EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Berryville, Virginia
FINANCIAL REPORT
DECEMBER 31, 2002
CONTENTS
INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of shareholders' equity Consolidated statements of
cash flows Notes to consolidated financial statements
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors
Eagle Financial Services, Inc. and Subsidiary
Berryville, Virginia
We have audited the accompanying consolidated balance sheets of Eagle
Financial Services, Inc. and Subsidiary, as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years ended December 31, 2002, 2001, and 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Eagle
Financial Services, Inc. and Subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years ended
December 31, 2002, 2001, and 2000, in conformity with accounting principles
generally accepted in the United States of America
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 29, 2003
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2002 and 2001
2002 2001
--------------- ---------------
Assets
Cash and due from banks $ 14,341,473 $ 13,105,622
Federal funds sold 1,857,000 0
Securities available for sale 25,068,025 16,713,595
Securities held to maturity (fair value:
2002, $15,861,743; 2001, $20,519,159) 15,266,757 20,259,234
Loans, net of allowance for loan losses of
$2,376,463 in 2002 and $1,797,263 in 2001 223,601,868 177,871,629
Bank premises and equipment, net 7,653,104 5,422,574
Other assets 4,779,344 4,269,285
--------------- ---------------
Total assets $ 292,567,571 $ 237,641,939
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest bearing demand deposits $ 50,635,337 $ 36,718,703
Savings and interest bearing demand
deposits 113,371,665 83,597,263
Time deposits 72,584,706 77,032,485
--------------- ---------------
Total deposits $ 236,591,708 $ 197,348,451
Federal funds purchased and securities
sold under agreements to repurchase 2,909,443 7,816,807
Federal Home Loan Bank advances 20,000,000 10,000,000
Trust preferred capital notes 7,000,000 0
Other liabilities 1,664,629 1,003,974
Commitments and contingent liabilities 0 0
--------------- ---------------
Total liabilities $ 268,165,780 $ 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, 1,478,770 shares;
issued 2001, 1,461,395 shares 3,696,926 3,653,487
Surplus 3,545,408 3,178,848
Retained earnings 17,012,437 14,407,901
Accumulated other comprehensive
income 147,020 232,471
--------------- ---------------
Total shareholders' equity $ 24,401,791 $ 21,472,707
--------------- ---------------
Total liabilities and
shareholders' equity $ 292,567,571 $ 237,641,939
=============== ===============
See Notes to Consolidated Financial Statements.
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2002, 2001, 2000
2002 2001 2000
--------------- --------------- ---------------
Interest and Dividend Income
Interest and fees on loans $ 14,031,831 $ 12,310,725 $ 11,098,066
Interest on federal funds sold 23,246 18,138 14,162
Interest on securities held to maturity:
Taxable interest income 525,314 846,923 1,088,686
Interest income exempt from
federal income taxes 365,272 393,271 415,753
Interest and dividends on securities
available for sale:
Taxable interest income 810,803 727,767 515,850
Interest income exempt from
federal income taxes 65,882 73,509 69,410
Dividends 146,438 140,954 138,665
Interest on deposits in banks 1,252 2,920 2,374
--------------- --------------- ---------------
Total interest and
dividend income $ 15,970,038 $ 14,514,207 $ 13,342,966
--------------- --------------- ---------------
Interest Expense
Interest on deposits $ 3,621,459 $ 5,453,773 $ 5,340,634
Interest on federal funds purchased and
securities sold under agreements
to repurchase 135,352 238,004 307,776
Interest on Federal Home Loan Bank advances 667,411 320,826 251,127
Interest on trust preferred capital notes 193,926 0 0
--------------- --------------- ---------------
Total interest expense $ 4,618,148 $ 6,012,603 $ 5,899,537
--------------- --------------- ---------------
Net interest income $ 11,351,890 $ 8,501,604 $ 7,443,429
Provision For Loan Losses 700,000 712,500 350,000
--------------- --------------- ---------------
Net interest income after
provision for loan losses $ 10,651,890 $ 7,789,104 $ 7,093,429
--------------- --------------- ---------------
Noninterest Income
Trust Department income $ 487,096 $ 558,940 $ 345,327
Service charges on deposit accounts 1,061,198 924,846 742,026
Other service charges and fees 1,735,475 1,317,379 964,223
Securities gains 36,036 84,614 0
Other operating income 148,347 97,725 123,652
--------------- --------------- ---------------
$ 3,468,152 $ 2,983,504 $ 2,175,228
--------------- --------------- ---------------
Noninterest Expenses
Salaries and wages $ 4,274,535 $ 3,276,835 $ 2,850,031
Pension and other employee benefits 1,020,588 880,878 725,400
Occupancy expenses 507,353 430,914 513,400
Equipment expenses 779,548 683,184 632,097
Stationary and supplies 227,356 184,590 225,065
Credit card expense 268,595 225,142 200,490
Other operating expenses 2,003,710 1,694,329 1,429,652
--------------- --------------- ---------------
$ 9,081,685 $ 7,375,872 $ 6,576,135
--------------- --------------- ---------------
Income before income taxes $ 5,038,357 $ 3,396,736 $ 2,692,522
Income Tax Expense 1,494,456 952,044 677,696
--------------- --------------- ---------------
Net Income $ 3,543,901 $ 2,444,692 $ 2,014,826
=============== =============== ===============
Earnings Per Share
Net income per common share,
basic and diluted $ 2.41 $ 1.68 $ 1.40
=============== =============== ===============
See Notes to Consolidated Financial Statements.
