SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
-------------
For the fiscal year ended Commission File Number 0-20146
December 31, 1996
EAGLE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1601306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Post Office Box 391
Berryville, Virginia 22611
(Address or principal executive offices) (Zip Code)
(540) 955-2510
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $2.50
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[X]
PAGE 1 OF 76 PAGES. Exhibit index on page 12.
------ ------ -----
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at April 1, 1997 was $30,847,366.
The number of shares of Registrant's Common Stock outstanding as of April
1, 1997 was 1,402,153.
DOCUMENTS INCORPORATED BY REFERENCE
Listed hereunder are the following documents which are incorporated by
reference and the Part of the Form 10-K into which the document is incorporated:
Document Part
Proxy statement for Registrant's III
1997 Annual Meeting of Stockholders
Registrant's 1996 Annual Report IV
to Stockholders (filed as a part of
the Company's Proxy Statement)
-2-
<PAGE>
EAGLE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-K
Page
------
PART I
Item 1. Business.................................................. 4
Item 2. Properties............................................... 5
Item 3. Legal Proceedings........................................ 5
Item 4. Submission of Matters to a Vote of Security Holders...... 5
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................ 6
Item 6. Selected Financial Data................................... 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
Item 8. Financial Statements and Supplementary Data.............. 8
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 8
PART III
Item 10. Directors and Executive Officers of the Registrant....... 11
Item 11. Executive Compensation.................................. 11
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 11
Item 13. Certain Relationships and Related Transactions.......... 11
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 12
-3-
<PAGE>
PART I
Item 1. Business.
The Registrant was incorporated October 2, 1991 by the Bank of Clarke
County, Berryville, Virginia (the "Bank"), for the purpose of establishing a one
bank holding company upon consummation of a Plan of Share Exchange between the
Registrant and the Bank. The Bank is a Virginia banking corporation chartered on
April 1, 1881. On December 31, 1991, the Share Exchange was consummated
resulting in the Bank becoming a wholly-owned subsidiary of the Registrant. The
Registrant has no other subsidiaries.
The Registrant is regulated by the Board of Governors of the Federal
Reserve System under the Bank Holding Company Act of 1956, which limits the
Registrant's activities to managing or controlling banks and engaging in other
activities closely related to banking. The Bank is a member of the Federal
Deposit Insurance Corporation and is a state member bank of the Federal Reserve
System. The Bank is supervised and regulated by the Federal Reserve Board and
the Virginia Bureau of Financial Institutions.
The Bank offers a wide range of retail commercial banking services,
including demand and time deposits and installment, mortgage and other consumer
lending services. The Bank makes seasonal and term commercial loans, both alone
and in conjunction with other banks or governmental agencies. The Bank also
offers a wide variety of trust services to customers.
The Bank's main office is located in Berryville, Clarke County,
Virginia, and it operates branch offices in Boyce, Jubal Early Drive in
Winchester, Senseny Road in Frederick County and in Stephens City. Clarke and
Frederick Counties and the City of Winchester are the Bank's primary trade area.
Within its primary trade area, the Bank competes with numerous large and small
financial institutions, credit unions, insurance companies and other non-bank
competitors.
The Bank had eighteen officers, fifty-two other full-time and fifteen
part-time employees as of December 31, 1996. None of the Bank's employees are
represented by a union or covered under a collective bargaining agreement.
Employee relations have been good.
One of the primary businesses in Clarke County is agriculture.
Although agricultural loans result in some seasonal changes in the Bank's
lending operations, the Bank also serves commercial and industrial customers
which limits the effect of seasonal credit demands by farmers and others engaged
in the agricultural business.
- -4-
<PAGE>
The loss of any one depositor or the failure by any one borrower to
repay a loan would not have a material adverse effect on the Bank.
Item 2. Properties.
The present headquarters building of the Registrant and the Bank was
substantially enlarged and remodeled in 1983-84 and again in 1993. The building
now consists of a two-story building of brick construction, with approximately
20,000 square feet of floor space located at 2 East Main Street, Berryville,
Virginia. The office operates ten teller windows, including one drive-up
facility, one walk-up facility and a 24 hour automated teller machine. The Bank
also operates a branch office in Boyce, Virginia at 108 West Main Street. Both
such facilities are owned by the Bank. The Bank opened a branch in Winchester in
August, 1992 at 625 East Jubal Early Drive. This branch site is leased.
The Bank also purchased a 1.5 acre lot located adjacent to the Food
Lion north of Berryville on Route 340. The site will house a branch on this site
in the future. In addition, the Bank owns 18 North Church Street in Berryville
for future expansion. This site is currently leased. The Bank has also purchased
a .75 acre lot on Senseny Road and opened a full service branch in June 1995.
The Bank opened a branch in Stephens City on March 15, 1996. This branch was
purchased from First Union National Bank of Virginia under a purchase and
assumption agreement dated October 26, 1995.
Item 3. Legal Proceedings.
There are no material pending legal proceedings against the Registrant
or the Bank and no material proceedings to which any director, officer or
affiliate of the Registrant, any beneficial owner of more than 5% of the Common
Stock of the Registrant, or any associate of such director, officer or affiliate
of the Registrant, is a party adverse to the Registrant or the Bank or has a
material interest adverse to the Registrant or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
-5-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Common Stock of the Registrant is not listed for trading on a
registered exchange or any automated quotation system. Accordingly, there is no
established public trading market for shares of the Registrant's Common Stock.
Trades in shares of the Registrant's Common Stock occur sporadically on a local
basis. Based on information available to the Registrant concerning such trading,
the following table shows the trading ranges of the Common Stock of the
Registramt and dividends for the periods indicated.
<TABLE>
<CAPTION>
Dividends
Per Share
1996 1995 1994 1996 1995 1994
High Low High Low High Low
<S> <C>
1st Quarter $19.00 $18.75 $18.00 $17.50 $16.75 $16.25 $0.00 $0.00 $0.00
2nd Quarter 19.50 19.00 18.00 18.00 16.75 16.75 0.22 0.21 0.19
3rd Quarter 20.00 19.50 18.50 18.00 17.00 16.75 0.00 0.00 0.00
4th Quarter 20.50 20.00 18.75 18.50 17.50 17.00 0.38 0.34 0.33
</TABLE>
The Registrant declared a 100% stock dividend effected in the form of
a two for one split as of December 31, 1996. The par value remained unchanged.
The share prices above have been changed to reflect the stock split.
The Registrant paid semiannual dividends in 1996, 1995, and 1994. The
dividend policy was changed to begin paying quarterly dividends beginning
February 15, 1997
The Registrant's future dividends will, of course, depend upon its
earnings and financial condition and upon other factors not presently
determinable. After the Share Exchange, it is anticipated that the Registrant
will obtain the funds needed for the payment of its dividends and expenses from
the Bank, chiefly in the form of dividends.
There were 882 holders of record of the Registrant's Common Stock as
of April 1, 1997.
-6-
<PAGE>
Item 6. Selected Financial Data.
The following Selected Financial Data for the five fiscal years ended
December 31, 1996 should be read in conjunction with Item 7, Management's
Discussion & Analysis of Financial Condition and Results of Operations and
the Financial Statements of the Registrant incorporated by reference in
response to Item 8, Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------------ -------------- ----------------- --------------
<S> <C>
INCOME STATEMENT DATA:
Interest Income $9,402,870 $8,726,902 $7,896,082 $7,713,898 $8,066,113
Interest Expense 3,910,612 3,584,788 2,722,451 2,927,042 3,490,897
------------- ------------------ -------------- ----------------- --------------
Net Interest Income 5,492,258 5,142,114 5,173,631 4,786,856 4,575,216
Less: Provision for Loan Losses 290,000 240,000 203,000 163,333 300,000
------------- ------------------ -------------- ----------------- --------------
Net Interest Income after
Provision for Loan Losses 5,202,258 4,902,114 4,970,631 4,623,523 4,275,216
Non-Interest Income 1,024,770 811,968 590,458 586,309 542,939
------------- ------------------ -------------- ----------------- --------------
Net Revenue 6,227,028 5,714,082 5,561,089 5,209,832 4,818,155
Non-Interest Expense 4,378,387 3,976,155 3,626,679 3,325,600 2,893,624
------------- ------------------ -------------- ----------------- --------------
Income before Income Taxes 1,848,641 1,737,927 1,934,410 1,884,232 1,924,531
Applicable Income Taxes 537,304 477,237 573,407 540,439 597,307
------------- ------------------ -------------- ----------------- --------------
Net Income 1,311,337 1,260,690 1,361,003 1,343,793 1,327,224
============= ================== ============== ================= ==============
PERFORMANCE RATIOS:
Return on Average Assets 1.06% 1.12% 1.25% 1.25% 1.31%
Return on Average Equity 9.58% 9.94% 11.90% 12.93% 14.39%
Dividend Payout Ratio 31.86% 30.18% 26.17% 25.24% 22.34%
PER SHARE DATA (1) :
Net Income $0.94 $0.91 $0.99 $0.98 $0.98
Cash Dividends Declared 0.30 0.28 0.26 0.25 0.22
Book Value 10.14 9.44 8.67 7.94 7.18
Market Price * 20.50 18.75 17.50 16.25 14.50
Average Shares Outstanding 1,392,298 1,383,152 1,369,330 1,361,496 1,347,646
BALANCE SHEET DATA:
Assets $126,241,741 $121,492,853 $114,607,016 $110,804,265 $111,525,581
Loans (Net of Unearned Income) 87,870,194 85,871,203 80,634,132 73,643,768 70,734,637
Securities 26,089,574 26,618,148 23,833,408 20,374,505 20,184,687
Deposits 111,087,867 105,612,562 99,007,815 99,475,856 101,123,382
Stockholders' Equity 14,196,856 13,120,419 11,969,374 10,855,243 9,778,087
</TABLE>
(1) Adjusted for a stock split effected in the form of a 100% stock dividend
of Eagle Financial Services, Inc. stock on December 31, 1996.
* The Company issues one class of stock, Common, which is not listed for
trading on a registered exchange or quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ). Trades in the
Company's stock occur sporadically on a local basis. Accordingly, there
is no established public trade market for shares of the Company's stock,
and quotations do not necessarily reflect the price that would be paid in
an active and liquid market.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Pursuant to General Instruction G(2), information required by this
Item is incorporated by reference from pages 35 to 40 of the Registrant's Annual
Report to Shareholders for the fiscal year ended December 31, 1996. In addition,
under Securities Act Guide 3,II.B., the Schedules entitled Maturity Distribution
and Yields of Securities as of December 31, 1996; Deposits and Rates Paid for
the years ended December 31, 1996, 1995 and 1994; and Maturities of Certificates
of Deposit of $100,000 and More as of December 31, 1995 are displayed on the
following two pages.
Item 8. Financial Statements and Supplementary Data
Pursuant to General Instruction G(2) information required by this Item
is incorporated by reference from pages 12 to 34 of the Company's Annual Report
to Shareholders for the fiscal year ended December 31, 1996.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
-8-
<PAGE>
<TABLE>
<CAPTION>
Maturity Distribution and Yields of Securities
December 31, 1996
Due in one year Due after 1 Due after 5
or less through 5 years through 10 years
---------- -------- --------------- ------- -------------- ---------
Amount Yield Amount Yield Amount Yield
---------- -------- --------------- ------- -------------- ---------
<S> <C>
Securities held to maturity:
U.S. Treasury securities $ 449,775 5.04% $ 249,880 5.15% $ 0 0.00%
Obligations of U.S. government
corporations and agencies 249,960 6.07% 2,227,998 6.04% 2,989,533 6.52%
Mortgage-backed securities 0 0.00% 7,188,320 6.28% 7,130,040 6.93%
Other taxable securities 100,000 5.60% 0 0.00% 0 0.00%
---------- ------------- ------------
Total taxable 799,735 9,666,198 10,119,573
Tax-exempt securities (1) 100,000 7.96% 2,075,000 7.02% 570,521 7.52%
---------- ------------- ------------
Total $ 899,735 $ 11,741,198 $ 10,690,094
---------- ------------- ------------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $ 0 0.00% $ 742,372 5.28% $ 250,000 7.22%
Other taxable securities 0 0.00% 0 0.00% 0 0.00%
---------- ------------- ------------
Total $ 0 $ 742,372 $ 250,000
========== ============= ============
Total securities: $ 899,735 $ 12,483,570 $ 10,940,094
========== ============= ============
</TABLE>
<TABLE>
<CAPTION>
Maturity Distribution and Yields of Securities
December 31, 1996
(continued)
Due after 10 years
and Equity Securities Total
-------------- -------- -------------- -----------
Amount Yield Amount Yield
-------------- -------- -------------- -----------
<S> <C>
Securities held to maturity:
U.S. Treasury securities $ 121,976 7.63% $ 821,631 5.45%
Obligations of U.S. government
corporations and agencies 0 0.00% 5,467,491 6.31%
Mortgage-backed securities 642,099 7.00% 14,960,459 6.62%
Other taxable securities 0 0.00% 100,000 5.60%
------------- --------------
Total taxable 764,075 21,349,581
Tax-exempt securities (1) 250,000 6.63% 2,995,521 7.12%
------------- --------------
Total $ 1,014,075 $ 24,345,102
------------- --------------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $ 0 0.00% $ 992,372 5.77%
Other taxable securities 752,100 6.61% 752,100 6.61%
------------- --------------
Total $ 752,100 $ 1,744,472
============= ==============
Total securities: $ 1,766,175 $ 26,089,574
============= ==============
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a federal tax rate of 34%.
