ 16,713,595
============== ==============
(5) Net loans at September 30,2002 and December 31, 2001 are summarized as
follows (In Thousands):
Sep 30, 2002 Dec 31, 2001
--------------- ---------------
Loans secured by real estate:
Construction and land development $ 17,122 $ 10,383
Secured by farmland 3,255 4,778
Secured by 1-4 family residential 109,425 93,042
Nonfarm, nonresidential loans 42,871 30,295
Loans to farmers (except those secured
by real estate) 1,208 1,002
Commercial and industrial loans (except
those secured by real estate) 16,811 13,912
Consumer installment loans (except those
secured by real estate) 29,387 25,909
All other loans 152 350
--------------- ---------------
Gross loans $ 220,231 $ 179,671
Less:
Unearned income 0 (2)
Allowance for loan losses (2,304) (1,797)
--------------- ---------------
Loans, net $ 217,927 $ 177,872
=============== ===============
(6) Allowance for Loan Losses
Sep 30, 2002 Sep 30, 2001 Dec 31, 2001
-------------- -------------- --------------
Balance, beginning $ 1,797,263 $ 1,340,086 $ 1,340,086
Provision charged to operating expense 585,000 505,000 712,500
Recoveries added to the allowance 49,555 56,395 95,217
Loan losses charged to the allowance (127,446) (305,516) (350,540)
-------------- -------------- --------------
Balance, ending $ 2,304,372 $ 1,595,965 $ 1,797,263
============== ============== ==============
(7) Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement 145,
Recission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. This statement rescinds FASB Statement No. 4 , Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that Statement
, FASB Statement No. 64 , Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
provisions of this Statement related to the rescission of Statement 4 shall be
applied in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 are effective for transactions occurring after
May 15, 2002, with early application encouraged. This statement is not expected
to have a material effect on the Company's financial statements.
In June 2002, the Financial Accounting Standards Board issued Statement 146,
Accounting for Costs Associated with Exit or Disposal Activities. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". The standard requires companies to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan. The provisions of this Statement
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. This statement is not expected to
have a material effect on the Company's financial statements.
The Financial Accounting Standards Board issued Statement No. 147, Acquisitions
of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and
144 and FASB Interpretation No. 9 in October 2002. FASB Statement No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method, provided interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, this Statement
removes acquisitions of financial institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of
Statement 72 to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of this Statement. In addition, this
Statement amends FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of this Statement, which relates to the application of the purchase
method of accounting, is effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer-relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
This Statement clarifies that a branch acquisition that meets the definition of
a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill.
The transition provisions state that if the transaction that gave rise to the
unidentifiable intangible asset was a business combination, the carrying amount
of that asset shall be reclassified to goodwill as of the later of the date of
acquisition or the date Statement 142 was first applied (fiscal years beginning
after December 15, 2001). Any previously issued interim statements that reflect
amortization of the unidentifiable intangible asset subsequent to the Statement
142 application date shall be restated to remove that amortization expense. The
carrying amounts of any recognized intangible assets that meet the recognition
criteria of Statement 141 that have been included in the amount reported as an
unidentifiable intangible asset and for which separate accounting records have
been maintained shall be reclassified and accounted for as assets apart from the
unidentifiable intangible asset and shall not be reclassified to goodwill. The
Company is currently in the process of evaluating the impact, if any, arising
from the adoption of Statement No. 147.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CRITICAL ACCOUNTING POLICIES
The financial statements of Eagle Financial Services, Inc. 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. We use historical loss
factors as one element in determining the inherent loss that may be present in
our loan portfolio. Actual losses could differ significantly from the historical
factors that we use. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change.
The allowance for loan losses is an estimate of the losses that may be sustained
in our 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 are
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 nine months of 2002 and 2001 was
$2,681,440 and $1,743,056, respectively. This is an increase of $938,384 or
53.84%. Net interest income after provision for loan losses for the first nine
months of 2002 and 2001 was $7,801,997 and $5,668,463, respectively. This is an
increase of $2,133,534 or 37.64%. This increase can be attributed to continued
loan growth during 2002 being funded with growth in noninterest bearing demand
deposits, interest bearings demand deposits, and savings accounts. Total
noninterest income increased $354,564 or 16.17% from $2,192,101 for the first
nine months of 2001 to $2,546,665 for the first nine months of 2002. This change
can be attributed to increases in commissions earned on the sale of nondeposit
investment products and fees earned from the origination of secondary market
mortgages. Total noninterest expenses increased $1,061,866 or 19.47% from
$5,454,230 during the first nine months of 2001 to $6,516,096 during the first
nine months of 2002. This change can be attributed to an increase in
compensation and benefits expense from the hiring of additional personnel for
the Bank's eighth branch location and in the loan operations department.