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 2002,2001, and 2000
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 $ 3,581,992 $ 2,602,005 $11,407,018 $ (130,167) $17,460,848
Comprehensive income:
Net income - 2000 2,014,826 $ 2,014,826 2,014,826
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of deferred
income taxes of $75,961 147,453 147,453 147,453
------------
Total comprehensive income $ 2,162,279
============
Issuance of common stock to employee
benefit plan (2,731 shares) 6,828 45,301 52,129
Issuance of common stock, dividend
investment plan (9,909 shares) 24,773 226,766 251,539
Dividends declared ($0.46 per share) (661,146) (661,146)
Fractional shares purchased (15) (148) (163)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 $ 3,613,578 $ 2,873,924 $12,760,698 $ 17,286 $19,265,486
Comprehensive income:
Net income - 2001 2,444,692 $ 2,444,692 2,444,692
Other comprehensive income:
Unrealized holding gains arising
During the period,
net of deferred
income taxes of $139,621 271,030
Reclassification adjustment, net of
Deferred income taxes of $28,769 (55,845)
Other comprehensive income, net of
Deferred income taxes of $110,853 215,185 215,185 215,185
------------
Total comprehensive income $ 2,659,877
============
Issuance of common stock to employee
benefit plan (3,111 shares) 7,778 43,958 51,736
Issuance of common stock, dividend
investment plan (12,861 shares) 32,151 261,137 293,288
Dividends declared ($0.55 per share) (797,489) (797,489)
Fractional shares purchased (20) (171) (191)
------------ ------------ ------------ ------------- ------------
Balance, December 31, 2001 $ 3,653,487 $ 3,178,848 $14,407,901 $ 232,471 $21,472,707
Comprehensive income:
Net income - 2002 3,543,901 $ 3,543,901 3,543,901
Other comprehensive income:
Unrealized holding gains arising
During the period,
net of deferred
income taxes of $176,321 342,273
Reclassification adjustment, net of
income taxes of $12,252 (23,784)
Minimum pension liability adjustment,
Net of income taxes of $208,090 (403,940)
Other comprehensive income, net of
Deferred income taxes of $164,069 (85,451) (85,451) (85,451)
------------
Total comprehensive income $ 3,458,450
============
Issuance of common stock to employee
benefit plan (2,672 shares) 6,680 54,108 60,788
Issuance of common stock, dividend
investment plan (14,715 shares) 36,787 312,694 349,481
Dividends declared ($0.64 per share) (939,365) (939,365)
Fractional shares purchased (28) (242) (270)
------------ ------------ ------------ ------------- ------------
Balance, December 31, 2002 $ 3,696,926 $ 3,545,408 $17,012,437 $ 147,020 $24,401,791
============ ============ ============ ============= ============
See Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001, 2000
2002 2001 2000
-------------- -------------- --------------
Cash Flows from Operating Activities
Net income $ 3,543,901 $ 2,444,692 $ 2,014,826
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 472,270 420,285 521,096
Amortization of intangible and other assets 208,511 193,085 143,276
(Gain ) Loss on equity investment 4,838 11,619 (10,469)
Provision for loan losses 700,000 712,500 350,000
(Gain) loss on sale of other real estate owned - (6,513) 1,184
(Gain) on sale of securities (36,036) (84,614) 0
Premium amortization on securities, net 76,038 65,159 58,460
Deferred tax expense (benefit) (150,030) (212,932) (95,158)
Changes in assets and liabilities:
(Increase) decrease in other assets (296,595) (169,872) (563,875)
Increase (decrease) in other liabilities (184,137) (135,239) 88,195
-------------- -------------- --------------
Net cash provided by operating activities $ 4,338,760 $ 3,238,170 $ 2,507,535
-------------- -------------- --------------
Cash Flows from Investing Activities
Proceeds from maturities and principal
payments of securities held to maturity $ 5,596,170 $ 6,242,797 $ 3,231,713
Proceeds from maturities and principal
payments of securities available for sale 3,519,880 3,788,378 4,866,123
Proceeds from sales of securities available
For sale 306,108 2,635,914 0
Purchases of securities held to maturity (639,510) (253,623) (92,928)
Purchases of securities available for sale (11,702,045) (11,122,146) (5,170,752)
Purchases of bank premises and equipment (2,702,800) (933,607) (1,432,429)
Proceeds from sale of other real estate owned - 207,845 107,701
Net (increase) in loans (46,430,239) (38,076,031) (17,364,831)
-------------- -------------- --------------
Net cash (used in) investing activities $ (52,052,436) $ (37,510,473) $ (15,855,403)
-------------- -------------- --------------
Cash Flows from Financing Activities
Net increase in demand deposits,
money market, and savings accounts $ 43,691,036 $ 35,426,830 $ 6,860,667
Net increase(decrease)in certificates (4,447,779) (6,135,155) 12,307,631
Of deposits
Net increase (decrease) in federal funds
Purchased and securities sold under
Agreements to repurchase (4,907,364) 5,034,141 (3,378,186)
Proceeds from Federal Home Loan Bank advances 10,000,000 5,000,000 0
Proceeds from trust preferred capital notes 7,000,000 - 0
Proceeds from issuance of common stock to ESOP 60,788 51,736 52,129
Cash dividends paid (589,884) (504,201) (409,607)
Fractional shares purchased (270) (191) (163)
-------------- -------------- --------------
Net cash provided by financing activities $ 50,806,527 $ 38,873,160 $ 15,432,471
-------------- -------------- --------------
Increase (decrease) in cash and
cash equivalents $ 3,092,851 $ 4,600,857 $ 2,084,603
Cash and Cash Equivalents
Beginning $ 13,105,622 $ 8,504,765 6,420,162
-------------- -------------- --------------
Ending $ 16,198,473 $ 13,105,622 8,504,765
============== ============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,670,385 $ 6,102,514 $ 5,869,010
============== ============== ==============
Income taxes $ 1,792,624 $ 1,130,850 680,092
============== ============== ==============
Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of common stock,
dividend investment plan $ 349,481 $ 293,288 $ 251,539
============== ============== ==============
Unrealized gain (loss) on securities
available for sale $ 482,558 $ 326,038 $ 223,414
============== ============== ==============
Change in minimum pension liability $ 612,030 $ 0 $ 0
============== ============== ==============
Other real estate acquired in settlement
of loans $ 0 $ 201,332 $ 0
============== ============== ==============
See Notes to Consolidated Financial Statements
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1. Nature of Banking Activities and Significant Accounting Policies
Eagle Financial Services, Inc. and Subsidiary (the Company) grant commercial,
financial, agricultural, residential and consumer loans to customers in Virginia
and the Eastern Panhandle of West Virginia. The loan portfolio is well
diversified and generally is collateralized by assets of the customers. The
loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers.
