UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
-------------
For the fiscal year ended Commission File Number 0-20146
December 31, 1997
EAGLE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1601306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 391
Berryville, Virginia 22611
(Address or principal executive offices) (Zip Code)
(540) 955-2510
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $2.50
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[ ]
PAGE 1 OF 68 PAGES. Exhibit index on page 39 .
------ ------ ------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 20, 1998 was $31,787,400. The aggregate market value of
the stock was computed using a market rate of $25.00 per share.
The number of shares of Registrant's Common Stock outstanding as of March
20, 1998 was 1,410,432.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1997 Annual Report to Shareholders are
incorporated by reference in Parts I, II, and IV of this Form 10-K.
(2) Portions of the Registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Form 10-K.
1
<PAGE>
EAGLE FINANCIAL SERVICES, INC.
INDEX TO FORM 10-K
Page
------
PART I
Item 1. Business.................................................. 3
Item 2. Properties............................................... 17
Item 3. Legal Proceedings........................................ 17
Item 4. Submission of Matters to a Vote of Security Holders...... 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters............................ 18
Item 6. Selected Financial Data................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 20
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8. Financial Statements and Supplementary Data.............. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 35
PART III
Item 10. Directors and Executive Officers of the Registrant....... 36
Item 11. Executive Compensation.................................. 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 36
Item 13. Certain Relationships and Related Transactions.......... 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................... 37
2
<PAGE>
PART I
Item 1. Business.
General
The Registrant was incorporated October 2, 1991 by the Bank of Clarke
County, Berryville, Virginia (the "Bank"), for the purpose of establishing a one
bank holding company upon consummation of a Plan of Share Exchange between the
Registrant and the Bank. The Bank is a Virginia banking corporation chartered on
April 1, 1881. On December 31, 1991, the Share Exchange was consummated
resulting in the Bank becoming a wholly-owned subsidiary of the Registrant. The
Registrant has no other subsidiaries.
The Registrant is regulated by the Board of Governors of the Federal
Reserve System under the Bank Holding Company Act of 1956, which limits the
Registrant's activities to managing or controlling banks and engaging in other
activities closely related to banking. The Bank is a member of the Federal
Deposit Insurance Corporation and is a state member bank of the Federal Reserve
System. The Bank is supervised and regulated by the Federal Reserve Board and
the Virginia Bureau of Financial Institutions.
The Bank offers a wide range of retail commercial banking services,
including demand and time deposits and installment, mortgage and other consumer
lending services. The Bank makes seasonal and term commercial loans, both alone
and in conjunction with other banks or governmental agencies. The Bank also
offers a wide variety of trust services to customers. During 1997 the Bank
formed Eagle Investment Services, a division of the Bank which sells non-deposit
investment products through a third party provider, UVEST Investment Services.
During 1997 the Bank also formed Eagle Home Funding, a wholly owned subsidiary
of the Bank, which offers secondary market mortgage products.
The Bank's main office is located in Berryville, Clarke County,
Virginia, and it operates branch offices in Boyce, Jubal Early Drive in
Winchester, Senseny Road in Frederick County and in Stephens City. Clarke and
Frederick Counties and the City of Winchester are the Bank's primary trade area.
Within its primary trade area, the Bank competes with numerous large and small
financial institutions, credit unions, insurance companies and other non-bank
competitors. Eagle Home Funding is located at 615 Jubal Early Drive in
Winchester, in the same retail center as the Jubal Early branch.
The Bank had twenty officers, 55 other full-time and 19 part-time
employees as of December 31, 1997. None of the Bank's employees are represented
by a union or covered under a collective bargaining agreement. Employee
relations have been good.
The Bank's loan portfolio is primarily comprised of real estate loans,
particularly those secured by 1-4 family residential properties. The Bank also
offers many other types of loans including consumer loans, commercial real
estate loans, commercial and industrial loans (not secured by real estate),
agricultural production loans, and construction loans. See the respective
sections in Items 6, 7, and 8 for additional discussion and analysis of the
Bank's loan portfolio.
The loss of any one depositor or the failure by any one borrower to
repay a loan would not have a material adverse effect on the Bank.
3
<PAGE>
Statistical Information
The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.