9
<PAGE>
Deposits and Rates Paid
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1996 1995 1994
--------------------- ---------------------- ---------------------
Amount Rate Amount Rate Amount Rate
--------- --------- ---------- -------- --------- ---------
(Dollars in thousands)
<S> <C>
Noninterest-bearing $15,175 $11,972 $13,078
--------- ---------- ---------
Interest-bearing:
NOW accounts 16,773 2.10% 14,089 2.49% 11,812 2.53%
Money market accounts 17,172 3.08% 16,932 3.20% 16,985 2.81%
Regular savings accounts 13,421 2.52% 12,325 2.76% 12,716 2.75%
Certificates of deposit:
Less than $100,000 37,204 5.38% 39,116 5.11% 35,307 3.86%
$100,000 and more 11,343 5.40% 11,179 5.57% 9,110 4.04%
--------- ---------- ---------
Total interest-bearing $95,913 4.03% $93,641 4.06% $85,930 3.22%
--------- ---------- ---------
Total deposits $111,088 $105,613 $99,008
========= ========== =========
</TABLE>
Maturities of Certificates of Deposit of $100,000 and More
<TABLE>
<CAPTION>
Within Three to Six to One to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
--------- -------- --------- --------- -------- ---------
(Dollars in thousands)
<S> <C>
At December 31, 1995 $ 5,170 $ 1,038 $ 2,932 $ 2,203 ---- $ 11,343
========= ======== ========= ========= ======== =========
</TABLE>
10
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
Item 13. Certain Relationships and Related Transactions.
Pursuant to General Instruction G(3), the information called for by
Part III, Items 10. through 13., is incorporated herein by reference from the
Company's definitive proxy statement, dated April 1, 1997, for the Company's
Annual Meeting of Shareholders to be held April 16, 1997.
-11-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) The following documents are filed or incorporated by
reference as part of this report:
(1) Financial Statements.
Independent Auditor's Report
Consolidated Balance Sheets -
At December 31, 1996 and 1995 ....................... 12
Consolidated Statements of Income -
Years ended December 31, 1996, 1995,1994 ............ 13
Consolidated Statements of Changes in
Stockholders' Equity -
Years ended December 31, 1996, 1995, 1994 ........... 14
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995, 1994 ........... 15
Notes to Financial Statements ....................... 17
(2) Schedules.
Selected Financial Data ............................. 11
Average Balances, Income/Expenses
and Average Rates ................................... 35
Allocation of Allowance for Loan Losses ............. 37
Maturities of CDs of $100,000 and More ....Seq Pg.... 10
Deposits and Rates Paid ......Seq Pg................ 10
Risk-Based Capital Ratios ........................... 40
Financial Highlights ................................ 10
Analysis of Reserve for Loan Losses ................. 36
Past Due Loans and Non-Performing Assets ............. 39
Interest Rate Sensitivity Schedule ................... 40
Loan Portfolio ....................................... 38
Rate/Volume Variance ................................. 36
Security Maturity Analysis ......Seq Pg............... 9
All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is given in
the consolidated financial statements or notes thereto.
-12-
<PAGE>
(3) Exhibit.
Exhibit No. Description of Exhibit
3.1 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.)
3.2 Bylaws of Registrant (incorporated
herein by reference to Exhibit 3.2 of
Registrant's Form S-4 Registration
Statement, Registration No. 33-43681).
10.1 Description of Executive Supplemental
Income Plan
11 Computation of Per Share Earnings
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
(b) Reports on Form 8-K.
None.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, this 1st day of April,
1997.
Eagle Financial Services, Inc.
By /s/ LEWIS M. EWING
---------------------------------
Lewis M. Ewing, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ LEWIS M. EWING President (principal April 1, 1997
- --------------- executive officer)
Lewis M. Ewing and Director
/s/ JOHN R. MILLESON Treasurer (principal April 1, 1997
- -------------------- financial officer)
John R. Milleson
/s/ JAMES W. MCCARTY, JR. Controller (principal April 1, 1997
- ------------------------- accounting officer)
James W. McCarty, Jr.
/s/ JOHN D. HARDESTY Chairman of the Board April 1, 1997
- ---------------------- and Director
John D. Hardesty
/s/ J. FRED JONES Director April 1, 1997
- ----------------------
J. Fred Jones
/s/ ROBERT W. SMALLEY, JR. Director April 1, 1997
- --------------------------
Robert W. Smalley, Jr.
/s RANDALL G. VINSON Director April 1, 1997
- ----------------------
Randall G. Vinson
Director April 1, 1997
/s/ JOHN F. MILLESON, JR.
- -------------------------
John F. Milleson, Jr.
</TABLE>
<PAGE>
EAGLE FINANCIAL SERVICES, INC.
EXHIBIT INDEX
TO
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description of Exhibit Page No.
<S> <C>
3.1 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). N/A
3.2 Bylaws of Registrant (incorporated
herein by reference to Exhibit 3.2
of Registrant's Form S-4 Registration
Statement, Registration No. 33-43681). N/A
10.1 Description of Executive
Supplemental Income Plan
11 Computation of Per Share Earnings
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
</TABLE>
-15-
Exhibit 10
Description of
Executive Supplemental Income Plan
The Registrant's Executive Supplemental Income Plan is not a written
plan. A description of the plan can be found at page 16 of this Annual Report of
Form 10-K.
-17-
Exhibit 11
Eagle Financial Services, Inc. and Subsidiary
Computations of Weighted Average Shares Outstanding
and Earnings Per Share
1996 1995 1994
Shares Shares Shares
Outstanding Outstanding Outstanding
(As Restated) (As Restated) (As Restated)
----------- -------------- --------------
1,390,570 1,381,348 1,367,676
1,390,570 1,381,348 1,367,676
1,390,570 1,381,348 1,367,676
1,390,570 1,381,348 1,367,676
1,390,570 1,381,348 1,367,676
1,390,570 1,381,348 1,367,676
1,394,026 1,384,954 1,370,984
1,394,026 1,384,954 1,370,984
1,394,026 1,384,954 1,370,984
1,394,026 1,384,954 1,370,984
1,394,026 1,384,954 1,370,984
1,394,026 1,384,954 1,370,984
----------- -------------- --------------
16,707,576 16,597,812 16,431,960
12 12 12
------------- ----------- -------------- --------------
Weighted
Average
Shares
Outstanding 1,392,298 1,383,152 1,369,330
------------- ----------- -------------- --------------
Net Income 1,311,337 1,260,690 1,361,003
------------- ----------- -------------- --------------
Earnings Per
Share .94 .91 .99
------------- ----------- -------------- --------------
INDEPENDENT AUDITOR'S REPORT
To the Stockholders 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, 1996 and 1995, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1996, 1995, and 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Eagle
Financial Services, Inc. and Subsidiary as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for the years ended December
31, 1996, 1995, and 1994, in conformity with generally accepted accounting
principles.
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 17, 1997
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<CAPTION>
Assets 1996 1995
---------------- ---------------
<S> <C>
Cash and due from banks $ 4 409 250 $ 4 106 467
Securities (fair value: 1996, $25,786,814;
1995, $26,659,486) (Note 2) 26 089 574 26 618 148
Federal funds sold 1 553 000 - -
Loans, net of unearned discounts (Notes 3 and 11) 87 870 194 85 871 203
Less allowance for loan losses (Note 4) (913 955) (828 104)
---------------- ---------------
Net loans 86 956 239 85 043 099
Bank premises and equipment, net (Note 5) 4 251 675 3 493 722
Other real estate owned 46 605 46 605
Other assets 2 935 398 2 184 812
---------------- ---------------
Total assets $ 126 241 741 $ 121 492 853
================ ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 6):
Noninterest bearing $ 15 175 041 $ 11 971 823
Interest bearing 95 912 826 93 640 739
---------------- ---------------
Total deposits $ 111 087 867 $ 105 612 562
Federal funds purchased - - 1 867 000
Other liabilities 957 018 892 872
Commitments and contingent liabilities (Notes 10, 15 and 17) - - - -
---------------- ---------------
Total liabilities $ 112 044 885 $ 108 372 434
---------------- ---------------
Stockholders' Equity
Preferred stock, $10 par value; authorized
500,000 shares; no shares outstanding $ - - $ - -
Common stock, $2.50 par value; authorized 1,500,000
shares; issued 1996, 1,399,885 shares; issued
1995, 695,285 shares 3 499 714 1 738 212
Surplus 1 945 891 1 782 186
Retained earnings (Note 13) 8 756 281 9 612 627
Unrealized gain (loss) on securities available for sale, net (5 030) (12 606)
---------------- ---------------
Total stockholders' equity $ 14 196 856 $ 13 120 419
---------------- ---------------
Total liabilities and stockholders' equity $ 126 241 741 $ 121 492 853
================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
<S> <C>
1996 1995 1994
-------------- --------------- ---------------
Interest Income
Interest and fees on loans $ 7 750 646 $ 7 483 952 $ 6 533 391
Interest on federal funds sold 51 219 54 740 94 397
Interest on securities held to maturity:
Taxable interest income 1 308 152 833 620 871 725
Interest income exempt from federal income taxes 158 070 158 409 170 530
Interest and dividends on securities available for sale:
Taxable interest income 90 459 158 215 213 113
Dividends 44 324 37 966 12 926
-------------- --------------- ---------------
Total interest income $ 9 402 870 $ 8 726 902 $ 7 896 082
-------------- --------------- ---------------
Interest Expense
Interest on deposits (Note 6) $ 3 853 810 $ 3 525 861 $ 2 686 044
Interest on federal funds purchased 56 802 56 144 34 868
Interest on Federal Home Loan Bank advances - - 2 783 1 539
-------------- --------------- ---------------
Total interest expense $ 3 910 612 $ 3 584 788 $ 2 722 451
-------------- --------------- ---------------
Net interest income $ 5 492 258 $ 5 142 114 $ 5 173 631
Provision for loan losses (Note 4) 290 000 240 000 203 000
-------------- --------------- ---------------
Net interest income after provision
for loan losses $ 5 202 258 $ 4 902 114 $ 4 970 631
-------------- --------------- ---------------
Other Income
Trust Department income $ 199 587 $ 145 318 $ 134 011
Service charges on deposit accounts 522 436 374 082 301 153
Other service charges and fees 196 232 181 853 86 618
Income (loss) on equity investment 595 (18 689) (36 838)
Other operating income 105 920 129 404 105 514
-------------- --------------- ---------------
$ 1 024 770 $ 811 968 $ 590 458
-------------- --------------- ---------------
See Notes to Consolidated Financial Statements.