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to accepted
practices within the banking industry.
Principles of Consolidation
Eagle Financial Services, Inc. owns 100% of Bank of Clarke County (the "Bank").
The consolidated financial statements include the accounts of Eagle Financial
Services, Inc. and its wholly-owned subsidiary. All significant intercompany
accounts have been eliminated.
Trust Assets
Securities and other property held by the Trust Department in a fiduciary or
agency capacity are not assets of the Company and are not included in the
accompanying consolidated financial statements.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Securities
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as "available for sale" and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans
throughout the Counties of Clarke and Frederick, Virginia and the City of
Winchester, Virginia. The ability of the Company's debtors to honor their
contracts is dependent upon the real estate and general economic conditions in
this area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for the allowance for loan losses and any
deferred fees or costs on originated loans. Interest income is accrued on the
unpaid principal balance. Loan origination and commitment fees and direct loan
costs are being recognized as collected and incurred. The use of this method of
recognition does not produce results that are materially different from results
which would have been produced if such costs and fees were deferred and
amortized as an adjustment of the loan yield over the life of the related loan.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Credit card loans and other personal loans are typically
charged off no later than 180 days past due. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
Bank Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line or declining-balance
method over the estimated useful lives of the assets.
Other Real Estate Owned
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lesser of the fair value of the property, less
selling costs or the loan balance outstanding at the date of foreclosure.
Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair value less
cost to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
Intangible Assets
Acquired intangible assets, such as the value of purchased core deposits and
organizational costs, are amortized over the periods benefited, not exceeding
fifteen years.
Pension Plan
The Company has a trusteed, noncontributory defined benefit pension plan
covering substantially all full-time employees.
Postretirement Benefits
The Company provides certain health care and life insurance benefits for six
retired employees who have met certain eligibility requirements. All other
employees retiring after reaching age 65 and having at least 15 years service
with the Company will be allowed to stay on the Company's group life and health
insurance policies, but will be required to pay premiums. The Company's share of
the estimated costs that will be paid after retirement is generally being
accrued by charges to expense over the employees' active service periods to the
dates they are fully eligible for benefits, except that the Company's unfunded
cost that existed at January 1, 1993 is being accrued primarily in a
straight-line manner that will result in its full accrual by December 31, 2013.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability
(or balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
Earnings Per Share
Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Weighted average shares were 1,469,995, 1,452,416, 1,439,129, for the years
ended 2002, 2001 and 2000, respectively. The Company had no potential dilution
of common stock as of December 31, 2002, 2001 and 2000.
Comprehensive Income
Accounting principles generally accepted in the United States of America require
that recognized revenue, expenses, gains and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities, are reported as a separate component of
the equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
Interest Rate Risk
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment and more likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds
before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting the terms
of new loans and deposits and by investing in securities with terms that
mitigate the Company's overall interest rate risk.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.
Note 2. Securities
The amortized costs and fair values of securities available for sale as of
December 31, 2002 and 2001, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------- -------------
2002
-------------------------------------------------------------
Obligations of U.S. government
corporations and agencies $ 7,152,565 $ 107,685 $ - $ 7,260,250
Mortgage-backed securities 4,711,530 38,419 - 4,749,949
Obligations of states and
political subdivisions 1,309,526 119,918 - 1,429,444
Corporate securities 9,668,817 666,033 (97,268) 10,237,582
Restricted stock 1,390,800 - - 1,390,800
------------- ------------- ------------- -------------
$ 24,233,238 $ 932,055 $ (97,268) $ 25,068,025
============= ============= ============= =============
2001
-------------------------------------------------------------
Obligations of U.S. government
corporations and agencies $ 1,989,914 $ 24,994 $ (58) $ 2,014,850
Mortgage-backed securities 2,009,049 45,065 - 2,054,114
Obligations of states and
political subdivisions 1,498,807 46,448 - 1,545,255
Corporate securities 9,693,902 255,930 (48,605) 9,901,227
Restricted stock 1,016,700 - - 1,016,700
Other 152,994 28,455 - 181,449
------------- ------------- ------------- -------------
$ 16,361,366 $ 400,892 $ (48,663) $ 16,713,595
============= ============= ============= =============
The amortized cost and fair value of securities available for sale as of
December 31, 2002, by contractual maturity, are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties.
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 1,633,036 $ 1,636,795
Due after one year through five years 14,769,627 15,202,901
Due after five years through ten years 5,687,025 6,026,529
Due after ten years 752,750 811,000
Restricted stock 1,390,800 1,390,800
------------- ------------
$ 24,233,238 $ 25,068,025
============= ============
Amortized costs and fair values of securities held to maturity as of December
31, 2002 and 2001, are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------- -------------
2002
-------------------------------------------------------------
Obligations of U.S. government
corporations and agencies $ 999,541 $ 36,864 $ - $ 1,036,405
Mortgage-backed securities 3,042,902 126,059 (26) 3,168,935
Obligations of states and
political subdivisions 11,224,314 432,497 (408) 11,656,403
------------- ------------- ------------- -------------
$ 15,266,757 $ 595,420 $ (434) $ 15,861,743
============= ============= ============= =============
2001
-------------------------------------------------------------
U.S. Treasury securities $ 121,985 $ 1,083 $ - $ 123,068
Obligations of U.S. government
corporations and agencies 1,998,678 55,232 - 2,053,910
Mortgage-backed securities 5,383,586 84,424 (15,235) 5,452,775
Obligations of states and
political subdivisions 12,754,985 158,129 (23,708) 12,889,406
------------- ------------- -------------
- ------------
$ $ 20,259,234 $ 298,868 $ (38,943) $ 20,519,159
============= ============= ============= =============
The amortized cost and fair value of securities being held to maturity as of
December 31, 2002, by contractual maturity, are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties.