<TABLE>
<CAPTION>
<S><C> INDEX
Table 1 Average Balances, Income/Expenses and Average Rates
Table 2 Rate/Volume Variance
Table 3 Analysis of Allowance for Loans Losses
Table 4 Allocation of Allowance for Loan Losses
Table 5 Loan Portfolio
Table 6 Maturity Schedule of Selected Loans
Table 7 Non-Performing Assets
Table 8 Maturity Distribution and Yields of Securities
Table 9 Deposits and Rates Paid
Table 10 Maturities of Certificates of Deposit of $100,000 and More
Table 11 Risk Based Capital Ratios
Table 12 Interest Rate Sensitivity Schedule
</TABLE>
4
<PAGE>
<TABLE>
Table 1 - Average Balances, Income/Expenses and Average Rates
(In Thousands) (Fully Taxable Equivalent)
<CAPTION>
<S><C> 1997 1996
---------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate
--------- --------- --------- --------- --------- --------
ASSETS:
Loans
Taxable $81,525 $7,184 8.81% $84,772 $7,660 9.04%
Tax-exempt (1) 1,389 107 7.70% 1,410 138 9.79%
Non-accrual 495 0 0% 0 0 0%
--------- --------- --------- ---------
Total Loans $83,409 $7,291 8.74% $86,182 $7,798 9.05%
--------- --------- --------- ---------
Securities
Taxable $28,671 $1,809 6.13% $23,528 $1,443 6.13%
Tax-Exempt (1) 3,106 219 7.05% 3,289 239 7.27%
--------- --------- --------- ---------
Total Securities $31,777 $2,028 6.38% $26,817 $1,682 6.27%
--------- --------- --------- ---------
Federal funds sold $1,793 $101 5.63% $918 $51 5.56%
--------- --------- --------- ----------
Total Earning Assets $116,979 $9,420 8.05% $113,917 $9,531 8.37%
========= =========
Less: Reserve for
loan losses (817) (853)
Cash and due from banks 4,643 4,197
Bank premises and
equipment, net 4,122 4,097
Other assets 3,209 2,858
--------- ---------
Total Assets $128,136 $124,216
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT:
Deposits
Demand deposits $15,846 $ 0 $12,900 $ 0
--------- --------- --------- ---------
NOW accounts $15,062 $309 2.05% $15,262 $321 2.10%
Money market accounts 16,709 520 3.11% 17,393 535 3.08%
Savings accounts 13,956 341 2.44% 13,594 342 2.52%
Time deposits 50,655 2,729 5.39% 49,349 2,656 5.38%
--------- --------- --------- ---------
Total Interest-
Bearing Deposits $96,382 $3,899 4.05% $95,598 $3,854 4.03%
Fed funds purchased 115 5 4.35% 974 57 5.85%
Federal Home Loan
Bank advances 0 0 0% 0 0 0%
--------- --------- --------- ---------
Total Interest-
Bearing Liabilities $96,497 $3,904 4.05% $96,572 $3,911 4.05%
--------- --------- --------- ---------
Other Liabilities $1,143 $1,053
--------- ---------
Stockholders' Equity $14,650 $13,691
--------- ---------
Total Liabilities &
Shareholders' Equity $128,136 $124,216
========= =========
Net interest spread 4.00% 4.32%
Interest expense as a percent
of average earning assets 3.34% 3.43%
Net interest margin 4.72% 4.93%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
</TABLE>
<TABLE>
<CAPTION>
Average Balances, Income/Expenses and Average Rates (continued)
(In Thousands) (Fully Taxable Equivalent)
<S><C> 1995
---------------------------------
Average Income/ Average
Balances Expense Rate
--------- --------- --------
ASSETS:
Loans
Taxable $81,855 $7,407 9.05%
Tax-exempt (1) 1,334 116 8.70%
Non-accrual 36 0 0%
--------- ---------
Total Loans $83,225 $7,523 9.04%
--------- ---------
Securities
Taxable $17,102 $1,030 6.02%
Tax-Exempt (1) 3,073 240 7.81%
--------- ---------
Total Securities $20,175 $1,270 6.29%
--------- ---------
Federal funds sold $951 $55 5.78%
--------- ----------
Total Earning Assets $104,351 $8,848 8.48%
=========
Less: Reserve for
loan losses (847)
Cash and due from banks 3,849
Bank premises and
equipment, net 3,295
Other assets 2,228
---------
Total Assets $112,876
=========
LIABILITIES AND SHAREHOLDERS' INVESTMENT:
Deposits
Demand deposits $11,548 $ 0
--------- ---------
NOW accounts $12,761 $318 2.49%
Money market accounts 16,932 542 3.20%
Savings accounts 12,699 351 2.76%
Time deposits 44,496 2,315 5.20%
--------- ---------
Total Interest-
Bearing Deposits $86,888 $3,526 4.06%
Fed funds purchased 908 56 6.17%
Federal Home Loan
Bank advances 25 3 12.00%
--------- ---------
Total Interest-
Bearing Liabilities $87,821 $3,585 4.08%
--------- ---------
Other Liabilities $820
---------
Stockholders' Equity $12,686
---------
Total Liabilities &
Shareholders' Equity $112,875
=========
Net interest spread 4.40%
Interest expense as a percent
of average earning assets 3.44%
Net interest margin 5.04%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
</TABLE>
5
<PAGE>
Table 2 - Rate/Volume Variance (In Thousands)
<TABLE>
<CAPTION>
<S><C> 1997 Compared to 1996 1996 Compared to 1995
---------------------------------------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
---------- -------- ------- --------- ------- ---------
INTEREST INCOME:
Loans; taxable ($476) ($286) ($190) $253 $253 $0
Loans; tax-exempt (31) (2) (29) 22 7 15
Securities; taxable 366 323 43 413 394 19
Securities; tax-exempt (20) (13) (7) (1) (60) 59
Federal funds sold 50 49 1 (4) (2) (2)
---------- -------- ------- --------- ------- ---------
Total Interest Income ($111) $71 ($182) $683 $592 $91
---------- -------- ------- --------- ------- ---------
INTEREST EXPENSE:
NOW accounts ($12) ($4) ($8) $3 $15 ($12)
Money market accounts (15) (20) 5 (7) 19 (26)
Savings accounts (1) 5 (6) (9) 38 (47)
Time deposits 73 68 5 341 259 82
Federal funds purchased (52) (40) (12) 1 4 (3)
Federal Home Loan
Bank Advances 0 0 0 (3) (3) 0
---------- -------- ------- --------- ------- ---------
Total Interest Expense ($7) $9 ($16) $326 $332 ($6)