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
-------------- --------------- ---------------
Other Expenses
Salaries and wages $ 1 732 542 $ 1 492 105 $ 1 359 821
Pension and other employee benefits
(Notes 8, 9 and 16) 478 669 443 291 502 971
Occupancy expenses 323 962 241 353 236 802
Equipment expenses 472 462 378 102 301 558
FDIC assessment 2 000 111 904 215 359
Stationery and supplies 150 313 154 605 112 668
Postage 126 724 125 253 100 210
Credit card expense 93 637 99 004 93 732
Bank franchise tax 113 484 124 865 61 239
ATM network fees 129 385 89 723 64 126
Other operating expenses 755 209 715 950 578 193
-------------- --------------- ---------------
$ 4 378 387 $ 3 976 155 $ 3 626 679
-------------- --------------- ---------------
Income before income taxes $ 1 848 641 $ 1 737 927 $ 1 934 410
Income Tax Expense (Note 7) 537 304 477 237 573 407
-------------- --------------- ---------------
Net income $ 1 311 337 $ 1 260 690 $ 1 361 003
============== =============== ===============
Earnings Per Share
Per average share outstanding, net income $ .94 $ .91 $ .99
============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
<S> <C>
Unrealized
Gain (Loss)
on Securities
Common Retained Available for
Stock Surplus Earnings Sale, Net Total
------------- ------------ ------------ ----------- ------------
Balance, December 31, 1995 $ 1 738 212 $ 1 782 186 $ 9 612 627 $ (12 606) $ 13 120 419
Balance, December 31, 1993 $ 1 709 600 $ 1 430 919 $ 7 714 724 $ - - $ 10 855 243
Net income - 1994 - - - - 1 361 003 - - 1 361 003
Sale of common stock to ESOP
(2,400 shares) 6 000 68 448 - - - - 74 448
Issuance of common stock
- dividend investment plan
(4,434 shares) (Note 14) 11 085 134 001 - - - - 145 086
Dividends declared ($0.52
per share) - - - - (356 140) - - (356 140)
Principal advances on ESOP
debt guarantee (Note 9) - - - - (19 000) - - (19 000)
Principal curtailments on ESOP
debt guarantee (Note 9) - - - - 31 832 - - 31 832
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes
of $63,414 - - - - - - (123 098) (123 098)
------------- ------------ ------------ ---------- ------------
Balance, December 31, 1994 $ 1 726 685 $ 1 633 368 $ 8 732 419 $ (123 098) $ 11 969 374
Net income - 1995 - - - - 1 260 690 - - 1 260 690
Issuance of common stock
- dividend investment plan
(4,611 shares) (Note 14) 11 527 148 818 - - - - 160 345
Dividends declared ($.55
per share) - - - - (380 482) - - (380 482)
Principal advances on ESOP
debt guarantee (Note 9) - - - - (14 388) - - (14 388)
Principal curtailments on
ESOP debt guarantee (Note 9) - - - - 14 388 - - 14 388
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes
of $56,918 - - - - - - 110 492 110 492
See Notes to Consolidated Financial Statements.
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Continued)
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Retained Available for
Stock Surplus Earnings Sale, Net Total
------------- ------------ ------------ ----------- ------------
Balance, December 31, 1995 $ 1 738 212 $ 1 782 186 $ 9 612 627 $ (12 606) $ 13 120 419
Net income - 1996 - - - - 1 311 337 - - 1 311 337
Issuance of common stock
- dividend investment plan
(4,662 shares) (Note 14) 11 656 163 875 - - - - 175 531
Dividends declared ($.60
per share) - - - - (417 826) - - (417 826)
Issuance of common stock -
stock split effected in the
form of 100% stock
dividend (699,943 shares) 1 749 857 (1 749 857) - - - - - -
Discretionary transfer from
retained earnings - - 1 749 857 (1 749 857) - - - -
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes
of $3,903 - - - - - - 7 576 7 576
Fractional shares purchased (11) (170) - - - - (181)
------------- ------------ --------------- ---------- ------------
Balance, December 31, 1996 $ 3 499 714 $ 1 945 891 $ 8 756 281 $ (5 030) $ 14 196 856
============= ============ =============== ========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
------------- --------------- --------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 1 311 337 $ 1 260 690 $ 1 361 003
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 399 076 287 456 254 110
Amortization of intangible assets 52 496 12 600 12 600
(Income) loss on equity investment (595) 18 689 36 838
Provision for loan losses 290 000 240 000 203 000
(Gain) on sale of other real estate owned - - - - (4 666)
Premium amortization (discount accretion)
on securities, net (2 854) 8 532 25 843
Deferred tax (benefit) (891) (37 710) (17 514)
Changes in assets and liabilities:
(Increase) decrease in other assets (805 499) (86 106) 63 725
Increase in other liabilities 64 146 263 045 169 493
------------- --------------- --------------
Net cash provided by operating activities $ 1 307 216 $ 1 967 196 $ 2 104 432
------------- --------------- --------------
Cash Flows from Investing Activities
Proceeds from maturities and principal payments
of securities held to maturity $ 5 128 436 $ 5 820 188 $ 3 245 898
Proceeds from maturities and principal payments
of securities available for sale 1 748 844 496 000 1 000 000
Purchases of securities held to maturity (6 178 873) (8 704 650) (7 453 956)
Purchases of securities available for sale (155 500) (243 400) (463 200)
Proceeds from maturities of interest-bearing
deposits - - - - 758 131
Purchases of bank premises and equipment (1 157 029) (837 492) (116 904)
Purchase of equity investment - - - - (326 222)
Proceeds from sale of other real estate owned - - - - 108 066
Net increase in loans (2 203 140) (5 456 584) (7 129 897)
------------- --------------- --------------
Net cash (used in) investing activities $ (2 817 262) $ (8 925 938) $ (10 378 084)
------------- --------------- --------------
See Notes to Consolidated Financial Statements.
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
------------- --------------- --------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits,
money market and savings accounts $ 7 222 447 $ 727 513 $ (10 758 918)
Net increase (decrease) in certificates of deposit (1 747 141) 5 877 234 10 290 877
Proceeds from sale of common stock to ESOP - - - - 74 448
Increase (decrease) in federal funds purchased (1 867 000) 1 867 000 - -
Net increase (decrease) in Federal Home Loan
Bank advances - - (3 000 000) 3 000 000
Cash dividends paid (242 295) (220 137) (211 054)
Fractional shares purchased (181) - - - -
------------- --------------- --------------
Net cash provided by
financing activities $ 3 365 830 $ 5 251 610 $ 2 395 353
------------- --------------- --------------
Increase (decrease) in cash and cash
equivalents $ 1 855 783 $ (1 707 132) $ (5 878 299)
Cash and Cash Equivalents
Beginning 4 106 467 5 813 599 11 691 898
------------- --------------- --------------
Ending $ 5 962 250 $ 4 106 467 $ 5 813 599
============= =============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3 960 889 $ 3 412 668 $ 2 621 981
============= =============== ==============
Income taxes $ 592 372 $ 542 248 $ 627 296
============= =============== ==============
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of common stock -
dividend investment plan $ 175 531 $ 160 345 $ 145 086
============= =============== ==============
Unrealized gain (loss) on
securities available for sale $ 11 479 $ 167 410 $ (186 512)
============= =============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
Eagle Financial Services, Inc. and Subsidiary (the Company) grant commercial,
financial, agricultural, residential and consumer loans to customers in Virginia
and the Eastern Panhandle of West Virginia. The loan portfolio is well
diversified and generally is collateralized by assets of the customers. The
loans are expected to be repaid from cash flow or proceeds from the sale of
selected assets of the borrowers.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to accepted practice within the banking
industry.
Principles of Consolidation
The consolidated financial statements of Eagle Financial Services, Inc. and its
wholly-owned subsidiary, Bank of Clarke County (the Bank), include the accounts
of both companies. All material intercompany balances and transactions have been
eliminated in consolidation.
Trust Assets
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Company and are not included in the
accompanying consolidated financial statements.
Securities
The Company adopted FASB No. 115, "Accounting for Certain Investment in Debt and
Equity Securities" effective beginning January 1, 1994. This statement addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
Those investments are classified in three categories and accounted for as
follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt securities the
Company has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest method over their
contractual lives.
<PAGE>
b. Securities Available for Sale
Securities classified as available for sale are those debt and equity
securities that the Company intends to hold for an indefinite period of time,
but not necessarily to maturity. Any decision to sell a security classified
as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses are reported as increases
or decreases in stockholders' equity, net of the related deferred tax effect.
Realized gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized and
unrealized gains and losses on trading account assets are included in
interest income on trading account securities. The Company had no trading
securities at December 31, 1996 and 1995.
Derivative Financial Instruments
In October, 1994, FASB No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" was issued. It requires
various disclosures for derivative financial instruments which are futures,
forward, swap or option contract, or other financial instruments with similar
characteristics. The Company does not have any derivative financial instruments
as defined under this statement.
Other Real Estate Owned
Other real estate owned is carried at the lower of estimated market value or the
carrying amount of the loan. A reserve for other real estate owned is maintained
to recognize estimated selling costs or declines in value. Provisions for
estimated selling costs or declines in value, net gains and losses on the sale
of other real estate owned, and net direct expenses attributable to these
properties are included in other operating expenses. Assets, other than real
estate, acquired in the settlement of loans are recorded as other assets.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
<PAGE>
Loans
Loans are shown on the balance sheets net of unearned discounts and the
allowance for loan losses. Interest is computed by methods which result in level
rates of return on principal. Loans are charged off when in the opinion of
management they are deemed to be uncollectible after taking into consideration
such factors as the current financial condition of the customer and the
underlying collateral and guarantees.
Unearned interest on certain installment loans is amortized to income over the
life of the loans, using the sum-of-digits formula. For all other loans,
interest is computed on the loan balance outstanding.
Loan origination and commitment fees and direct loan origination costs are being
recognized as collected and incurred. The use of this method does not produce
results that are materially different from results which would have been
produced if such costs and fees were deferred and amortized as an adjustment of
the loan yield over the life of the related loan.
On January 1, 1995, the Company adopted FASB No. 114, "Accounting by Creditors
for Impairment of a Loan." This statement has been amended by FASB No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the impairment of loans
that have been separately identified for evaluation is to be measured based on
the present value of expected future cash flows or, alternatively, the
observable market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is, if repayment of
those loans is expected to be provided solely by the underlying collateral) and
for which management has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of the collateral.
Statement 114, as amended, also requires certain disclosures about investments
in impaired loans and the allowance for credit losses and interest income
recognized on loans.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowances relating to impaired
loans are charged or credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is computed principally on the
straight-line and declining-balance methods.
Maintenance and repairs of property and equipment are charged to operations and
major improvements are capitalized. Upon retirement, sale or other disposition
of property and equipment, the cost and accumulated depreciation are eliminated
from the accounts and gain or loss is included in operations.
Intangible Assets
Acquired intangible assets, such as the value of purchased core deposits and
organizational costs, are amortized over the periods benefited, not exceeding
fifteen years.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences, operating loss
carryforwards, and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
<PAGE>
Postretirement Benefits
The Company provides certain health care and life insurance benefits for all
retired employees and one current employee who have met certain eligibility
requirements. All other employees retiring after reaching age 65 and having at
least 15 years service with the Company will be allowed to stay on the Company's
group life and health insurance policies, but will be required to pay premiums.
Effective January 1, 1993, the Company adopted FASB No. 106 to account for its
share of the costs of those benefits. Under that Statement, the Company's share
of the estimated costs that will be paid after retirement is generally being
accrued by charges to expense over the employees' active service periods to the
dates they are fully eligible for benefits, except that the Company's unfunded
cost that existed at January 1, 1993 is being accrued primarily in a
straight-line manner that will result in its full accrual by December 31, 2013.
Prior to 1993, the Company expensed its share of costs as they were paid.
Pension Plan
The Company has a trusteed, noncontributory pension plan covering substantially
all full-time employees. The Company computes the net periodic pension cost of
the plan in accordance with FASB No. 87, "Employers' Accounting for Pensions."