Amortized Fair
Cost Value
------------- -------------
Due in one year or less $ 1,786,311 $ 1,813,361
Due after one year through five years 7,462,140 7,759,813
Due after five years through ten years 4,324,659 4,546,317
Due after ten years 1,693,647 1,742,252
------------- -------------
$ 15,266,757 $ 15,861,743
============= =============
Proceeds from maturities and principal payments of securities being held to
maturity during 2002, 2001, and 2000 were $5,596,170,$6,242,797, and $3,231,713.
There were no sales of securities being held to maturity during 2002, 2001, and
2000.
Proceeds from sales, maturities and principal payments of securities available
for sale during 2002, 2001,and 2000 were $3,825,988,$6,424,292,and $4,866,123.
Gross gains of $36,036 were realized on sales during 2002. Gross gains of
$86,721 and gross losses of $2,107 were realized on sales during 2001. There
were no sales of securities available for sale during 2000.
Securities having a book value of $21,875,747 and $25,387,340 at December 31,
2002 and 2001, respectively, were pledged to secure public deposits and for
other purposes required by law.
Note 3. Loans
The composition of loans is as follows:
December 31
------------------------------
2002 2001
----------- -----------
(thousands)
Mortgage loans on real estate:
Construction and land development $ 12,081 $ 10,383
Secured by farmland 2,892 4,778
Secured by 1-4 family residential properties 111,273 93,042
Secured by nonfarm, nonresidential properties 48,459 30,295
Loans to farmers 1,071 1,002
Commercial and industrial loans 18,671 13,912
Consumer installment loans 31,377 25,907
All other loans 154 350
----------- -----------
Total loans $ 225,978 $ 179,669
Less: Allowance for loan losses (2,376) (1,797)
----------- -----------
Loans, net $ 223,602 $ 177,872
=========== ===========
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
December 31
-------------------------------------------
2002 2001 2000
------------- ------------- -------------
Balance, beginning $ 1,797,263 $ 1,340,086 $ 1,122,616
Provision charged to operating
expense 700,000 712,500 350,000
Recoveries added to the allowance 67,332 95,217 37,988
Loan losses charged to the allowance (188,132) (350,540) (170,518)
------------- ------------- -------------
Balance, ending $ 2,376,463 $ 1,797,263 $ 1,340,086
============= ============= =============
The following is a summary of information pertaining to impaired loans:
December 31
---------------------------------------------
2002 2001 2000
------------- ------------- -------------
Impaired loans with an allowance provided $ 0 $ 0 $ 125,752
============= ============= =============
Average balance of impaired loans $ 0 $ 0 $ 125,789
============= ============= =============
Interest income recognized $ 0 $ 0 $ 10,474
============= ============= =============
There were no nonaccrual loans as of December 31, 2002 or 2000, however,
nonaccrual loans excluded from the impaired loan disclosure under FASB 114
totaled $2,029,379 at December 31, 2001. If interest would have been accrued,
such income would have been approximately $57,683 for 2001.
Note 5. Bank Premises and Equipment, Net
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
December 31
-----------------------------
2002 2001
------------- -------------
Land $ 2,386,239 $ 1,492,125
Buildings and improvements 5,873,020 4,869,645
Furniture and equipment 3,859,270 3,788,329
------------- -------------
$ 12,118,529 $ 10,150,099
Less accumulated depreciation 4,465,425 4,727,525
------------- -------------
Bank premises and equipment, net $ 7,653,104 $ 5,422,574
============= =============
Depreciation expense on buildings and improvements was $181,507,$137,944, and
$224,468 for the years ended December 31,2002,2001 and 2000 respectively.
Depreciation expense on furniture and equipment was $290,763, $282,341, and
$296,628 for the years ended December 31, 2002,2001 and 2000, respectively.
The Bank leases certain facilities under operating leases, which expire at
various dates through 2032. These leases require payment of certain operating
expenses and contain renewal options. The total minimum rental commitment at
December 31, 2002 under these leases is $1,619,120, which is due as follows:
2003 $ 121,323
2004 122,913
2005 96,310
2006 41,261
2007 41,690
Thereafter 1,195,623
------------
$ 1,619,120
============
The total building and equipment rental expense was $107,214, $92,875, and
$106,318 in 2002,2001 and 2000, respectively.
Note 6. Deposits
The aggregate amount of time deposits which had a balance of $100,000 or greater
was $28,209,969 and $25,697,977 at December 31, 2002 and 2001, respectively.
At December 31, 2002, the scheduled maturities of time deposits are as follows:
2003 $ 55,352,847
2004 6,060,002
2005 2,153,382
2006 2,065,288
2007 6,893,132
Thereafter 60,055
------------
$ 72,584,706
============
Deposit overdrafts reclassified as loans totaled $78,165 and $33,567 at December
31, 2002 and 2001, respectively.
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of December 31,
2002 and 2001.