---------- -------- ------- --------- ------- ---------
Net Interest Income ($104) $62 ($166) $357 $260 $97
---------- -------- ------- --------- ------- ---------
</TABLE>
6
<PAGE>
Table 3 - Analysis of Allowance for Loans Losses
(In Thousands)
<TABLE>
<CAPTION>
<S><C> Year Ended
December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Allowance for Loan
Losses, January 1 $914 $828 $808 $744 $761
Loans Charged-Off:
Commercial, financial
and agricultural $4 $0 $144 $52 $75
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 42 0 0 0 48
Consumer 640 267 130 122 151
------ ------ ------ ------ ------
Total Loans Charged-Off $686 $267 $274 $174 $274
------ ------ ------ ------ ------
Recoveries:
Commercial, financial
and agricultural $1 $6 $10 $11 $25
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 4 0 0 0 9
Consumer 39 57 44 24 60
------ ------ ------ ------ ------
Total Recoveries $44 $63 $54 $35 $94
------ ------ ------ ------ ------
Net Charge-Offs $642 $204 $220 $139 $180
------ ------ ------ ------ ------
Provision for Loan Losses $477 $290 $240 $203 $163
------ ------ ------ ------ ------
Allowance for Loan
Losses, December 31 $749 $914 $828 $808 $744
====== ====== ====== ====== ======
Ratio of Net Charge-Offs
to Average Loans: 0.77% 0.24% 0.26% 0.18% 0.25%
====== ====== ====== ====== ======
</TABLE>
7
<PAGE>
Table 4 - Allocation of Allowance for Loan Losses
(In Thousands)
<TABLE>
<CAPTION>
<S><C> 1997 1996 1995
--------------------- --------------------- ---------------------
Allowance Percentage Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total for Loan of Total
Losses Loans Losses Loans Losses Loans
--------- ---------- --------- ---------- --------- ----------
Commercial, financial,
and agricultural $323 8.8% $365 10.6% $323 10.8%
Real Estate: mortgage 125 74.0% 75 68.4% 55 65.1%
Consumer 301 17.2% 474 21.0% 450 24.1%
--------- --------- ---------
$749 $914 $828
========= ========= =========
</TABLE>
8
<PAGE>
Table 5 - Loan Portfolio (In Thousands)
<TABLE>
<CAPTION>
<S><C> December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Loans secured by real estate:
Construction and land development $588 $1,434 $0 $0 $0
Secured by farmland 3,700 4,013 4,112 3,888 3,410
Secured by 1-4 family residential 44,863 45,156 41,411 35,803 33,363
Nonfarm, nonresidential loans 11,141 9,518 10,372 13,698 13,297
Loans to farmers (except secured
by real estate) 770 1,446 1,605 1,777 1,462
Commercial and industrial loans
(except those secured by real estate) 5,116 6,145 6,349 6,247 5,563
Loans to individuals (except those
secured by real estate) 14,458 19,633 22,508 19,547 16,186
All other loans 1,251 1,732 1,239 1,239 1,382
------ ------ ------ ------ ------
Total loans 81,887 89,077 87,596 82,199 74,663
Less: Unearned discount (462) (1,207) (1,725) (1,565) (1,019)
------ ------ ------ ------ ------
Total Loans, Net $81,425 $87,870 $85,871 $80,634 $73,644
====== ====== ====== ====== ======
</TABLE>
9
<PAGE>
Table 6 - Maturity Schedule of Selected Loans
(In Thousands)
<TABLE>
<CAPTION>
<S><C> After
1 Year
Within Within After
1 Year 5 Years 5 Years Total
------- ------- ------- -------
Loans secured by real estate $10,127 $45,034 $5,131 $60,292
Agricultural production loans 297 473 0 770
Commercial and industrial loans 2,528 2,588 0 5,116
Consumer loans 2,559 10,557 880 13,996
All other loans 1,154 97 0 1,251
------- ------- ------- -------
$16,665 $58,749 $6,011 $81,425
======= ======= ======= =======
For maturities over one year:
Interest rates - floating $1,835 $1,917 $3,752
Interest rates - fixed 56,914 4,094 61,008
------- ------- -------
$58,749 $6,011 $64,760
======= ======= =======
</TABLE>
10
<PAGE>
Table 7 - Non-Performing Assets (In Thousands)
<TABLE>
<CAPTION>
<S><C> December 31,
--------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Nonaccrual loans $437 $0 $430 $0 $30
Restructured loans 0 0 0 0 0
Other real estate owned 190 47 47 47 150
------ ------ ------ ------ ------
Total Non-Performing Assets $627 $47 $477 $47 $180
====== ====== ====== ====== ======
Loans past due 90 days
accruing interest $614 $967 $1,694 $683 $219
====== ====== ====== ====== ======
Allowance for loan losses to
period end loans 0.92% 1.04% 0.96% 1.00% 1.01%
Non-performing assets to
period end loans and other
real estate owned 0.77% 0.05% 0.52% 0.06% 0.24%
</TABLE>
11
<PAGE>
<TABLE>
Table 8 - Maturity Distribution and Yields of Securities
(In Thousands)
<CAPTION>
<S><C> Due in one year Due after 1 Due after 5
or less through 5 years through 10 years
---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- -----
Securities held to maturity:
U.S. Treasury securities $250 5.34% $0 0.00% $122 7.63%
Obligations of U.S. government
corporations and agencies 500 6.06% 9,148 6.30% 500 6.90%
Mortgage-backed securities 507 7.30% 8,161 6.14% 8,590 7.11%
Obligations of states and
political subdivisions,
taxable 0 0.00% 1,703 6.68% 0 0.00%
------- ------- -------
Total taxable 1,257 19,012 9,212
Obligations of states and
political subdivisions,
tax-exempt (1) 550 7.03% 1,850 7.06% 1,030 6.98%
------- ------- -------
Total $1,807 $20,862 $10,242
------- ------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $749 5.22% $2,767 6.47% $0 0.00%
Other taxable securities 0 0.00% 0 0.00% 0 0.00%
------- ------- -------
Total $749 $2,767 $0
------- ------- -------
Total securities: $2,556 $23,629 $10,242
======= ======= =======
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a federal tax rate of 34%.