Earnings per common share outstanding (basic and diluted) was $1.83 and $1.20
for the nine months ended September 30, 2002 and 2001, respectively. Annualized
return on average assets for the nine month periods ended September 30, 2002 and
2001 was 1.37% and 1.13%, respectively. Annualized return on average equity for
the nine month periods ended September 30, 2002 and 2001 was 15.88% and 11.60%,
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 reflective of the
risks in the loan portfolio. 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. The provision for
loan losses for the nine month periods ended September 30, 2001 and 2002 was
$505,000 and $585,000, respectively. The allowance for loan losses increased
$507,109 or 28.22% during the first nine months of 2002 from $1,797,263 at
December 31, 2001 to $2,304,372 at September 30, 2002. The allowance as a
percentage of total loans increased from 1.00% as of December 31, 2001 to 1.05%
as of September 30, 2002. The Company had net charge-offs of $249,121 and
$77,891 for the first nine months of 2001 and 2002, respectively. The ratio of
net charge-offs to average loans was 0.16% and 0.04% for the first nine months
of 2001 and 2002, respectively.
Loans past due greater than 90 days and still accruing interest increased from
$7,827 at December 31, 2001 to $22,186 at September 30, 2002. Total nonaccrual
loans were $2,029,379 as of December 31, 2001 and $22,734 as of September 30,
2002. There were no impaired loans as of December 31, 2001 and September 30,
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 September 30, 2002 was
$129,097. 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 $41.2 million or 17.30% from $237.6 million at December
31, 2001 to $278.8 million at September 30, 2002. Securities decreased $3.7
million or 9.94% during the first nine months of 2002 from $37.0 million at
December 31, 2001 to $33.3 million at September 30, 2002. Loans, net of unearned
discounts increased $40.5 million or 22.58% during the same period from $179.7
million at December 31, 2001 to $220.2 million at September 30, 2002. Total
liabilities increased $38.6 million or 17.87% during the first nine months of
2002 from $216.2 million at December 31, 2001 to $254.8 million at September 30,
2002. Total deposits increased $27.3 million or 13.78% during the same period
from $197.3 at December 31, 2001 to $224.6 million at September 30, 2002. Total
shareholders' equity increased $2.5 million or 11.55% during the first nine
months of 2002 from $21.5 million at December 31, 2001 to $24.0 million at
September 30, 2002.
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 September 30, 2002 was 5.24%. 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 securities 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
The Company continues to be a well capitalized financial institution.
Shareholders' equity per share increased $1.58 or 10.76% from $14.69 per share
at December 31, 2001 to $16.27 per share at September 30, 2002. During 2001 the
Company paid $0.55 per share in dividends. The Company's 2002 total dividends
for the first three quarters was $0.47 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 $64.3 million at December 31, 2001 and $85.6
million at September 30, 2002. These amounts represent 29.75% and 33.61% of
total liabilities as of December 31, 2001 and September 30, 2002, respectively.
There have been no material changes in Quantitative and Qualitative Disclosures
about Market Risk as reported at December 31, 2001 in the Company's Form 10-K.
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.
8
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The information required by Part I, Item 3., is incorporated herein
by reference to the section titled LIQUIDITY AND MARKET RISK within Part I, Item
2 "Management's Discussion and Analysis of Financial Condition and Results of
Operation."
9
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 within ninety (90) days 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.
10
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.
11
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 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 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 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 99. Additional Exhibits
99.1 Certification Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes- Oxley Act of
2002
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the third
quarter of 2002.
12
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: November 8, 2002 /s/ JOHN R. MILLESON
--------------------------
John R. Milleson
President and Chief Executive
Officer
Date: November 8, 2002 /s/ JAMES W. MCCARTY, JR.
--------------------------
James W. McCarty, Jr.
Vice President, Chief Financial
Officer, and Secretary/Treasurer
13
SECTION 302 CERTIFICATION
I, John R. Milleson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Financial
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ JOHN R. MILLESON
- --------------------------
John R. Milleson.
President and Chief Executive Officer
14
SECTION 302 CERTIFICATION
I, James W. McCarty, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eagle Financial
Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ JAMES W. MCCARTY, JR.
- --------------------------
James W. McCarty, Jr.
Vice President, Chief Financial Officer, and Secretary/Treasurer
15