December 31
--------------------------
2002 2001
------------ ------------
Deferred tax assets:
Allowance for loan losses $ 674,319 $ 478,350
Deferred compensation 102,875 105,970
Minimum pension liability
Adjustment 208,090 0
Accrued postretirement benefits 54,074 51,148
Home equity origination costs 51,145 26,369
Non-accrual interest 0 19,127
Other 20,109 0
------------ -----------
$ 1,110,612 $ 680,964
------------ ------------
Deferred tax liabilities:
Property and equipment $ 335,789 $ 249,714
Prepaid pension costs 52,849 67,396
Securities available for sale 283,827 119,758
------------ ------------
$ 672,465 $ 436,868
------------ ------------
Net deferred tax asset $ 438,147 $ 244,096
============ ============
The provision for income taxes charged to operations for the years ended
December 31, 2002,2001 and 2000 consists of the following:
December 31
----------------------------------------
2002 2001 2000
------------ ------------ ------------
Current tax expense $ 1,644,486 $ 1,164,975 $ 772,854
Deferred tax (benefit) (150,030) (212,931) (95,158)
------------ ------------ ------------
$ 1,494,456 $ 952,044 $ 677,696
============ ============ ============
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income from continuing
operations for the years ended December 31, 2002, 2001 and 2000, due to the
following:
2002 2001 2000
------------ ------------ ------------
Computed "expected" tax expense $ 1,713,041 $ 1,154,890 $ 915,457
(Decrease) increase in income taxes
resulting from:
Tax-exempt interest (156,294) (161,764) (168,974)
Low income housing credits (46,227) (46,227) (46,227)
Nontaxable life insurance (13,750) (6,436) (17,402)
Other (2,314) 11,581 (5,158)
------------ ------------ ------------
$ 1,494,456 $ 952,044 $ 677,696
============ ============ ============
Note 8. Pension and Postretirement Benefit Plans
The following tables provide a reconciliation of the changes in the benefit
obligations and fair value of assets for 2002, 2001 and 2000 and a statement of
the funded status as of December 31, 2002, 2001 and 2000 for the pension plan
and postretirement benefit plan of the Company.
Pension Benefits Postretirement Benefits
----------------------------------- -----------------------------------
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ----------- ----------- -----------
Change in Benefit Obligation
Benefit obligation,
beginning $1,961,352 $1,760,646 $1,620,857 $ 275,657 $ 240,601 $ 244,169
Service cost 156,038 127,910 110,253 0 0 0
Interest cost 145,248 130,203 110,737 20,007 17,426 17,625
Actuarial (gain) loss 180,712 82,204 5,823 24,488 35,744 (4,371)
Benefits paid (100,884) (139,611) (87,024) (21,159) (18,114) (16,822)
----------- ----------- ----------- ----------- ----------- -----------
Benefit obligation,
ending $2,342,466 $1,961,352 $1,760,646 $ 298,993 $ 275,657 $ 240,601
----------- ----------- ----------- ----------- ----------- -----------
Change in Plan Assets
Fair value of plan
assets, beginning $1,278,758 $1,395,729 $1,395,158 $ 0 $ 0 $ 0
Actual return on plan
assets (161,237) (143,156) 13,699 0 0 0
Employer contributions 208,837 165,796 73,896 21,159 18,114 16,822
Benefits paid (100,884) (139,611) (87,024) (21,159) (18,114) (16,822)
----------- ----------- ----------- ----------- ----------- -----------
Fair value of plan
assets, ending $1,225,474 $1,278,758 $1,395,729 $ 0 $ 0 $ 0
----------- ----------- ----------- ----------- ----------- -----------
Funded status
Funded status,
beginning $(1,116,992)$ (682,594)$ (364,917)) $ (298,993) $(275,657) $ (240,601)
Unrecognized net
actuarial loss 1,186,141 782,990 468,850 120,778 102,642 70,659
Unrecognized net
obligation at
transition 0 (7) (12,851) 20,469 23,081 25,693
Unrecognized prior
service cost 68,693 80,238 91,783 0 0 0
----------- ----------- ----------- ----------- ----------- -----------
Prepaid (accrued)
benefits $ 137,842 $ 180,627 $ 182,865 $ (157,746)$ (149,934) $ (144,249)
=========== =========== =========== =========== =========== ===========
Amounts Recognized in
Consolidated balance
Sheet:
Pre-paid benefit cost $ 137,842 $ 180,627 $ 182,665
Accrued benefit
Liability (680,723) 0 0
Intangible asset 68,693 0 0
Deferred income tax
Benefit 208,090 0 0
Accumulated other
Comprehensive income 403,940 0 0
Net amount recognized 137,842 180,627 182,865
The following table provides the components of net periodic benefit cost for the
years ended December 31, 2002,2001 and 2000:
Pension Benefits Postretirement Benefits
---------------------------------- ----------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
Components of Net Periodic
Benefit Cost
Service cost $ 156,038 $ 127,910 $ 110,253 $ 0 $ 0 $ 0
Interest cost 145,248 130,203 110,737 20,007 17,426 17,625
Expected return on
plan assets (100,326) (109,693) (109,647) 0 0 0
Amortization of prior
service costs 11,545 11,545 11,545 0 0 0
Amortization of net
obligation at transition (7) (12,844) (12,844) 2,612 2,612 2,612
Recognized net actuarial
loss 39,124 20,913 6,944 6,352 3,761 3,026
---------- ---------- ---------- ---------- ---------- ----------
Net periodic benefit cost $ 251,622 $ 168,034 $ 116,988 $ 28,971 $ 23,799 $ 23,263
========== ========== ========== ========== ========== ==========
The weighted average discount rates used for the pension calculations was 7.00%
for 2002 and 7.50% for 2001 and 2000, the expected return on plan assets was
8.00% for all periods and the rate of compensation increase was 5.00% for all
periods. The weighted average discount rate used in estimating the accumulated
postretirement benefit obligation was 7.00% for 2002 and 7.50% for 2001 and
2000. For measurement purposes, an annual rate increase of 10.00% for 2002 and
2001 and 7.49% for 2000 in per capita health care costs of covered benefits was
assumed. This rate was assumed to decrease to 8.00% for 2005 and 2006, then
decrease to 6.00% for 2007 and remain at that level. If assumed health care cost
trend rates were increased by 1.00% in each year, the accumulated postretirement
benefit obligation at December 31, 2002 would be increased by $15,085 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 2002 would be
increased by $1,055.
Note 9. Employee Benefits
The Company has established an Employee Stock Ownership Plan (ESOP) to provide
additional retirement benefits to substantially all employees. Contributions are
made to the Bank of Clarke County Employee Retirement Trust to be used to
purchase the Company's common stock. There were no contributions in 2002, 2001
or 2000.