</TABLE>
Maturity Distribution and Yields of Securities (continued)
(In Thousands)
<TABLE>
<CAPTION>
<S><C> Due after
10 years and
Equity Securities Total
---------------- ----------------
Amount Yield Amount Yield
------- ----- ------- -----
Securities held to maturity:
U.S. Treasury securities $0 0.00% $372 6.09%
Obligations of U.S. government
corporations and agencies 0 0.00% 10,148 6.32%
Mortgage-backed securities 0 0.00% 17,258 6.66%
Obligations of states and
political subdivisions,
taxable 0 0.00% 1,703 6.68%
------- -------
Total taxable 0 29,481
Obligations of states and
political subdivisions,
tax-exempt (1) 250 4.38% 3,680 7.00%
------- -------
Total $250 $33,161
------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $0 5.22% $3,516 6.20%
Other taxable securities 742 6.69% 742 6.69%
------- -------
Total $742 $4,258
------- -------
Total securities: $992 $37,419
======= =======
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a federal tax rate of 34%.
</TABLE>
12
<PAGE>
Table 9 - Deposits and Rates Paid (In Thousands)
<TABLE>
<CAPTION>
<S><C> December 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Amount Rate Amount Rate Amount Rate
--------- ------ --------- ------ --------- ------
Noninterest-bearing $17,774 $15,175 $11,972
--------- --------- ---------
Interest-bearing:
NOW accounts 15,796 2.05% 16,773 2.10% 14,089 2.49%
Money market accounts 16,232 3.11% 17,172 3.08% 16,932 3.20%
Regular savings accounts 13,572 2.44% 13,421 2.52% 12,325 2.76%
Certificates of deposit:
Less than $100,000 38,743 5.39% 37,204 5.38% 39,116 5.11%
$100,000 and more 14,962 5.49% 11,343 5.40% 11,179 5.57%
--------- --------- ---------
Total interest-bearing $99,305 4.05% $95,913 4.03% $93,641 4.06%
--------- --------- ---------
Total deposits $117,079 $111,088 $105,613
========= ========= =========
</TABLE>
13
<PAGE>
<TABLE>
Table 10 - Maturities of Certificates of Deposit of $100,000 and More
(In Thousands)
<CAPTION>
<S><C> Within Three to Six to One to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
-------- -------- -------- -------- -------- --------
At December 31, 1997 $6,524 $3,925 $2,531 $1,882 $100 $14,962
======== ======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
Table 11 - Risk Based Capital Ratios (In Thousands)
<TABLE>
<CAPTION>
<S><C> December 31,
--------------------------------------
1997 1996
---------- ----------
Tier 1 Capital:
Stockholders' Equity $14,445 $13,540
Tier 2 Capital:
Allowable Allowance for Loan Losses 749 914
---------- ----------
Total Capital: $15,194 $14,454
---------- ----------
Risk Adjusted Assets: $82,443 $83,712
---------- ----------
Risk Based Capital Ratios:
Tier 1 to Risk Adjusted Assets 17.52% 16.17%
Total Capital to Risk Adjusted Assets 18.43% 17.27%
</TABLE>
15
<PAGE>
<TABLE>
Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
<CAPTION>
<S><C> December 31, 1997
------------------------------------------------------
Mature or Reprice Within
------------------------------------------------------
Over Three
Months Over
Three Through One Year Over
Months Twelve To Five Five
Or Less Months Years Years Total
--------- --------- --------- -------- --------
INTEREST-EARNING ASSETS:
Loans (net of unearned income) $13,228 $7,333 $56,727 $4,599 $81,887
Securities and other
interest-earning assets 4,404 4,225 18,343 10,447 37,419
Federal funds sold 2,300 0 0 0 2,300
--------- --------- --------- -------- --------
Total interest-earning assets $19,932 $11,558 $75,070 $15,046 $121,606
--------- --------- --------- -------- --------
INTEREST-BEARING LIABILITIES:
Certificates of deposit:
$100,000 and more $6,524 $6,456 $1,982 $0 $14,962
less than $100,000 13,092 13,144 12,507 0 38,743
Other deposits 45,429 171 0 0 45,600
--------- --------- --------- -------- --------
Total interest-bearing
liabilities $65,045 $19,771 $14,489 $0 $99,305
--------- --------- --------- -------- --------
Interest sensitivity gap:
Asset sensitive
(Liability sensitive) ($45,113) ($8,213) $60,581 $15,046 $22,301
========= ========= ========= ======== ========
Cumulative interest rate gap: ($45,113) ($53,326) $7,255 $22,301
========= ========= ========= ========
Ratio of cumulative gap to total
interest earning assets: -37.10% -43.85% 5.97% 18.34%
========= ========= ========= ========
</TABLE>
16
<PAGE>
Item 2. Properties.