Earnings and Dividends Paid Per Share
Earnings and dividends per share of common stock are based on the weighted
average number of shares outstanding during each year after giving retroactive
effect to the 100% stock dividend declared in 1996.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
<PAGE>
Note 2. Securities
The amortized costs and fair values of securities being held to maturity as of
December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- -------------- -------------- ---------------
1996
-------------------------------------------------------------------
U.S. Treasury securities $ 821 632 $ 6 090 $ (4 361) $ 823 361
Obligations of U.S. government
corporations and agencies 5 467 491 1 964 (72 992) 5 396 463
Mortgage-backed securities 14 960 458 25 267 (254 950) 14 730 775
Obligations of states and
political subdivisions 2 995 521 14 680 (18 468) 2 991 733
Other 100 000 10 - - 100 010
-------------- -------------- -------------- ---------------
$ 24 345 102 $ 48 011 $ (350 771) $ 24 042 342
============== ============== ============== ===============
1995
-------------------------------------------------------------------
U.S. Treasury securities $ 1 373 588 $ 12 340 $ (5 832) $ 1 380 096
Obligations of U.S. government
corporations and agencies 4 249 817 19 166 (21 467) 4 247 516
Mortgage-backed securities 14 196 391 75 086 (67 013) 14 204 464
Obligations of states and
political subdivisions 3 171 195 32 331 (3 125) 3 200 401
Other 299 988 - - (148) 299 840
-------------- -------------- -------------- ---------------
$ 23 290 979 $ 138 923 $ (97 585) $ 23 332 317
============== ============== ============== ===============
</TABLE>
The amortized cost and fair value of securities being held to maturity as of
December 31, 1996, by contractual maturity, are shown below. Maturities may
differ from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the maturity summary.
<TABLE>
<CAPTION>
<S> <C>
Amortized Fair Cost Value
-------------- ---------------
Due in one year or less $ 1 349 736 $ 1 351 802
Due after one year through five years 4 102 879 4 056 341
Due after five years through ten years 3 560 053 3 526 497
Due after ten years 371 976 376 927
Mortgage-backed securities 14 960 458 14 730 775
-------------- ---------------
$ 24 345 102 $ 24 042 342
============== ===============
</TABLE>
<PAGE>
Amortized costs and fair values of securities available for sale as of December
31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- -------------- ------------- --------------
1996
-----------------------------------------------------------------
Obligations of U.S.
government corporations
and agencies $ 999 994 6 $ (7 628) $ 992 372
Other 752 100 - - - - 752 100
-------------- -------------- ------------- --------------
$ 1 752 094 $ 6 $ (7 628) $ 1 744 472
============== ============== ============= ==============
1995
-----------------------------------------------------------------
Obligations of U.S.
government corporations
and agencies $ 2 749 669 $ 4 760 $ (23 860) $ 2 730 569
Other 596 600 - - - - 596 600
-------------- -------------- ------------- --------------
$ 3 346 269 $ 4 760 $ (23 860) $ 3 327 169
============== ============== ============= ==============
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1996, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
<S> <C>
Amortized Fair
Cost Value
-------------- ---------------
Due after one year through five years $ 750 000 $ 742 372
Due after five years through ten years 249 994 250 000
Other 752 100 752 100
-------------- ---------------
$ 1 752 094 $ 1 744 472
============== ===============
</TABLE>
Proceeds from maturities and principal payments of securities being held to
maturity during 1996, 1995 and 1994 were $5,128,436, $5,820,188 and $3,245,898.
There were no sales of securities being held to maturity during 1996, 1995 and
1994.
Proceeds from maturities and principal payments of securities available for sale
during 1996, 1995 and 1994 were $1,748,844, $496,000 and $1,000,000. There were
no sales of securities available for sale during 1996, 1995 and 1994.
Securities having a book value of $6,967,840 and $7,259,464 at December 31, 1996
and 1995, were pledged to secure public deposits and for other purposes required
by law.
<PAGE>
Note 3. Loans, Net
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
1996 1995
---------- -----------
(thousands)
Loans secured by real estate:
Construction and land development $ 1 434 $ - -
Secured by farmland 4 013 4 112
Secured by 1-4 family residential 45 156 41 411
Nonfarm, nonresidential loans 9 518 10 372
Loans to farmers (except secured by real estate) 1 446 1 605
Commercial and industrial loans
(except those secured by real estate) 6 145 6 349
Loans to individuals (except those
secured by real estate) 19 633 22 401
Loans to U.S. state and political subdivision 1 517 1 239
All other loans 215 107
---------- -----------
Total loans $ 89 077 $ 87 596
Less:
Unearned income (1 207) (1 725)
Allowance for loan losses (914) (828)
---------- -----------
Loans, net $ 86 956 $ 85 043
========== ===========
</TABLE>
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
-------------------------------------------------
1996 1995 1994
------------- ------------- ------------
Balance, beginning $ 828 104 $ 807 617 $ 744 150
Provision charged to operating
expense 290 000 240 000 203 000
Recoveries added to the allowance 63 561 54 960 34 114
Loan losses charged to the allowance (267 710) (274 473) (173 647)
------------- ------------- ------------
Balance, ending $ 913 955 $ 828 104 $ 807 617
============= ============= ============
</TABLE>
<PAGE>
There were no impaired loans as of December 31, 1996. Information about impaired
loans as of and for the year ended December 31, 1995 is as follows:
<TABLE>
<S> <C>
Impaired loans for which an allowance
has been provided $ 430 124
Impaired loans for which no allowance
has been provided - -
------------
Total impaired loans $ 430 124
============
Allowance provided for impaired
loans, included in the allowance for
loan losses $ 43 000
Average balance in impaired loans $ 35 844
Interest income recognized $ - -
</TABLE>
There were no loans on which the accrual of interest was discontinued or reduced
in 1996 and 1995, except for the loans included in the impaired loan disclosure
under FASB 114.
Note 5. Premises and Equipment, Net
The major classes of premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
------------------------------
1996 1995
------------ -------------
Land $ 787 918 $ 449 204
Land held for future branch site 150 587 150 587
Buildings and improvements 3 534 056 3 141 077
Furniture and equipment 2 685 566 2 247 085
Construction in progress - - 13 145
------------ -------------
$ 7 158 127 $ 6 001 098
Less accumulated depreciation 2 906 452 2 507 376
------------ -------------
Bank premises and equipment, net $ 4 251 675 $ 3 493 722
============ =============
</TABLE>
Depreciation expense was $399,076, $287,456, and $254,110 for the years ended
December 31, 1996, 1995, and 1994, respectively.
<PAGE>
Note 6. Deposits
Deposits outstanding at December 31, 1996, 1995, and 1994, and the related
interest expense for the years then ended, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
------------------------------------------------------------------
Amount Expense Amount Expense
--------------- -------------- ---------------- --------------
Noninterest bearing $ 15 175 041 $ - - $ 11 971 823 $ - -
--------------- -------------- ---------------- --------------
Interest bearing:
Interest checking $ 16 772 462 $ 320 709 $ 14 088 827 $ 318 369
Money market
accounts 17 171 896 535 299 16 932 323 542 425
Regular savings 13 421 289 342 267 12 325 269 350 633
Certificates of deposit:
Less than $100,000 37 204 152 2 105 623 39 115 817 1 798 908
$100,000 and more 11 343 027 549 912 11 178 503 515 526
--------------- -------------- ---------------- --------------
Total interest
bearing $ 95 912 826 $ 3 853 810 $ 93 640 739 $ 3 525 861
--------------- -------------- ---------------- --------------
Total deposits $ 111 087 867 $ 3 853 810 $ 105 612 562 $ 3 525 861
=============== ============== ================ ==============
1994
--------------------------------
Amount Expense
--------------- --------------
Noninterest bearing $ 13 078 233 $ - -
--------------- --------------
Interest bearing:
Interest checking $ 11 811 684 $ 282 840
Money market
accounts 16 984 792 655 250
Regular savings 12 716 020 380 998
Certificates of deposit:
Less than $100,000 35 307 175 1 113 584
$100,000 and more 9 109 911 253 372
--------------- --------------
Total interest
bearing $ 85 929 582 $ 2 686 044
--------------- --------------
Total deposits $ 99 007 815 $ 2 686 044
=============== ==============
</TABLE>
<PAGE>
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of December 31,
1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
December 31,
1996 1995
------------ -------------
Deferred tax assets:
Allowance for loan losses $ 224 213 $ 196 009
Deferred compensation 86 082 74 216
Accrued postretirement benefits 72 915 55 993
Reserve for other real estate
owned 2 040 2 040
Securities available for sale 2 591 6 494
Other - - 9 407
------------ -------------
$ 387 841 $ 344 159
------------ -------------
Deferred tax liabilities:
Property and equipment $ 294 407 $ 293 047
Prepaid pension costs 53 142 7 808
------------ -------------
$ 347 549 $ 300 855
------------ -------------
$ 40 292 $ 43 304
============ =============
</TABLE>
The provision for income taxes charged to operations for the years ended
December 31, 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
December 31,
1996 1995 1994
----------- ------------ -----------
Current tax expense $ 538 195 $ 514 947 $ 590 921
Deferred tax (benefit) (891) (37 710) (17 514)
----------- ------------ -----------
$ 537 304 $ 477 237 $ 573 407
=========== ============ ===========
</TABLE>
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, 1996, 1995 and 1994, due to the
following:
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
----------- ------------ -----------
Computed "expected" tax expense $ 628 538 $ 590 895 $ 657 699
(Decrease) in income taxes
resulting from:
Tax-exempt interest (84 622) (75 477) (73 881)
Other (6 612) (38 181) (10 411)
----------- ------------ -----------
$ 537 304 $ 477 237 $ 573 407
=========== ============ ===========
</TABLE>
<PAGE>
Low income housing credits totalled $48,000, $46,227 and $51,073 for 1996, 1995
and 1994.
Note 8. Defined Benefit Pension Plan
The amount of expense recognized for the Company's pension plan totaled $69,426,
$66,884 and $26,768 for the years ended December 31, 1996, 1995, and 1994,
respectively. The components of the pension cost charged against expense for
1996, 1995, and 1994, consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
-------------- --------------- -------------
Service cost (benefits earned) $ 57 734 $ 51 682 $ 39 136
Interest cost on projected
benefit obligation 87 942 82 421 64 292
Actual return on plan assets (108 168) (66 948) (69 787)
Gain or loss to the extent
recognized 5 109 - - 5 971
Net amortization and deferral 26 809 (271) (12 844)
$ 69 426 $ 66 884 $ 26 768
============== =============== =============
</TABLE>
The following table sets forth the plan's funded status as of December 31, 1996
and 1995, respectively.
<TABLE>
<CAPTION>
<S> <C>
1996 1995
-------------- ---------------
Actuarial present value of benefit obligations:
Vested benefits $ 1 025 392 $ 896 614
============== ===============
Accumulated benefits $ 1 040 589 $ 896 614
============== ===============
Projected benefits $ (1 126 270) $ (1 126 270)
Plan assets at fair value 1 127 104 977 700
-------------- ---------------
Funded status $ (92 602) $ (148 570)
Unrecognized net loss 156 039 189 256
Prior service costs attributable to
plan amendments 139 963 149 508
Unrecognized (net asset) at date of
initial application (64 227) (77 071)
-------------- ---------------
Prepaid pension cost $ 137 173 $ 113 123
=============== ===============
</TABLE>
<PAGE>
A weighted average discount rate of 8% and a 6% rate of increase in future
compensation levels were used in determining the actuarial present value of the
benefit obligations. The expected long-term rate of return on plan assets was
8%.
Note 9. Employee Benefits
The Company has established an Employee Stock Ownership Plan (ESOP) to provide
additional retirement benefits to substantially all employees. Contributions
under the plan amounted to $70,579 in 1994. There were no contributions in 1996
or 1995. The contributions are made to the Bank of Clarke County Employee
Retirement Trust to be used to purchase the Company's common stock. The plan is
leveraged to the extent that money was borrowed during 1995 and 1994 to purchase
available stock. The debt related to these borrowings was guaranteed by the
Company. At December 31, 1996 and 1995, there was no outstanding debt related to
the ESOP.
The Company sponsors a 401(k) savings plan under which eligible employees may
choose to save up to 15 percent of their salary on a pretax basis, subject to
certain IRS limits. The Company matches 25 percent (up to 6 percent of the
employee's salary) of employee contributions with Company common stock. The
shares for this purpose are provided principally by the Company's employee stock
ownership plan (ESOP), supplemented, as needed, by newly issued shares.
Contributions under the plan amounted to $8,160 and $7,925 in 1996 and 1995,
respectively. The plan was not in effect in 1994.