The Company sponsors a 401(k) savings plan under which eligible employees may
choose to save up to 15 percent of their salary on a pretax basis, subject to
certain IRS limits. The Company matches 50 percent (up to 6 percent of the
employee's salary) of employee contributions with Company common stock. The
shares for this purpose are provided principally by the Company's employee stock
ownership plan (ESOP), supplemented, as needed, by newly issued shares.
Contributions under the plan amounted to $63,030 in 2002, $67,446 in 2001 and
$53,461 in 2000.
In addition, an Executive Supplemental Income Plan was developed for certain key
employees. Benefits are to be paid in monthly installments following retirement
or death. The agreement provides that if employment is terminated for reasons
other than death or disability prior to age 65, the amount of benefits could be
reduced or forfeited. The executive supplemental income benefit expense, based
on the present value of the retirement benefits, amounted to $23,160 for 2002,
$3,600 for 2001 and $31,440 for 2000. The plan is unfunded, however, life
insurance has been acquired on the lives of those employees in amounts
sufficient to discharge the obligations thereunder.
Note 10. Commitments and Contingencies
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities, which are not reflected in the
accompanying financial statements. These commitments and contingent liabilities
include various guarantees, commitments to extend credit and standby letters of
credit. The Company does not anticipate any material losses as a result of these
commitments.
The Company is a defendant in various lawsuits wherein substantial amounts are
claimed. In the opinion of the Company's legal counsel, these suits are without
substantial merit and should not result in judgements which in the aggregate
would have a material adverse effect on the Company's financial statements.
As a member of the Federal Reserve System, the Bank is required to maintain
certain average reserve balances. These reserve balances include usable vault
cash and amounts on deposit with the Federal Reserve Bank. For the final weekly
reporting period in the years ended December 31, 2002 and 2001, the amount of
daily average required balances were approximately $602,000 and $2,566,000,
respectively. In addition, the Bank was required to maintain a compensating
balance on deposit with a correspondent bank in the amount of $250,000 at
December 31, 2002.
See Note 15 with respect to financial instruments with off-balance-sheet risk.
Note 11. Transactions with Directors and Officers
The Company has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal shareholders (commonly referred to as related parties) on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. These persons and firms were indebted
to the Company for loans totaling $2,077,184 and $1,250,486 at December 31, 2002
and 2001, respectively. During 2002, total principal additions were $3,400,597
and total principal payments were $2,573,899.
Note 12. Capital Requirements
The Company(on a consolidated basis)and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2002 and
2001, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2002, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the tables. There are no conditions or events since the
notification that management believes have changed the Bank's category. The
Company's and the Bank's actual capital amounts and ratios as of December 31,
2002 and 2001 are also presented in the table.
Minimum
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
---------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ -------- ------ -------- ------
(Amount in Thousands)
As of December 31, 2002:
Total Capital to Risk Weighted Assets
Consolidated $ 32,867 14.87% $ 17,683 8.00% N/A
Bank of Clarke County $ 29,720 13.57% $ 17,523 8.00% $ 21,904 10.00%
Tier 1 Capital to Risk Weighted Assets
Consolidated $ 30,491 13.79% $ 8,841 4.00% N/A
Bank of Clarke County $ 27,344 12.48% $ 8,762 4.00% $ 13,143 6.00%
Tier 1 Capital to Average Assets
Consolidated $ 30,491 10.69% $ 11,410 4.00% N/A
Bank of Clarke County $ 27,344 9.70% $ 11,278 4.00% $ 14,097 5.00%
As of December 31, 2001:
Total Capital to Risk Weighted Assets
Consolidated $ 22,633 13.01% $ 13,916 8.00% N/A
Bank of Clarke County $ 17,813 10.45% $ 13,631 8.00% $ 17,039 10.00%
Tier 1 Capital to Risk Weighted Assets
Consolidated $ 20,836 11.98% $ 6,958 4.00% N/A
Bank of Clarke County $ 16,016 9.40% $ 6,816 4.00% $ 10,224 6.00%
Tier 1 Capital to Average Assets
Consolidated $ 20,836 9.07% $ 9,188 4.00% N/A
Bank of Clarke County $ 16,016 7.13% $ 8,991 4.00% $ 11,238 5.00%
Note 13. Restrictions On Dividends, Loans, and Advances
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends which may be paid at any date is generally limited to the lesser of
the Bank's retained earnings or the three preceding years' undistributed net
income of the Bank. Loans or advances are limited to 10% of the Bank's capital
stock and surplus on a secured basis. In addition, dividends paid by the Bank to
the Company would be prohibited if the effect thereof would cause the Bank's
capital to be reduced below applicable minimum capital requirements.
At December 31, 2002, the Bank's retained earnings available for the payment of
dividends was $4,300,808. Accordingly, $23,802,166 of the Company's equity in
the net assets of the Bank was restricted at December 31, 2002. Funds available
for loans or advances by the Bank to the Company amounted to $286,675 at
December 31, 2002.
Note 14. Dividend Investment Plan
The Company has in effect a Dividend Investment Plan, which provides an
automatic conversion of dividends into common stock for enrolled shareholders.
It is based on 95% of the stock's fair market value on each dividend record
date.
Note 15. Financial Instruments With Off-Balance Sheet Risk
The Company, through its banking subsidiary, is a party to credit related
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit, unfunded commitments under
lines of credit, and commercial and standby letters of credit. Such commitments
involve, to varying degrees,elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheets.
The Company's exposure to credit loss is represented by the contractual amount
of these instruments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
At December 31, 2002 and 2001, the following financial instruments were
outstanding whose contract amounts represent credit risk:
2002 2001
------------ -------------
Commitments to extend credit $ 7,691,217 $ 10,827,300
Unfunded commitments under lines of credit 48,759,470 40,099,754
Commercial and standby letters of credit 3,609,105 3,439,994
Commitments to extend credit are agreements to lend to a customer as long as the
terms offered are acceptable and certain other conditions are met. Commitments
generally have fixed expiration dates or other termination clauses. Since these
commitments may expire or terminate, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, with regards to these commitments, is based on management's credit
evaluation of the customer.