The present headquarters building of the Registrant and the Bank was
substantially enlarged and remodeled in 1983-84 and again in 1993. The building
now consists of a two-story building of brick construction, with approximately
20,000 square feet of floor space located at 2 East Main Street, Berryville,
Virginia. This office has seven teller stations in the lobby, a remote drive-
through facility with a walk-up window, and a 24 hour automated teller machine.
The Bank also owns and operates branch offices at 108 West Main Street, Boyce,
Virginia, 1508 Senseny Road, Winchester, Virginia, and 382 Fairfax Pike,
Stephens City, Viringia. The Bank also presently operates a leased branch at 625
East Jubal Early Drive in Winchester and has leased a site at 40 West Piccadilly
Street in downtown Winchester, Virginia to open a branch location during January
1998.
The Bank also purchased a 1.5 acre lot located adjacent to the Food
Lion north of Berryville on Route 340. The site will house a branch on this site
in the future. The Bank also owns a building at 18 North Church Street in
Berryville for future expansion. This site is currently leased.
Item 3. Legal Proceedings.
There are no material pending legal proceedings against the Registrant
or the Bank and no material proceedings to which any director, officer or
affiliate of the Registrant, any beneficial owner of more than 5% of the Common
Stock of the Registrant, or any associate of such director, officer or affiliate
of the Registrant, is a party adverse to the Registrant or the Bank or has a
material interest adverse to the Registrant or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the fiscal
year covered by this report.
17
<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
Registrant and dividends for the periods indicated.
<TABLE>
<CAPTION>
Dividends
Per Share
1997 1996 1995 1997 1996 1995
High Low High Low High Low
<S> <C>
1st Quarter $22.00 $20.50 $19.00 $18.75 $18.00 $17.50 $0.08 $0.00 $0.00
2nd Quarter 23.00 22.00 19.50 19.00 18.00 18.00 0.08 0.11 0.11
3rd Quarter 24.00 23.00 20.00 19.50 18.50 18.00 0.08 0.00 0.00
4th Quarter 24.00 24.00 20.50 20.00 18.75 18.50 0.08 0.19 0.17
</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 restated to reflect the stock split.
The Registrant paid semiannual dividends in 1996 and 1995. Dividends
per share have been restated to reflect the 100% stock dividend. The dividend
policy was changed to begin paying quarterly dividends beginning February 15,
1997.
The Registrant's future dividends will depend upon its earnings and
financial condition and upon other factors not presently determinable. It is
anticipated that the Registrant will obtain the funds needed for the payment of
its dividends and expenses from the Bank in the form of dividends.
There were 938 holders of record of the Registrant's Common Stock as
of March 20, 1998.
18
<PAGE>
Item 6. Selected Financial Data.
The following Selected Financial Data for the five fiscal years ended
December 31, 1997 should be read in conjunction with Item 7, Management's
Discussion & Analysis of Financial Condition and Results of Operations and
the Financial Statements of the Registrant incorporated by reference in
response to Item 8, Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
<S><C> Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
Income Statement Data: ---------- ---------- ---------- ---------- ----------
Interest Income $9,310,237 $9,402,870 $8,726,902 $7,896,082 $7,713,898
Interest Expense 3,904,197 3,910,612 3,584,788 2,722,451 2,927,042
---------- ---------- ---------- ---------- ----------
Net Interest Income 5,406,040 5,492,258 5,142,114 5,173,631 4,786,856
Less: Provision for
Loan Losses 476,667 290,000 240,000 203,000 163,333
---------- ---------- ---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 4,929,373 5,202,258 4,902,114 4,970,631 4,623,523
Non-Interest Income 1,245,781 1,024,770 811,968 590,458 586,309
---------- ---------- ---------- ---------- ----------
Net Revenue 6,175,154 6,227,028 5,714,082 5,561,089 5,209,832
Non-Interest Expense 4,690,999 4,378,387 3,976,155 3,626,679 3,325,600
---------- ---------- ---------- ---------- ----------
Income before Income Taxes 1,484,155 1,848,641 1,737,927 1,934,410 1,884,232
Applicable Income Taxes 372,143 537,304 477,237 573,407 540,439
---------- ---------- ---------- ---------- ----------
Net Income 1,112,012 1,311,337 1,260,690 1,361,003 1,343,793
========== ========== ========== ========== ==========
Performance Ratios:
Return on Average Assets 0.87% 1.06% 1.12% 1.25% 1.25%
Return on Average Equity 7.59% 9.58% 9.94% 11.90% 12.93%
Dividend Payout Ratio 40.38% 31.86% 30.18% 26.17% 25.24%
Per Share Data (1):
Net Income, basic and diluted $0.79 $0.94 $0.91 $0.99 $0.98
Cash Dividends Declared 0.32 0.30 0.28 0.26 0.25
Book Value 10.69 10.14 9.44 8.67 7.94
Market Price * 24.00 20.50 18.75 17.50 16.25
Average Shares Outstanding 1,404,645 1,392,298 1,383,152 1,369,330 1,361,496
Balance Sheet Data:
Assets $133,239,401 $126,241,741 $121,492,853 $114,607,016 $110,804,265
Loans (Net of
Unearned Income) 81,425,186 87,870,194 85,871,203 80,634,132 73,643,768
Securities 37,418,780 26,089,574 26,618,148 23,833,408 20,374,505
Deposits 117,079,355 111,087,867 105,612,562 99,007,815 99,475,856
Stockholders' Equity 15,058,115 14,196,856 13,120,419 11,969,374 10,855,243
(1) Adjusted for a 100% stock dividend effected in the form of a two for
one split of Eagle Financial Services, Inc. stock on December 31, 1996.