In addition, an Executive Supplemental Income Plan was developed for certain key
employees. Benefits are to be paid in monthly installments following retirement
or death. The agreement provides that if employment is terminated for reasons
other than death or disability prior to age 65, the amount of benefits could be
reduced or forfeited. The executive supplemental income benefit expense for
1996, 1995, and 1994 based on the present value of the retirement benefits,
amounted to $38,499, $34,899 and $43,216, respectively. The plan is unfunded.
However, life insurance has been acquired on the lives of those employees in
amounts sufficient to discharge the obligations thereunder.
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.
<PAGE>
The Bank entered into a five-year noncancellable lease agreement for a branch
office in Winchester on August 1, 1995. This lease requires payment of certain
operating expenses and contains a renewal option clause for one additional
five-year term. The total minimum rental commitment at December 31, 1996 under
the lease is $156,237, which is due as follows:
<TABLE>
<CAPTION>
<S> <C>
Due in the year ending December 31, 1997 $ 43 601
1998 43 601
1999 43 601
2000 25 434
-------------
$ 156 237
=============
</TABLE>
The total rental expense was $49,035, $43,669 and $41,314 in 1996, 1995 and
1994, respectively.
As a member of the Federal Reserve System, the Bank is required to maintain
certain average reserve balances. These reserve balances include usable vault
cash and amounts on deposit with the Federal Reserve. For the final weekly
reporting period in the years ended December 31, 1996 and 1995, the amount of
daily average required balances were approximately $744,000 and $588,000,
respectively.
See Note 14 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 stockholders (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 $8,080,611 and $877,664 at December 31, 1996
and 1995, respectively. During 1996, total principal additions were $1,035,205
and total principal payments were $1,104,808.
Note 12. Capital Requirements
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
<PAGE>
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1996, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Reserve
categorized the Company as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company
must maintain minimum total risk-based, Tier 1 risk- based, and Tier 1 leverage
ratios as set forth in the table.
The Company's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
<S> <C>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
--------------------- ------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 14 454 17.27% >=$ 6 697 >= 8.00% >=$ 8 371 >= 10.00%
Bank of Clarke County $ 14 116 16.93% >=$ 6 670 >= 8.00% >=$ 8 338 >= 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 13 540 16.17% >=$ 3 348 >= 4.00% >=$ 5 023 >= 6.00%
Bank of Clarke County $ 13 202 15.83% >=$ 3 335 >= 4.00% >=$ 5 003 >= 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 13 540 10.90% >=$ 4 969 >= 4.00% >=$ 6 211 >= 5.00%
Bank of Clarke County $ 13 202 10.66% >=$ 4 955 >= 4.00% >=$ 6 194 >= 5.00%
<PAGE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purpose Action Provisions
--------------------- ------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 13 929 16.40% >=$ 6 794 >= 8.00% >=$ 8 492 >= 10.00%
Bank of Clarke County $ 13 585 16.06% >=$ 6 766 >= 8.00% >=$ 8 457 >= 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 13 101 15.43% >=$ 3 397 >= 4.00% >=$ 5 095 >= 6.00%
Bank of Clarke County $ 12 757 15.08% >=$ 3 383 >= 4.00% >=$ 5 074 >= 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 13 101 11.61% >=$ 4 515 >= 4.00% >=$ 5 644 >= 5.00%
Bank of Clarke County $ 12 757 11.34% >=$ 4 501 >= 4.00% >=$ 5 626 >= 5.00%
</TABLE>
Note 13. Retained Earnings
Transfers of funds from the banking subsidiary to the Parent Company in the form
of loans, advances and cash dividends, are restricted by federal and state
regulatory authorities. At December 31, 1996, the aggregate amount of
unrestricted funds, which could be transferred from the Bank to the Parent
Company without prior regulatory approval, amounted to $3,185,414 or 22.4% of
the consolidated net assets.
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 stockholders. 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 is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
<PAGE>
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit written is represented by the contractual notional
amount of those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
A summary of the contract or notional amount of the Company's exposure to
off-balance sheet risk as of December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
-------------- -----------------
Financialinstruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 10 160 277 $ 8 093 000
Standby letters of credit $ 46 631 $ 148 000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit written are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company holds real estate and bank deposits as collateral supporting those
commitments for which collateral is deemed necessary. At December 31, 1996, none
of the outstanding letters of credit were collateralized.
The Company has cash accounts in other commercial banks. The amount on deposit
at one of these banks at December 31, 1996 exceeded the insurance limits of the
Federal Deposit Insurance Corporation by approximately $1,130,465.
<PAGE>
Note 16. Postretirement Benefit Plan
The Company sponsors a postretirement life and health care plan for all retirees
and two current employees that 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 unsubsidized premiums.
The plan is contributory, with retiree contributions that are adjustable
annually based on various factors, some of which are discretionary. The plan is
unfunded.
Net periodic postretirement benefit cost included the following components for
the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
----------- ------------ ------------
Service cost-benefits attributable
to service during the year $ 11 818 $ 11 452 $ 11 991
Interest on accumulated postretire-
ment benefit obligation 33 567 35 701 30 066
Amortization of transition obligation 20 189 20 189 20 189
Net amortization and deferral (2 896) (2 239) (188)
----------- ------------ ------------
$ 62 678 $ 65 103 $ 62 058
============ =========== ============
</TABLE>
The following table sets forth the plan's obligation recognized in the
accompanying balance sheets at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
----------- -----------
Accumulated postretirement benefit obligation:
Retirees $ 157 743 $ 160 227
Other fully eligible participants 75 452 77 015
Other active participants 213 817 188 551
------------ -----------
$ 447 012 $ 425 793
============ ===========
Plan assets:
Accumulated postretirement
benefit obligation $ (459 108) $ (425 793)
Unrecognized transition obligation 323 029 343 218
Unrecognized net experience (gains) (83 116) (86 012)
------------ -----------
Obligation included on balance sheet $ (219 195) $ (168 587)
============ ===========
</TABLE>
For measurement purposes, a 10 percent annual rate of increase in per capita
health care costs of covered benefits was assumed for 1996, with such annual
rate of increase gradually declining to 5 percent in 2004. If assumed health
care cost trend rates were increased by 1 percentage point in each year, the
accumulated postretirement benefit obligation at December 31, 1996 would be
increased by $ and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost for the year ended December 31, 1996
would be increased by $ .
<PAGE>
The weighted average discount rate used in estimating the accumulated
postretirement benefit obligation was % for 1996 and 1995.
Note 17. Federal Home Loan Bank Advances and Available Lines of Credit
The Company has a $13,000,000 line of credit with the Federal Home Loan Bank of
Atlanta. Advances bear interest at a floating rate based on the daily rate
credit and would mature on January 4, 1997. Advances are secured by the
Company's real estate loan portfolio. There is no limit to the number of renewal
options available to the Company. The unused line of credit totaled $13,000,000
at December 31, 1996 and 1995.
The Company had unused lines of credit totaling $14,100,000 with nonaffiliated
banks at December 31, 1996.
Note 18. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Securities
For securities held for investment purposes, fair values are based on quoted
market prices or dealer quotes.
Loans
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans were estimated using discounted cash flow analyses, using interest
rates currently being offered.
Deposit Liabilities
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 fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
<PAGE>
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, 1996 and 1995, 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:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
----------------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- ---------------- ---------------
(in thousands) (in thousands)
Financial assets:
Cash and short-term
investments $ 5 962 250 $ 5 962 250 $ 4 106 467 $ 4 106 467
Securities 26 089 574 25 786 814 26 618 148 26 659 486
Loans 87 870 194 85 659 000 85 871 203 82 754 896
Less: allowance
for loan losses (913 955) - - (828 104) - -
---------------- ---------------- ---------------- ---------------
Total financial
assets $ 119 008 063 $ 117 408 064 $ 115 767 714 $ 113 520 849
================ ================ ================ ===============
Financial liabilities:
Deposits $ 111 087 867 $ 111 186 000 $ 105 612 562 $ 105 589 000
Federal funds
purchased - - - - 1 867 000 1 867 000
---------------- ---------------- ---------------- ---------------
Total financial
liabilities $ 111 087 867 $ 111 186 000 $ 107 479 562 $ 107 456 000
================ ================ ================ ===============
</TABLE>
<PAGE>
Note 19. Condensed Financial Information - Parent Company Only
<TABLE>
<CAPTION>
<S> <C>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
-------------- --------------
Cash $ 5 521 $ 4 073
Income tax credits receivable - - 48 000
Prepaid expenses 453 11 720
Securities 60 000 9 000
Organizational costs, net of accumulated
amortization - - 13 024
Investment in subsidiary, at cost,
plus undistributed net income 13 859 593 12 763 908
Equity investment in Johnson Williams
Limited Partnership 271 289 270 694
-------------- --------------
Total assets $ 14 196 856 $ 13 120 419
============== ==============
Liabilities and Stockholders' Equity
Liabilities $ - - $ - -
-------------- --------------
Stockholders' Equity
Preferred stock $ - - $ - -
Common stock 3 499 714 1 738 212
Surplus 1 945 891 1 782 186
Retained earnings 8 756 281 9 612 627
Unrealized gain (loss) on securities
available for sale, net (5 030) (12 606)
-------------- --------------
Total stockholders' equity $ 14 196 856 $ 13 120 419
-------------- --------------
Total liabilities and stockholders' equity $ 14 196 856 $ 13 120 419
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Income
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------- ------------- -------------
Income
Dividends from subsidiary $ 200 000 $ 200 000 $ 326 222
------------- ------------- -------------
Interest on securities 1 414 2 561 2 607
------------- ------------- -------------
Total income $ 201 414 $ 202 561 $ 328 829
------------- ------------- -------------
Expenses
Amortization of organizational costs $ 13 023 $ 12 600 $ 12 600
Legal expense 565 1 376 8 487
Other operating expenses 22 989 29 163 27 474
------------- ------------- -------------
Total expenses $ 36 577 $ 43 139 $ 48 561
------------- ------------- -------------
Other Income
Income (loss) on equity investment $ 595 $ (18 689) $ (36 838)
Other - - 25 064 - -
------------- ------------- -------------
Total other income $ 595 $ 6 375 $ (36 838)
------------- ------------- -------------
Income before allocated tax
benefits and undistributed
net income of subsidiary $ 165 432 $ 165 797 $ 243 430
Allocated Income Tax Benefit (57 797) (59 629) (55 531)
------------- ------------- -------------
Income before equity in
undistributed net income
of subsidiary $ 223 229 $ 225 426 $ 298 961
Equity in Undistributed Net Income
of Subsidiary 1 088 108 1 035 264 1 062 042
------------- ------------- -------------
Net income $ 1 311 337 $ 1 260 690 $ 1 361 003
============= ============= =============
Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------- ------------- -------------
Cash Flows from Operating Activities
Net income $ 1 311 337 $ 1 260 690 $ 1 361 003
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of organizational costs 13 023 12 600 12 600
(Income) loss on equity investment (595) 18 689 36 838
Undistributed earnings of subsidiary (1 088 108) (1 035 264) (1 062 042)
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses 11 267 (11 630) 30 720
(Increase) decrease in income tax
credits receivable 48 000 (48 000) - -
------------- ------------- -------------
Net cash provided by
operating activities $ 294 924 $ 197 085 $ 379 119
------------- ------------- -------------
Cash Flows from Investing Activities
Purchase of securities $ (51 000) $ (220 000) $ (35 000)
Purchase of equity investment - - - - (326 222)
Proceeds from maturities of securities - - 246 000 98 352
------------- ------------- -------------
Net cash provided by (used in)
investing activities $ (51 000) $ 26 000 $ (262 870)
------------- ------------- -------------
Cash Flows from Financing Activities
Proceeds from sale of common stock
to ESOP $ - - $ - - $ 74 448
Cash dividends paid (242 295) (220 137) (211 054)
Retirement of common stock (181) - - - -
------------- ------------- -------------
Net cash (used in)
financing activities $ (242 476) $ (220 137) $ (136 606)
------------- ------------- -------------
Increase (decrease) in cash $ 1 448 $ 2 948 $ (20 357)
Cash
Beginning 4 073 1 125 21 482
------------- ------------- -------------
Ending $ 5 521 $ 4 073 $ 1 125
============= ============= =============
Supplemental Schedule of Noncash
Financing Activities
Issuance of common stock
- dividend investment plan $ 175 531 $ 160 345 $ 145 086
============= ============= =============
Unrealized gain (loss) on securities
available for sale $ 11 479 $ 167 410 $ (186 512)
============= ============= =============
</TABLE>
<PAGE>
Performance Summary
In 1996, the Company grew from total assets of $121.5 million to $126.2 million.