Unfunded commitments under lines of credit are contracts for possible future
extensions of credit to existing customers. Unfunded commitments under lines of
credit include, but are not limited to, home equity lines of credit, overdraft
protection lines of credit, credit cards, and unsecured and secured commercial
lines of credit. The terms and conditions of these commitments vary depending on
the line of credit's purpose, collateral, and maturity. The amount disclosed
above represents total unused lines of credit for which a contract with the
Company has been established.
Commercial and standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. These
letters of credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in granting loans to customers. The
Company holds collateral supporting these commitments if it is deemed necessary.
At December 31, 2002, none of the outstanding letters of credit were
collateralized.
The Company has cash accounts in other commercial banks. The amount on deposit
in these banks at December 31, 2002 exceeded the insurance limits of the Federal
Deposit Insurance Corporation by $581,429.
Note 16. Federal Home Loan Bank Advances and Available Lines of Credit
The Company has a $57,834,000 line of credit with the Federal Home Loan Bank
(FHLB) of Atlanta which is secured by $94,815,000 in qualified 1-4 family
residential real estate loans at December 31, 2002. Advances bear interest at a
fixed or floating rate depending on the terms and maturity of each advance and
numerous renewal options are available to the Company. The unused line of credit
totaled $37,834,000 at December 31, 2002 and $36,544,000 at December 31, 2001.
The Company's $20,000,000 in fixed-rate long-term borrowing with the FHLB as of
December 31, 2002 matures as follows: $10,000,000 in 2007, %5,000,000 in 2008,
and $5,000,000 in 2011. Each advance has provisions for the FHLB to convert the
interest rate from a fixed rate to an indexed floating rate for the reminder of
the advance's term. If converted, the Company may pay back all or part of the
advance without a prepayment penalty. The interest rates on the on the
outstanding advances as of December 31, 2002 and 2001 ranged from 3.09% to 4.94%
and from 4.65% to 4.94%, respectively. The weighted average interest rate on
outstanding advances as of December 31, 2002 and 2001 was 3.94% and 4.80%,
respectively.
The Company had unused lines of credit totaling $19,253,000 with other
nonaffiliated banks at December 31, 2002.
Note 17. Trust Preferred Capital Notes
On May 23, 2002, Eagle Financial Statutory Trust l (the Trust), a wholly-owned
subsidiary of the Company, was formed for the purpose of issuing redeemable
capital securities. On June 26, 2002, $7,000,000 of the trust preferred
securities were issued through a pooled underwriting totaling approximately
$554,000,000. The securities have a LIBOR-indexed floating rate of interest. The
interest rate at December 31, 2002 was 4.85%. 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 $7,000,000 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 1 capital for regulatory
capital adequacy purposes as long as their amount does not exceed 25% of Tier 1
capital, including total trust preferred securities. The portion of the trust
preferred securities not considered as Tier 1 capital, if any, may be included
in Tier 2 capital. The total amount ($7,000,000) of the trust preferred
securities issued by the Trust can be included in the Company's Tier 1 capital.
The obligations of the Company with respect to the issuance of the capital
securities constitute a full and unconditional guarantee by the Company of the
Trust's obligation with respect to the capital securities.
Subject to certain exceptions and limitations, the Company may elect from time
to time to defer interest payments on the junior subordinated debt securities,
which would result in a deferral of distribution payments on the related capital
securities.
Note 18. Quarterly Condensed Statements of Income - Unaudited
2002 Quarter Ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Total interest and dividend income $ 3,775,214 $ 3,957,465 $ 4,115,325 $ 4,122,034
Net interest income after provision
for loan losses 2,318,394 2,706,019 2,777,584 2,849,893
Noninterest income 741,874 842,822 961,969 921,487
Noninterest expenses 1,962,686 2,245,591 2,307,819 2,565,589
Income before income taxes 1,097,582 1,303,250 1,431,734 1,205,791
Net income 769,750 903,795 1,007,895 862,461
Net income per common share,
Basic and diluted $ 0.53 $ 0.61 $ 0.69 $ 0.58
Dividends per common share 0.15 0.16 0.16 0.17
2001 Quarter Ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
Total interest and dividend income $ 3,490,278 $ 3,606,601 $ 3,728,627 $ 3,688,701
Net interest income after provision
for loan losses 1,819,864 1,894,304 1,954,295 2,120,641
Noninterest income 642,675 745,636 803,790 791,403
Noninterest expenses 1,697,195 1,894,988 1,862,047 1,921,642
Income before income taxes 765,344 744,952 896,038 990,402
Net income 554,861 543,581 644,614 701,636
Net income per common share,
Basic and diluted $ 0.38 $ 0.37 $ 0.44 $ 0.49
Dividends per common share 0.13 0.13 0.14 0.15
Note 19. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments: For those short-term instruments, the carrying
amount is a reasonable estimate of fair value.
Securities: For securities held for investment purposes, fair values are based
on quoted market prices or dealer quotes.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans were estimated using discounted cash flow analyses, using
interest rates currently being offered.
Deposits and Borrowings: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of all other deposits and borrowings is
determined using the discounted Cash flow method. The discount rate was equal to
the rate currently offered on similar products.
Accrued Interest: The carrying amounts of accrued interest approximate fair
value.
Off-Balance-Sheet Financial Instruments: The fair value of commitments to extend
credit is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and the
present credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of standby letters of
credit is based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date. At December 31, 2002 and 2001, the
difference between the carrying amounts and fair values of loan commitments and
standby letters of credit were immaterial.