* The Company issues one class of stock, Common, which is not listed for
trading on a registered exchange or quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ). Trades in the
Company's stock occur sporadically on a local basis. Accordingly, there
is no established public trade market for shares of the Company's stock,
and quotations do not necessarily reflect the price that would be paid in
an active and liquid market.
</TABLE>
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
PERFORMANCE SUMMARY
In 1997, the Company grew from total assets of $126.2 million to $133.2
million. This is an increase of $7.0 million or 5.5%. The investment portfolio
was responsible for the majority of the increase. Securities increased from
$26.1 million in 1996 to $37.4 million in 1997. Net loans fell from $87.0
million in 1996 to $80.7 million in 1997, resulting in a decrease of $6.3
million or 7.2%. The investment portfolio increase is due to the tightening of
credit in the loan portfolio. Paydowns resulting from the decreases in the loan
portfolio were invested in securities, primarily U.S. Agencies. Total deposits
grew $6.0 million or 5.4% from $111.1 million in 1996 to $117.1 million in 1997.
Stockholders' Equity has risen from $14.2 million in 1996 to $15.1 million in
1997, a 6.3% increase.
The net income of the company for 1997 was $1.11 million, down from
last year of $1.31 million. The decrease in net income can be attributed to the
increase in the provision for loan loss. The provision for loan loss increased
$187,000 or 64.5% from 1996 to 1997. Over the past five years, the Company has
earned $6.39 million, resulting in an increase in stockholders' equity of 54.0%
over those five years. The market value of the Company has risen steadily over
the same period. The market value of the stock has gone from $14.50 per share to
$24.00 over the same five year period, an increase of 65.5%
20
<PAGE>
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the difference between total interest income and
total interest expense, is the Company's primary source of earnings. Net
interest income decreased by $0.08 million or 1.6% from $5.49 million in 1996 to
$5.41 million in 1997. The amount of net interest income is derived from the
volume of earning assets, the rates earned on those assets, and the cost of
funds. The difference between rates on earning assets and the cost of funds is
measured by the net interest margin, which decreased from 4.93% in 1996 to 4.72%
in 1997.
The earning assets yielded 8.05% on a fully taxable equivalent basis in
1997 as compared to 8.37% in 1996, a decrease of 0.33%. The average rate on
total loans decreased from 9.05% in 1996 to 8.74% in 1997. The total income
earned on loans decreased by $0.51 million or 6.5% primarily due to the decrease
in the average balances of total loans. Income on investment securities
increased from $1.68 million in 1996 to $2.01 million in 1997, an increase of
$0.33 million or 19.7%. The average balances increased by $5.0 million or 18.5%
on investment securities, while the average rate increased by 0.11% from 6.27%
in 1996 to 6.38% in 1997.
Interest expense decreased in 1997 as compared to 1996. Average
balances on interest-bearing liabilities decreased by $0.1 million or 0.08% from
$96.6 million in 1996 to $96.5 million in 1997 while the interest expense
decreased $7,000 or .02%. The average rate on interest-bearing liabilities
remained unchanged at 4.05% for 1996 and 1997. Average time deposits increased
by $1.3 million or 2.6% from $49.3 million in 1996 to $50.7 million in 1997. The
average rate on time deposits changed only slightly from 5.38% in 1996 to 5.39%
in 1997. Interest expense as a percent of average earning assets decreased from
3.43% in 1996 to 3.34% in 1997.
21
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's estimate of
the amount required to maintain an adequate allowance for loan losses reflective
of the risks in the loan portfolio. The ratio of net charge-offs to average
loans was 0.77% in 1997 compared to 0.24% and 0.26% during 1996 and 1995,
respectively. The provision for loan losses increased $187,000 or 64.5% in 1997
and $50,000 or 20.8% in 1996, while the allowance for loan losses as a
percentage of loans decreased from 1.04% at the end of 1996 to .92% in 1997.