This is an increase of $4.7 million or 3.9%. Loan growth was responsible for the
majority of the increase. Net loans grew from $85.0 million in 1995 to $87.0
million in 1996, resulting in an increase of $2.0 million or 2.3%. Total
deposits grew $5.5 million or 5.2% from $105.6 million in 1995 to $111.1 million
in 1996. Stockholders' Equity has risen from $13.1 million in 1995 to $14.2
million in 1996, an 8.2% increase.
The net income of the company for 1996 was $1.31 million, up slightly from last
year of $1.26 million. Over the past five years, the Company has earned $6.60
million, resulting in an increase in stockholders' equity of 66.1% over those
five years. The market value of the Company has risen steadily over the same
period. The market value of the stock has gone from $12.00 per share to $20.50
over the same five year period, an increase of 70.8%
Average Balances, Income/Expenses and Average Rates (In Thousands)
(Fully Taxable Equivalent)
<TABLE>
<CAPTION>
<S> <C>
1996 1995
---------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
ASSETS: Balances Expense Rate Balances Expense Rate
--------- --------- --------- --------- --------- --------
Loans
Taxable $84,772 $7,660 9.04% $81,855 $7,407 9.05%
Tax-exempt (1) 1,410 138 9.79% 1,334 116 8.70%
Non-accrual -- -- -- 36 -- --
--------- --------- --------- ---------
Total Loans $86,182 $7,798 9.05% $83,225 $7,523 9.04%
--------- --------- --------- ---------
Securities
Taxable $23,528 $1,443 6.13% $17,102 $1,030 6.02%
Tax-Exempt (1) 3,289 239 7.27% 3,073 240 7.81%
--------- --------- --------- ---------
Total Securities $26,817 $1,682 6.27% $20,175 $1,270 6.29%
--------- --------- --------- ---------
Federal funds sold $918 $51 5.56% $951 $55 5.78%
--------- ========= --------- =========
Total Earning Assets $113,917 $9,531 8.37%$104,351 $8,848 8.48%
========= =========
Less: Reserve for loan losses (853) (847)
Cash and due from banks 4,197 3,849
Bank premises and equipment, net 4,097 3,295
Other assets 2,858 2,228
========= =========
Total Assets $124,216 $112,876
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT:
Deposits
Demand deposits $12,900 $ -- $11,548 $ --
--------- --------- --------- ---------
NOW accounts $15,262 $321 2.10% $12,761 $318 2.49%
Money market accounts 17,393 535 3.08% 16,932 542 3.20%
Savings accounts 13,594 342 2.52% 12,699 351 2.76%
Time deposits 49,349 2,656 5.38% 44,496 2,315 5.20%
--------- --------- --------- ---------
Total Interest-Bearing Deposits $95,598 $3,854 4.03% $86,888 $3,526 4.06%
Fed funds purchased 974 57 5.85% 908 56 6.17%
Federal Home Loan Bank advances -- -- -- 25 3 12.00%
--------- --------- --------- ---------
Total Interest-Bearing Liabilities $96,572 $3,911 4.05% $87,821 $3,585 4.08%
--------- --------- --------- ---------
Other Liabilities $1,053 $820
--------- ---------
Stockholders' Equity $13,691 $12,686
--------- ---------
Total Liabilities & Shareholders' Equity $124,216 $112,875
========= =========
Net interest spread 4.32% 4.40%
Interest expense as a percent of average
earning assets 3.43% 3.44%
Net interest margin 4.93% 5.04%
<CAPTION>
1994
---------------------------------
Average Income/ Average
ASSETS: Balances Expense Rate
-------- --------- ---------
Loans
Taxable $74,642 $6,470 8.67%
Tax-exempt (1) 1,300 95 7.31%
Non-accrual -- -- --
-------- ---------
Total Loans $75,942 $6,565 8.64%
-------- ---------
Securities
Taxable $18,607 $1,098 5.90%
Tax-Exempt (1) 3,251 258 7.94%
-------- ---------
Total Securities $21,858 $1,356 6.20%
-------- ---------
Federal funds sold $2,743 $94 3.43%
-------- =========
Total Earning Assets $100,543 $8,015 7.97%
=========
Less: Reserve for loan losses (800)
Cash and due from banks 3,936
Bank premises and equipment, net 3,000
Other assets 2,566
========
Total Assets $109,245
========
LIABILITIES AND SHAREHOLDERS' INVESTMENT:
Deposits
Demand deposits $12,682 $ --
-------- ---------
NOW accounts $11,182 $283 2.53%
Money market accounts 23,293 655 2.81%
Savings accounts 13,847 381 2.75%
Time deposits 35,139 1,367 3.89%
-------- ---------
Total Interest-Bearing Deposits $83,461 $2,686 3.22%
Fed funds purchased 739 35 4.74%
Federal Home Loan Bank advances 41 2 4.88%
-------- ---------
Total Interest-Bearing Liabilities $84,241 $2,723 3.23%
-------- ---------
Other Liabilities $882
--------
Stockholders' Equity $11,440
--------
Total Liabilities & Shareholders' Equity $109,245
========
Net interest spread 4.74%
Interest expense as a percent of average
earning assets 2.71%
Net interest margin 5.26%
</TABLE>
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
Net Interest Income and Net Interest Margin
Net interest income, the difference between total interest income and total
interest expense, is the Company's primary source of earnings. Net interest
income increased by $0.35 million or 6.8% from $5.14 million in 1995 to $5.49
million in 1996. The amount of net interest income is derived from the volume of
earning assets, the rates earned on those assets, and the cost of funds. The
difference between rates on earning assets and the cost of funds is measured by
the net interest margin, which decreased from 5.04% in 1995 to 4.93% in 1996.
The earning assets yielded 8.37% on a fully taxable equivalent basis in 1996 as
compared to 8.48% in 1995, a decrease of 0.11%. The average rate on total loans
increased from 9.04% in 1995 to 9.05% in 1996. The total income earned on loans
increased by $0.28 million or 3.7% due to the increase in average balances of
total loans. Income on investment securities increased from $1.27 million in
1995 to $1.68 million in 1996, an increase of $0.41 million or 32.3%. The
average balances increased by $6.6 million or 32.9% on investment securities,
while the average rate was reduced .02% from 6.29% in 1995 to 6.27% in 1996.
Interest expense increased in 1996 as compared to 1995. Average balances on
interest-bearing liabilities increased by $8.8 million or 10.0% from $87.8
million in 1995 to $96.6 million in 1996 and the interest expense increased
$0.33 million. The average rate decreased on interest-bearing deposits .03% from
4.08% in 1995 to 4.05% in 1996. Average time deposits increased by $4.9 million
or 10.9% from $44.5 million in 1995 to $49.3 million in 1996. The average rate
on time deposits increased from 5.20% in 1995 to 5.38% in 1996, an increase of
0.18%. Interest expense as a percent of average earning assets decreased from
3.44% in 1995 to 3.43% in 1996.
RATE/VOLUME VARIANCE
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
1996 Compared to 1995 1995 Compared to 1994
--------------------------------------- --------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
---------- ---------- ----------- ---------- ---------- ----------
INTEREST INCOME:
Loans; taxable $ 253 $ 253 $ 0 $ 937 $ 647 $ 290
Loans; tax-exempt 22 7 15 21 3 18
Securities; taxable 413 394 19 (68) (91) 23
Securities; tax-exempt (1) (60) 59 (18) (14) (4)
Federal funds sold (4) (2) (2) (39) (39) 0
---------- ---------- ----------- ----------- ---------- ----------
Total Interest Income $ 683 $ 592 $ 91 $ 833 $ 506 $ 327
---------- ---------- ----------- ----------- ---------- ----------
INTEREST EXPENSE:
Savings and NOW accounts $ (6) $ (101) $ 95 $ 5 $ 11 $ (6)
Money market accounts (7) 19 (26) (113) (229) 116
Time deposits 341 259 82 948 418 530
Federal funds purchased 1 4 (3) 21 21 0
Federal Home Loan Bank advances (3) (3) 0 1 1 0
---------- ---------- ----------- ----------- ---------- ----------
Total Interest Expense $ 326 $ 178 $ 148 $ 862 $ 222 $ 640
---------- ---------- ----------- ----------- ---------- ----------
Net Interest Income $ 357 $ 414 ($ 57) ($ 29) $ 284 ($ 313)
========== ========== =========== =========== ========== ==========
</TABLE>
Provision and Allowance for Loan Losses
The provision for loan losses is based upon management's estimate of the amount
required to maintain an adequate allowance for loan losses reflective of the
risks in the loan portfolio. The ratio of net charge-offs to average loans was
0.24% in 1996 compared to 0.26% and 0.18% during 1995 and 1994, respectively.
The provision for loan losses increased $50,000 or 20.8% in 1996 and $37,000 or
18.2% in 1995, while the allowance for loan losses as a percentage of loans
increased from 0.96% at the end of 1995 to 1.04% in 1996. Charged-off loans
decreased $7,000 or 2.6% and recoveries increased $9,000 or 16.7% in 1996
compared to 1995. Net charge-offs decreased by $16,000 or 7.3% from 1995 to
1996.
The coverage for the allowance for loan losses over non-performing assets and
loans 90 days past due and still accruing interest has increased from 38.1% in
1995 to 90.1% in 1996. Loans past due greater than 90 days decreased during the
year. At year end 1996, loans past due greater than 90 days was 1.10% of total
loans, net unearned discount. The amount of loans past due greater than 90 days
decreased from $1,694,000 in 1995 to $967,000 in 1996. Of the $967,000, 51.2%
are secured by real estate and management would expect only immaterial losses
from the balance of the past due loans. The allowance for loan losses as of year
end covered net charge-offs 4.48 times in 1996, 3.77 times in 1995, and 5.79
times in 1994.
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.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
Year Ended
December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Allowance for Loan Losses, January 1 $828 $808 $744 $761 $682
---------- ---------- ---------- ---------- ----------
Loans Charged-Off:
Commercial, financial and
agricultural $0 $144 $52 $75 $113
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 0 0 0 48 0
Consumer 267 130 122 151 193
---------- ---------- ---------- ---------- ----------
Total Loans Charged-Off $267 $274 $174 $274 $306
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial and
agricultural $6 $10 $11 $25 $12
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 0 0 0 9 0
Consumer 57 44 24 60 73
---------- ---------- ---------- ---------- ----------
Total Recoveries $63 $54 $35 $94 $85
---------- ---------- ---------- ---------- ----------
Net Charge-Offs $204 $220 $139 $180 $221
---------- ---------- ---------- ---------- ----------
Provision for Loan Losses $290 $240 $203 $163 $300
---------- ---------- ---------- ---------- ----------
Allowance for Loan Losses, December 31 $914 $828 $808 $744 $761
========== ========== ========== ========== ==========
Ratio of Net Charge-Offs
to Average Loans: 0.24% 0.26% 0.18% 0.25% 0.33%
========== ========== ========== ========== ==========
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
---------------------------- ----------------------------- ----------------------------
Allowance Percentage Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total for Loan of Total
Losses Loans Losses Loans Losses Loans
------------ ------------ ------------- ------------- ------------ ------------
Commercial, financial,
and agricultural $365 10.6% $323 10.8% $302 11.5%
Real Estate: mortgage 75 68.4% 55 65.1% 53 66.2%
Consumer 474 21.0% 450 24.1% 453 22.3%
------------ ------------- ------------
$914 $828 $808
============ ============= ============
</TABLE>
Other Income and Expenses
Total other income increased $212,802 or 26.2% from 1995 to 1996 and $221,510 or
37.5% from 1994 to 1995. Total other expenses increased $402,232 or 10.1% from
1995 to 1996 and $349,476 or 9.6% from 1994 to 1995. The efficiency ratio of the
Company, a measure of its performance based upon the relationship between
non-interest expense and operating income, was 62.9% in 1994, 65.9% in 1995 and
65.8% in 1996. With the acquisition of the Stephens City branch, management is
pleased that the efficiency ratio decreased slightly during 1996.