The estimated fair values of the Company's financial instruments are as follows:
2002 2001
--------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Financial assets:
Cash and short-term investments $ 16,198,473 $ 16,198,473 $ 13,105,622 $ 13,105,622
Securities 40,334,782 40,929,768 36,972,829 37,232,754
Loans, net 223,601,868 233,227,000 177,871,629 182,779,000
Accrued interest receivable 1,185,738 1,185,738 1,088,042 1,088,042
------------- ------------- ------------- -------------
Total financial assets $ 281,320,861 $ 291,540,979 $ 229,038,122 $ 234,205,418
============= ============= ============= =============
Financial liabilities:
Deposits $ 236,591,708 $ 237,411,000 $ 197,348,451 $ 198,417,000
Federal funds purchased and
securities sold under agree-
ments to repurchase 2,909,443 2,909,443 7,816,807 7,816,807
Federal Home Loan Bank advances 20,000,000 20,643,000 10,000,000 9,568,000
Trust preferred capital notes 7,000,000 7,000,000 0 0
Accrued interest payable 210,569 210,569 262,806 262,806
------------- ------------- ------------- -------------
Total financial liabilities $ 266,711,720 $ 268,174,012 $ 215,428,064 $ 216,064,613
============= ============= ============= =============
Note 20. Condensed Financial Information - Parent Company Only
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Balance Sheets
December 31, 2002 and 2001
2002 2001
-------------- --------------
Assets
Cash held in subsidiary bank $ 32,293 $ 5,214
Securities available for sale 2,848,986 4,687,817
Loans 59,865 0
Investment in subsidiary, at cost, plus
undistributed net income 28,292,000 16,771,692
Other assets 254,608 64,787
-------------- --------------
Total assets $ 31,487,752 $ 21,529,510
============== ==============
Liabilities and Shareholders' Equity
Trust preferred capital notes $ 7,000,000 $ 0
Other liabilities 85,961 56,803
-------------- --------------
Total liabilities $ 7,085,961 $ 56,803
============= ==============
Shareholders' Equity
Preferred stock $ 0 $ 0
Common stock 3,696,926 3,653,487
Surplus 3,545,408 3,178,848
Retained earnings 17,012,437 14,407,901
Accumulated other comprehensive income 147,020 232,471
-------------- --------------
Total shareholders' equity $ 24,401,791 $ 21,472,707
-------------- --------------
Total liabilities and
shareholders' equity $ 31,487,752 $ 21,529,510
============== ==============
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Income
Years Ended December 31, 2002,2001, and 2000
2002 2001 2000
------------- ------------- -------------
Income
Dividends from subsidiary $ 400,000 $ 1,450,000 $ 1,400,000
Interest on loans 12,739 0 0
Interest and dividends on
securities available for sale 202,253 255,917 157,116
------------- ------------- -------------
Total income $ 614,992 $ 1,705,917 $ 1,557,116
------------- ------------- -------------
Expenses
Interest expense on borrowings $ 197,514 $ 0 $ 0
Other operating expenses 93,811 56,887 17,294
------------- ------------- -------------
Total expenses $ 291,325 $ 56,887 $ 17,294
------------- ------------- -------------
Other Income
Income(loss)on equity investment $ (4,838) $ (11,619) $ 10,469
Gain on sale of securities 36,036 74,880 0
------------- ------------- -------------
Total other income $ 31,198 $ 63,261 $ 10,469
Income before income tax
(benefits) and equity in
undistributed net income
of subsidiary $ 354,865 $ 1,712,291 $ 1,550,291
Income Tax Expense(Benefit) (90,044) 26,022 (21,142)
------------- ------------- -------------
Income before equity in
undistributed net income
of subsidiary $ 444,909 $ 1,686,269 $ 1,571,433
Equity in Undistributed Net Income
of Subsidiary 3,098,992 758,423 443,393
------------- ------------- -------------
Net income $ 3,543,901 $ 2,444,692 $ 2,014,826
============= ============= =============
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
------------- ------------- -------------
Cash Flows from Operating Activities
Net income $ 3,543,901 $ 2,444,692 $ 2,014,826
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization 54,727 0 0
(Gain) loss on equity investment 4,838 11,619 (10,469)
Premium amortization(discount accretion)
on securities 2,436 (310) (3,551)
(Gain) on sale of securities (36,036) (74,880) 0
Undistributed earnings of subsidiary (3,098,992) (758,423) (443,393)
Changes in assets and liabilities:
(Increase) decrease in other assets (242,460) 19,347 (36,766)
Increase in other liabilities 6,611 863 0
------------- ------------- -------------
Net cash provided by operating activities $ 235,025 $ 1,642,908 $ 1,520,647
------------- ------------- -------------
Cash Flows from Investing Activities
Purchase of securities available for sale $ (1,467,064) $ (3,199,726) $ (2,583,442)
Proceeds from maturities of securities available
for sale 1,542,241 1,719,800 1,420,261
Proceeds from sales of securities available
for sale 306,108 293,988 0
Equity investment in subsidiary 7,000,000 0 0
Net(increase) in loans (59,865) 0 0
Net cash provided by (used in)
investing activities $ (6,678,580) $ (1,185,938) $ (1,163,181)
------------- ------------- -------------
Cash Flows from Financing Activities
Cash dividends paid $ (589,884) $ (504,201) $ (409,607)
Fractional shares purchased (270) (191) (163)
Proceeds from issuance of common stock to ESOP 60,788 51,736 52,129
Proceeds from trust preferred capital notes 7,000,000 0 0
------------- ------------- -------------
Net cash (used in) financing activities $ 6,470,634 $ (452,656) $ (357,641)
------------- ------------- -------------
Increase(decrease) in cash $ 27,079 $ 4,314 $ (175)
Cash
Beginning $ 5,214 $ 900 $ 1,075
------------- ------------- -------------
Ending $ 32,293 $ 5,214 $ 900
============= ============= =============
Supplemental Schedule of Noncash Investing
Activities:
Transfer of securities to subsidiary as
Equity investment $ 1,588,336 $ 0 $ 0
============= ============ ============
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