Charged-off loans increased $419,000 or 156.9% and recoveries decreased $19,000
or 30.2% in 1997 compared to 1996. Net charge-offs increased by $438,000 or
214.7% from 1996 to 1997. During 1997 the loan department began the process of
tightening credit standards. The result of that effort was an increase in the
amount of net charge-offs. Along with the tightening of credit standards, an
increased focus on collection efforts was made during the year. The Bank hired
an experienced collector to coordinate the efforts of the entire loan
department.
The coverage for the allowance for loan losses over non-performing
assets and loans 90 days past due and still accruing interest has decreased from
90.1% in 1996 to 60.4% in 1997. Loans past due greater than 90 days decreased
during the year. At year end 1997, loans past due greater than 90 days was .75%
of total loans, net unearned discount. The amount of loans past due greater than
90 days decreased from $967,000 in 1996 to $615,000 in 1997. Of the $615,000,
84.6% are secured by real estate and management would expect only immaterial
losses from the balance of the past due loans. The allowance for loan losses as
of year end covered net charge-offs 1.17 times in 1997, 4.48 times in 1996, and
3.77 times in 1995.
The Company reviews the adequacy of the allowance for loan losses
monthly and utilizes the results of these evaluations to establish the provision
for loan losses. The allowance is maintained at a level believed by management
to absorb potential losses in the loan portfolio. The methodology considers
specific identifications, specific and estimate pools, trends in delinquencies,
local and regional economic trends, concentrations, commitments, off balance
sheet exposure and other factors.
22
<PAGE>
OTHER INCOME AND EXPENSES
Total other income increased $221,011 or 21.6% from 1996 to 1997 and
$212,802 or 26.2% from 1995 to 1996. Total other expenses increased $312,612 or
7.1% from 1996 to 1997 and $402,232 or 10.1% from 1995 to 1996. The efficiency
ratio of the Company, a measure of its performance based upon the relationship
between non-interest expense and operating income, was 65.9% in 1995 and 65.8%
in 1996 and 69.5% in 1997.
Trust Department income increased $33,593 or 16.8% in 1997 over 1996
and increased $54,269 or 37.3% in 1996 over 1995. The increases in 1997 and 1996
can be attributed to restructuring the trust services fee schedule and overall
growth of the Trust Department. Trust Department income is expected to increase
in 1998 due to growth in the number of accounts and total assets administered by
the Trust Department.
Service charges on deposit accounts increased $9,841 or 1.9% in 1997
over 1996 and increased $148,354 or 39.7% in 1996 over 1995. Increases in
service charges on deposit accounts are expected to continue in the future due
to growth in the number of deposit accounts at the Bank and enhancements to the
deposit products currently being offered to our customers. Other service charges
and fees increased $93,233 or 47.5% and $14,379 or 7.9% in 1997 and 1996,
respectively. The increase in other service charges and fees during 1997 was due
to non-customer convenience fees received from transactions performed at our
ATM's, increased activity on credit card merchant accounts, and origination fees
received by Eagle Home Funding, the mortgage company subsidiary of the Bank
which was opened during July 1997. The 1998 amount of other service charges and
fees for 1998 is expected to increase over 1997 due to increasing ATM
non-customer convenience fees and a full year of operation by Eagle Home
Funding.
The Company had a loss on equity investment of $4,880 during 1997 and
income on equity investment of $595 during 1996. These amounts represent the
Company's share of the operating income or loss on its investment in the
Johnson-Williams Limited Partnership. This partnership is a low- to
moderate-income housing development for the elderly. The financial performance
in 1996 can be attributed to the facility remaining fully leased during the
year. Due to the status of the partnership, the Company receives substantial
income tax credits on the investment. The investment in this project is viewed
as a long term benefit to the Company both financially and for the good of the
community.
Other operating income increased $89,819 or 84.8% in 1997 and decreased
$23,484 or 18.2% in 1996. The increase during 1997 can be attributed to
commissions received from the sale of non-deposit investment products by Eagle
Investment Services. This amount is expected to increase during 1998 with
continued growth in sales by Eagle Investment Services.
Salaries and wages increased $219,027 or 12.64% in 1997 and $240,437 or
16.1% in 1996. The increase in 1997 reflects the hiring of additional personnel
for the Berryville branch and the increase in 1996 reflects the hiring of
additional personnel for the Stephens City branch. The amount of salaries and
wages for 1998 should increase over 1997 due to the addition of the Old Post
Office branch.
Pension and other employee benefits increased $13,244 or 2.8% in 1997
and increased $35,378 or 8.0% in 1996. The 1997 increase can be attributed to
the cost of benefits for personnel hired during 1996 and 1997. The 1998 amount
of pension and other employee benefits should increase slightly over 1997. See
Notes 8 and 9 to the Consolidated Financial Statements as of December 31, 1997
for a discussion of the defined benefit pension plan and employee benefits.
Occupancy expenses increased $8,954 or 2.8% in 1997 and $82,609 or
34.2% in 1996. Equipment expenses decreased $3,677 or 0.8% and increased $94,360
or 25.0% in 1997 and 1996, respectively. Management is pleased that total
occupancy and equipment expenses increased only $5,277 or 0.7% in 1997 over
1996. The increases in 1996 can be attributed to the opening and operation of
the Stephens City branch and upgrading the Bank=s computer system. The 1998
amounts are expected to increase over 1997 due to the investment in additional
computer equipment and the opening of the Old Post Office branch during January
1998.