Trust Department income increased $54,269 or 37.3% in 1996 over 1995 and
increased $11,307 or 8.4% in 1995 over 1994. The increase in 1996 can be
attributed to restructuring the trust services fee schedule and overall growth
of the Trust Department. The increase in 1995 can be attributed to growth in the
number of accounts administered by the Trust Department and fees earned on the
administration of estates which vary in number from year to year. Trust
Department income is expected to increase in 1997 due to growth in the number of
accounts and total assets administered by the Trust Department.
Service charges on deposit accounts increased $148,354 or 39.7% in 1996 over
1995 and increased $72,929 or 24.2% in 1995 over 1994. Increases in service
charges on deposit accounts are expected to continue in the future due to growth
in the number of deposit accounts at the Bank and enhancements to the deposit
products currently being offered to our customers. Other service charges and
fees increased $14,379 or 7.9% and $95,235 or 109.9% in 1996 and 1995 ,
respectively. The amount of other service charges and fees for 1997 is expected
to increase due to the imposition of non-customer fees on certain transactions
and the establishment of Eagle Investment Services..
The Company had Income on equity investment of $595 during 1996 and a Loss on
equity investment of $18,689 during 1995. These amounts represent the Company's
share of the operating income or loss on its investment in the Johnson-Williams
Limited Partnership. This partnership is a low- to moderate-income housing
development for the elderly. The improved financial
<PAGE>
performance in 1996 can be attributed to the facility remaining fully leased
during the year. Due to the status of the partnership, the Company receives
substantial income tax credits on the investment. The investment in this project
is viewed as a long term benefit to the Company both financially and for the
good of the community.
Other operating income decreased $23,484 or 18.2% in 1996 and increased $23,890
or 22.6% in 1995. Fluctuations in other operating income can be attributed to
fees received on the usage volume of the Bank's ATM's and credit cards. Other
operating income should increase in 1997 over 1996 due to the installation of
additional ATM's and enhancements of the credit card products.
Salaries and wages increased $240,437 or 16.1% in 1996 and $132,284 or 9.7% in
1995. The increase in 1996 reflects the hiring of additional personnel for the
Stephens City branch and the increase in 1995 reflects the hiring of additional
personnel for the Senseny Road branch. The amount of salaries and wages for 1997
should increase slightly over 1996.
Pension and other employee benefits increased $35,378 or 8.0% in 1996 and
decreased $59,680 or 11.9% in 1995. The 1996 increase can be attributed to the
cost of benefits for personnel hired during 1995 and 1996. The 1995 decrease can
be attributed to a lack of contributions to the Employee Stock Ownership Plan
(E.S.O.P.). The 1997 amount of pension and other employee benefits should
increase slightly over 1996. See Notes 8 and 9 to the Consolidated Financial
Statements as of December 31, 1996 for a discussion of the defined benefit
pension plan and employee benefits.
Occupancy expenses increased $82,609 or 34.2% in 1996 and $4,551 or 1.9% in
1995. Equipment expenses increased $94,360 or 25.0% and $76,544 or 25.4% in 1996
and 1995, respectively. The increases in 1996 can be attributed to the opening
and operation of the Stephens City branch and upgrading the Bank's computer
system. The increase in 1995 can be attributed to the opening and operation of
the Senseny Road branch. The 1997 amounts are expected to increase slightly over
1996 due to the investment in additional computer equipment.
The FDIC assessment decreased $109,904 or 98.2% and $103,455 or 48.0% in 1996
and 1995, respectively. The dramatic decreases in 1996 and 1995 are due to the
insurance fund covering banks once again having sufficient reserves. The amount
of FDIC assessment will increase slightly during 1997 due to growth in deposits.
Stationary and supplies decreased $4,292 or 2.8% in 1996 and increased $41,937
or 37.2% in 1995. The slight decrease in 1996 is a result of an effort to cut
supply costs despite additional purchases necessary to open and operate the
Stephens City branch. The significant increase during 1995 can be attributed to
opening and operating the Senseny Road branch. Stationary and supplies expense
is not expected to change significantly in 1997.
Postage expense increased $1,471 or 1.2% and $25,043 or 25.0% during 1996 and
1995, respectively. These increases can be attributed to an ever increasing
volume of accounts and transactions for which we distribute periodic
correspondence, however, the amount of increase for 1996 was greatly reduced by
no longer mailing correspondence which is not required by federal regulations.
The amount of postage expense is not expected to increase significantly during
1997.
<PAGE>
Credit card expense decreased $5,367 or 5.4% during 1996 and increased $5,272 or
5.6% during 1995. Fluctuations in credit card expense are attributable to
changes in the number of accounts and volume of transactions for which we are
billed by our credit card server. The amount of credit card expense is expected
to increase slightly during 1997.
Bank franchise tax decreased $11,381 or 9.1% during 1996 and increased $63,626
or 103.9% during 1995. The significant increase in 1995 is due to an amendment
of the returns for the previous three years which resulted in an underpayment of
$36,191. Without the amendment payment during 1995, the amount of 1996 franchise
tax increased $24,810 or 28.0%. This increase was expected due to growth of the
Bank's capital. The 1997 amount of bank franchise tax is expected to be slightly
greater than the 1996 amount.
ATM network fees increased $39,662 or 44.2% during 1996 and $25,597 or 39.9%
during 1995. These increases in ATM network fees can be attributed to an
increased number of ATM transactions being completed at the Bank's growing
number of ATM's. This amount is expected to increase during 1997 due to the
installation of additional ATM's.
Other operating expenses increased $39,259 or 5.5% in 1996 and $137,757 or 23.8%
in 1995. The increase in 1996 can be attributed to the amortization of
intangible assets acquired during the acquisition of the Stephens City branch.
The increase in 1995 can be attributed to the use of an outside trust processor
and service fees paid on Eagle Checking accounts. The amount of other operating
expenses should not increase significantly during 1997.
Income Tax Expense
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes" on a
prospective basis on January 1, 1993. The notes to the financial statements
discuss this method of accounting. The cumulative effect from the change in
accounting principle was deemed to be immaterial in determining net income for
1994. Income tax expense was $537,304, $477,237 and $573,407 for 1996, 1995 and
1994, respectively. The average effective rate for the three year period is
28.76% and that trend is expected to continue.
Balance Sheet
The Company uses its funds primarily to support lending activities from which it
derives the greatest
<PAGE>
amount of income. The objective is to invest 70% to 85% of total deposits in
loans. With total loans increasing 2.3% and total deposits increasing by 5.2%,
the ratio of loans to deposits remained steady. The ratio was 79.1% in 1996 and
81.3% in 1995. The majority of the remaining funds are invested in securities.
In order to accommodate daily fluctuations in deposit and loan demand, any
additional funds are sold overnight as federal funds. The Company's focus is
upon safety and soundness, liquidity and meeting the banking needs within our
community as we manage our balance sheet.
Loan Portfolio
Loans, net of unearned income increased $2.0 million or 2.3% in 1996 and $5.2
million or 6.5% in 1995. Net loans are expected to increase slightly during
1997. The loan portfolio consists primarily of loans for owner-occupied single
family dwellings, loans to acquire consumer products such as automobiles, and
loans to small farms and businesses.
Loans secured by real estate were $60.1 million or 67.5% of total loans in 1996
and $55.9 million or 63.8% of total loans in 1995, which represents an increase
of $4.2 million or 7.5% during the year. These loans are well-secured and based
on conservative appraisals in a stable market. The Company generally does not
make real estate loans outside its primary market area which consists of Clarke
and Frederick Counties and the City of Winchester, all of which are located in
the Northern Shenandoah Valley in the state of Virginia.
Loans to individuals are the second largest element of the loan portfolio. Total
loans to individuals were $19.6 million or 22.0% of total loans in 1996 and
$22.5 million or 25.7% of total loans in 1995, which represents a decrease of
$2.9 million or 12.8% during the year. These loans are expected to increase
steadily throughout 1997.
Commercial and agricultural loans were $7.6 million or 8.5% of total loans in
1996 and $8.0 million or 9.1% of total loans in 1995, which represents a
decrease of $0.4 million or 5.0% during 1996. The amount of commercial and
agricultural loans is not expected to change significantly during 1997.
LOAN PORTFOLIO
(In Thousands)
The following table sets forth the amounts of specified categories of loans at
the date indicated.
<TABLE>
<CAPTION>
<S> <C>
December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -------------
Loans secured by real estate:
Construction and land development $1,434 $0 $0 $0 $0
Secured by farmland 4,013 4,112 3,888 3,410 3,157
Secured by 1-4 family residential 45,156 41,411 35,803 33,363 30,210
Nonfarm, nonresidential loans 9,518 10,372 13,698 13,297 12,994
Loans to farmers (except secured
by real estate) 1,446 1,605 1,777 1,462 1,596
Commercial and industrial loans
(except those secured by real estate) 6,145 6,349 6,247 5,563 5,078
Loans to individuals (except those
secured by real estate) 19,633 22,508 19,547 16,186 17,302
All other loans 1,732 1,239 1,239 1,382 1,327
------------ ------------ ------------ ------------ -------------
Total loans 89,077 87,596 82,199 74,663 71,664
Less: Unearned discount (1,207) (1,725) (1,565) (1,019) (929)
------------ ------------ ------------ ------------ -------------
Total Loans, Net $87,870 $85,871 $80,634 $73,644 $70,735
============ ============ ============ ============ =============
The following table sets forth maturities of loans at December 31, 1996.
After
1 Year
WIthin Within After
1 Year 5 Years 5 Years Total
------------ ------------ ------------ -------------
Loans secured by real estate $17,994 $39,634 $2,493 $60,121
Agricultural production loans 732 714 ----- 1,446
Commercial and industrial loans 3,436 2,645 64 6,145
Consumer loans 3,254 14,319 853 18,426
All other loans 1,362 370 ----- 1,732
============ ============ ============ =============
$26,778 $57,682 $3,410 $87,870
============ ============ ============ =============
For maturities over one year:
Interest rates - floating $1,732 $2,270 $4,002
Interest rates - fixed 55,950 1,140 57,090
============ ============ =============
$57,682 $3,410 $61,092
============ ============ =============
</TABLE>
Risk Elements and Non-Performing Assets
The Company continues to minimize its risk and enhance its profitability by
focusing on providing community based financing and maintaining policies and
procedures ensuring safe and sound banking practices.
Non-performing assets consist of nonaccrual loans, restructured loans, and other
real estate owned (foreclosed properties). The total nonperforming assets and
loans that are 90+ days past due and accruing interest was $1.74 million on
December 31, 1995, and $1.01 million on December 31, 1996, a decrease of $0.73
million or 42.0%.
<PAGE>
On January 1, 1996, the Company adopted FASB No. 114, "Accounting by Creditors
for Impairment of a Loan." This statement has been amended by FASB No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the impairment of loans
that have been separately identified for evaluation is to be measured based on
the present value of expected future cash flows or, alternatively, the
observable market price of the loans or the fair value of the collateral. As of
December 31, 1995, the Company had impaired loans for which an allowance was
provided amounting to $430,124. There was no interest income recognized on those
loans in 1995. There were no impaired loans as of December 31, 1996.
The loans past due 90+ days and still accruing interest are primarily
well-secured and in the process of collection and therefore, are not classified
as nonaccrual. Any loan over 90 days past due without being in the process of
collection or where the collection of its principal or interest is doubtful
would be placed on nonaccrual status. Any accrued interest would then be
reversed and future accruals would be discontinued with interest income being
recognized on a cash basis.
The ratio of non-performing assets and other real estate owned to loans is
expected to remain at its low level relative to the Company's peers and
management expects this ratio to decrease in 1997. This expectation is based on
the potential problem loans on December 31, 1996. The amount of classified loans
has increased by $1.34 million from $1.29 million in 1995 to $2.63 million
during 1996. These loans are primarily well-secured and in the process of
collection and the allowance for loan losses includes $252,539 in specific
allocations for these loans as well as percentage allocations for classified
assets without specific allocations.
NON-PERFORMING ASSETS
(In Thousands)
<TABLE>
<CAPTION>
<S> <C>
December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ------------
Nonaccrual loans $ 0 $ 430 $ 0 $ 30 $ 590
Restructured loans 0 0 0 0 0
Other real estate owned 47 47 47 150 0
------------- ------------ ------------ ------------ ------------
Total Non-Performing Assets $ 47 $ 477 $ 47 $ 180 $ 590
============= ============ ============ ============ ============
Loans past due 90 days
accruing interest $967 $1,694 $683 $219 $277
============= ============ ============ ============ ============
Allowance for loan losses to
period end loans 1.04% 0.96% 1.00% 1.01% 1.07%
Non-performing assets to
period end loans and other
real estate owned 0.05% 0.52% 0.06% 0.24% 0.83%
</TABLE>
Securities
The book value of the securities portfolio as of December 31, 1996 was $26.1
million, compared to $26.6 million as of December 31, 1995. Securities decreased
$0.5 million or 1.9% in 1996 from 1995 and increased $2.8 million or 11.8% in
1995 over 1994. The decrease from 1995 to 1996 is primarily due to a $0.5
million or 7.4% decrease of investment in obligations of U.S. government
corporations and agencies and a $0.6 million or 40.2% decrease of investment in
U.S. Treasury securities along with a $0.8 million or 5.4% increase of
investment in mortgage-backed securities. Recent investment security purchases
have been in mortgage-backed securities. These securities provide a slightly
higher yield than other types of securities in the portfolio and they provide
monthly principle curtailments which are used to fund the loan portfolio.
Due to the adoption of FASB No. 115, "Accounting For Certain Investments in Debt
and Equity Securities" as of January 1, 1994, the securities portfolio was
classified into one of two categories: securities held to maturity and
securities available for sale. Securities are classified as held to maturity
when the Company has the intent and ability at the time of purchase to hold the
securities until maturity. Securities held to maturity are disclosed at cost
adjusted for amortization of premiums and accretion of discounts. Securities
with a book value of $24.3 million and a fair value of $24.0 million were
classified as held to maturity as of December 31, 1996. Securities with a book
value of $23.3 million and a fair value of $23.3 million were classified as held
to maturity as of December 31, 1995. This represents a $1.0 million or 4.5%
increase in book value and a $0.7 million or 3.0% increase in fair value in 1996
over 1995.
<PAGE>
Securities are classified as available for sale when the Company intends to hold
them for an indefinite period of time. These securities may be sold due to:
increased loan demand, liquidity needs, changes in market interest rates,
regulatory capital requirements, or other related factors. Available for sale
securities are disclosed at fair value. Unrealized gains or losses are reported
as increases or decreases in stockholders' equity, net of the related deferred
tax effect. Securities with a fair value of $1.7 million and a related
unrealized after tax loss of $5,030 were classified as available for sale as of
December 31, 1996. Securities with a fair value of $3.3 million and a related
unrealized after tax loss of $12,606 were classified as available for sale as of
December 31, 1995. This represents a $1.6 million or 47.6% decrease in fair
value and a $7,576 or 60.1% decrease in unrealized after tax loss in 1996
compared to 1995.
See Note 1 to the Consolidated Financial Statements as of December 31, 1996 for
a discussion of the classifications set forth under FASB No. 115, "Accounting
for Certain Investments in Debt and Equity Securities."
See Note 2 to the Consolidated Financial Statements as of December 31, 1996 for
a composition of the security classifications and an analysis of gross
unrealized gains and losses in the securities portfolio.
Deposits
Total deposits increased $5.5 million or 5.2% from $105.6 million in 1995 to
$111.1 million in 1996. Noninterest bearing demand deposits increased $3.2
million or 26.8% in 1996 after a $1.1 million or 8.4% decrease in 1995 from
1994. Interest checking increased $2.7 million or 19.1% from $14.1 million in
1995 to $16.8 million in 1996. The increases in demand deposits and interest
checking can be attributed to the acquisition and operation of the Stephens City
branch. Money market accounts increased $0.3 million or 1.4% from $16.9 million
in 1995 to $17.2 million in 1996. Certificates of deposit decreased $1.8 million
or 3.5% from $50.3 million in 1995 to $48.5 million in 1996. Total interest
bearing deposits increased $2.3 million or 2.4% from $93.6 million in 1995 to
$95.9 million in 1996. Total deposits are expected to grow during 1997 due to
enhancements of the products currently being offered and increased marketing
efforts.
The Company will continue funding assets with deposit liability accounts and
focus upon core deposit growth as its primary source of liquidity and stability.
Core deposits consist of demand deposits, interest checking accounts, money
market accounts, savings accounts, and time deposits of less than $100,000.
Certificates of deposit of $100,000 or more totalled $11.3 million or 10.2% of
total deposits in 1996 as compared to $11.2 million or 10.6% of total deposits
in 1995. The Company neither purchases brokered deposits nor solicits deposits
from sources outside of its primary market area.
<PAGE>
Stockholders' Equity
The Company continues to be a strongly capitalized financial institution. Total
stockholders' equity on December 31, 1996 was $14.2 million, reflecting a
percentage of total assets of 11.2% compared to $13.1 million and 10.8% at
year-end 1995. Stockholders' equity per share increased $0.70 or 7.4% from $9.44
per share in 1995, as restated for the 2 for 1 stock split on December 31, 1996,
to $10.14 per share in 1996. The return on average stockholders' equity was
9.58% in 1996, down from 9.94% in 1995. During 1996 the Company paid $0.30 per
share in dividends as compared to $0.28 per share in 1995, an increase of 7.1%
The Company has a Dividend Investment Plan that reinvests the dividends of the
shareholder in Company stock. The Dividend Investment Plan had 42.3% and 42.2%
of total outstanding shares at December 31, 1996 and 1995, respectively.
Federal regulatory risk-based capital guidelines were fully phased-in on
December 31, 1992. These guidelines require percentages to be applied to various
assets, including off-balance sheet assets, based on their perceived risk. Tier
I capital consists of total stockholders' equity. Tier II capital is comprised
of Tier I capital plus the allowable portion of the allowance for loan losses.
Financial institutions must maintain a Tier I capital ratio of at least 4% and a
Tier II capital ratio of at least 8%. Additionally, a 4% minimum leverage ratio
of stockholders' equity to average assets must be maintained. On December 31,
1996, the Company's Tier I capital ratio was 16.17% compared to 15.43% in 1995,
the Tier II capital ratio was 17.27% compared to 16.40% in 1995 and the leverage
ratio was 10.90% compared to 11.61% in 1995. See Note 12 to the Consolidated
Financial Statements as of December 31, 1996 for additional discussion and
analysis of regulatory capital requirements.
Risk Based Capital Ratios (In Thousands)
<TABLE>
<CAPTION>
<S> <C>
December 31,
-----------------------------------------------
1996 1995
--------------- ----------------
Tier 1 Capital:
Stockholders' Equity $ 13,540 $ 13,101
Tier 2 Capital:
Allowable Allowance for Loan Losses 914 828
Total Capital: $ 14,454 $ 13,929
Risk Adjusted Assets: $ 83,712 $ 84,922
Risk Based Capital Ratios:
Tier 1 to Risk Adjusted Assets 16.17% 15.43%
Total Capital to Risk Adjusted Assets 17.27% 16.40%
</TABLE>
Liquidity and Interest Rate Sensitivity
Asset and liability management assures liquidity and maintains the balance
between rate sensitive assets and liabilities. Liquidity management involves
meeting the present and future financial obligations of the Company with the
sale or maturity of assets or through the occurrence of additional liabilities.
Liquidity needs are met with cash on hand, deposits in banks, federal funds
sold, securities classified as available for sale and loans maturing within one
year. At year end 1996, liquid assets totaled $34.5 million which represents
30.8% of total deposits, federal funds purchased and other liabilities. The
Company minimizes liquidity demand by relying on core deposits which comprise
89.8% of total deposits. With an average remaining life of 4.6 years, the
securities portfolio provides a constant source of funds through paydowns and
maturities. As additional sources of liquidity, the Company maintains short-term
borrowing arrangements, namely federal funds lines, with larger financial
institutions. Finally, the Bank's membership in the Federal Home Loan Bank
provides a source of borrowings with a variety of maturities. The Company's
senior management monitors the liquidity position regularly and formulates a
strategy to maintain an interest sensitive position that maximizes the net
interest margin.
Interest rate sensitivity management involves stabilizing the net interest
margin to assure net income growth through various interest rate cycles and
fluctuations. The interest rate sensitivity analysis reflects the earlier of the
maturity or repricing date for interest sensitive assets and liabilities as of
December 31, 1996. The mismatching of the maturity or repricing dates of
interest sensitive assets and liabilities creates "gaps" which measure interest
rate sensitivity. At year end the Company had a negative cumulative twelve month
gap of $41.4 million or 35.9% of total interest earning assets.
<PAGE>
A negative gap normally impacts earnings favorably when interest rates decline
and adversely when interest rates rise. A weakness of the interest rate
sensitivity analysis is that it only provides a general indication of interest
sensitivity at a specific point in time. The Company's goal is to manage
interest rate exposure in order to hedge against interest rate fluctuations.
Senior management and the directorate monitor the interest rate gap regularly
and implement strategies such as maintaining a strong balance sheet with core
deposit growth and practicing conservative banking policies to accomplish this
goal.
Interest Rate Sensitivity Schedule (In Thousands)
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996
-----------------------------------------------------------
Mature or Reprice Within
-----------------------------------------------------------
Over Three Over
Three Months One Year
Months Through To Over Five
Or Less Twelve Months Five Years Years Total
------- ------------- ---------- ----- -----
INTEREST-EARNING ASSETS:
Loans (net of unearned income) $ 16,771 $ 14,029 $ 55,930 $ 1,140 $ 87,870
Securities and other interest-
earning assets 1,503 3,041 12,343 9,203 26,090
Federal funds sold 1,553 0 0 0 1,553
--------- -------- ---------- --------- ---------
Total interest-earning assets $ 19,827 $ 17,070 $ 68,273 $ 10,343 $ 115,513
--------- -------- ---------- --------- ---------
INTEREST-BEARING LIABILITIES:
Certificates of deposit:
$100,000 and more $ 5,170 $3,970 $ 2,203 $ 0 $ 11,343
less than $100,000 6,425 15,409 15,370 0 37,204
Other deposits 47,191 175 0 0 47,366
--------- -------- ---------- --------- ---------
Total interest-bearing liabilities $ 58,786 $ 19,554 $ 17,573 $ 0 $ 95,913
--------- -------- ---------- --------- ---------
Interest sensitivity gap:
Asset sensitive (Liability sensitive) ($ 38,959) ($ 2,484 $ 50,700 $ 10,343 $ 19,600
========= ======== ========== ========= =========
Cumulative interest rate gap: ($ 38,959) ($ 41,443 $ 9,257 $ 19,600
========= ======== ========== =========
Ratio of cumulative gap to total
interest earning assets: -33.73% -35.88 8.01% 16.97%
========= ======== ========== =========
</TABLE>
Exhibit 22
The only subsidiary of the Registrant is the Bank of Clarke County, a
Virginia banking corporation, located in Berryville, Clarke County, Virginia. It
is owned 100% by the Registrant.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,409
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,553
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,744
<INVESTMENTS-CARRYING> 24,345
<INVESTMENTS-MARKET> 24,042
<LOANS> 87,870
<ALLOWANCE> 914
<TOTAL-ASSETS> 126,242
<DEPOSITS> 111,088
<SHORT-TERM> 0
<LIABILITIES-OTHER> 957
<LONG-TERM> 0
5,446
0
<COMMON> 0
<OTHER-SE> 8,751
<TOTAL-LIABILITIES-AND-EQUITY> 126,242
<INTEREST-LOAN> 7,751
<INTEREST-INVEST> 1,601
<INTEREST-OTHER> 51
<INTEREST-TOTAL> 9,403
<INTEREST-DEPOSIT> 3,854
<INTEREST-EXPENSE> 3,911
<INTEREST-INCOME-NET> 5,492
<LOAN-LOSSES> 290
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,378
<INCOME-PRETAX> 1,849
<INCOME-PRE-EXTRAORDINARY> 1,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,311
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.94
<YIELD-ACTUAL> 4.82
<LOANS-NON> 0
<LOANS-PAST> 967
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 472
<ALLOWANCE-OPEN> 828
<CHARGE-OFFS> 267
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 914
<ALLOWANCE-DOMESTIC> 253
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 661
</TABLE>