The FDIC assessment increased $11,362 or 568% and decreased $109,904 or
98.2% in 1997 and 1996, respectively. The increase in 1997 was expected due to
increased deposits and the decrease in 1996 was due to the insurance fund
covering banks once again having sufficient reserves. The amount of FDIC
assessment should increase slightly during 1998 due to growth in deposits.
Stationary and supplies increased $39,841 or 26.5% in 1997 and
decreased $4,292 or 2.8% in 1996. The increase in 1997 was due to the opening
and operation of Eagle Home Funding and the purchase of supplies necessary to
open the Old Post Office branch in January 1998. The slight decrease in 1996 is
a result of an effort to cut supply costs despite additional purchases necessary
to open and operate the Stephens City branch. Stationary and supplies expense is
expected to increase slightly in 1998.
Postage expense decreased $7,011 or 5.5% and increased $1,471 or 1.2%
during 1997 and 1996, respectively. The amount of postage expense is expected to
increase slightly during 1998. Credit card expense increased $7,519 or 8.0%
during 1997 and decreased $5,367 or 5.4% during 1996. Fluctuations in credit
card expense are attributable to changes in the number of accounts and volume of
transactions for which we are billed by our credit card server. The amount of
credit card expense is expected to increase during 1998.
Bank franchise tax decreased $18,140 or 16.0% during 1997 and decreased
$11,381 or 9.1% during 1996. The increase in 1997 was expected due to growth of
the Bank=s capital. The 1998 amount of bank franchise tax is expected to be
slightly greater than the 1997 amount due to additional growth of the Bank's
capital.
ATM network fees decreased $9,558 or 7.4% during 1997 and increased
$39,662 or 44.2% during 1996. Fluctuations in the amount of ATM network fees can
be attributed to the number and type of transactions being performed at the
Bank's growing number of ATM locations.
Other operating expenses increased $51,051 or 6.8% in 1997 and $39,259
or 5.5% in 1996. The increase in 1997 over 1996 was due to increased spending on
education and training of employees and increased spending on marketing efforts,
particularly television advertising. The increase in 1996 can be attributed to
the amortization of intangible assets acquired during the acquisition of the
Stephens City branch. The amount of other operating expenses should not increase
significantly during 1998.
23
<PAGE>
INCOME TAX EXPENSE
The Company adopted FASB Statement No. 109, "Accounting for Income
Taxes" on a prospective basis on January 1, 1993. The notes to the financial
statements discuss this method of accounting. The cumulative effect from the
change in accounting principle was deemed to be immaterial in determining net
income for 1994. Income tax expense was $372,143, $537,304 and $477,237 for
1997, 1996 and 1995, respectively. The average effective rate for the three-year
period is 27.35% and this is not expected to vary significantly during future
periods.
24
<PAGE>
BALANCE SHEET
The Company uses its funds primarily to support lending activities from
which it derives the greatest amount of income. The objective is to invest 70%
to 85% of total deposits in loans. With total loans decreasing $6.4 million or
7.3% and total deposits increasing by $6.0 million or 5.4%, the ratio of loans
to deposits decreased 9.6% from 79.1% in 1996 to 69.5% in 1997. The majority of
the remaining funds are invested in securities. In order to accommodate daily
fluctuations in deposit and loan demand, any additional funds are sold overnight
as federal funds. The Company's focus is upon safety and soundness, liquidity
and meeting the banking needs within our community as we manage our balance
sheet.
25
<PAGE>
LOAN PORTFOLIO
Loans, net of unearned income decreased $6.4 million or 7.3% in 1997
after an increase of $2.0 million from 1995 to 1996. Net loans are expected to
increase slightly during 1998. The loan portfolio consists primarily of loans
for owner-occupied single family dwellings, loans to acquire consumer products
such as automobiles, and loans to small farms and businesses.
Loans secured by real estate were $60.3 million or 73.6% of total loans
in 1997 and $60.1 million or 67.5% of total loans in 1996, which represents an
increase of $.2 million or .3% during the year. These loans are well-secured and
based on conservative appraisals in a stable market. The Company generally does
not make real estate loans outside its primary market area which consists of
Clarke and Frederick Counties and the City of Winchester, all of which are
located in the Northern Shenandoah Valley in the state of Virginia.
Loans to individuals are the second largest element of the loan
portfolio. Total loans to individuals were $14.5 million or 17.7% of total loans
in 1997 and $19.6 million or 22.0% of total loans in 1996, which represents a
decrease of $5.1 million or 26.0% during the year. These loans are expected to
remain steady throughout 1998.
Commercial and agricultural loans were $5.9 million or 7.2% of total
loans in 1997 and $7.6 million or 8.5% of total loans in 1996, which represents
a decrease of $1.7 million or 22.5% during 1997. The amount of commercial and
agricultural loans is expected to increase significantly during 1998.
26
<PAGE>
RISK ELEMENTS AND NON-PERFORMING ASSETS
The Company continues to minimize its risk and enhance its
profitability by focusing on providing community based financing and maintaining
policies and procedures ensuring safe and sound banking practices.
Non-performing assets consist of nonaccrual loans, restructured loans,
and other real estate owned (foreclosed properties). The total non-performing
assets and loans that are 90+ days past due and accruing interest was $1.24
million on December 31, 1997, and $1.01 million on December 31, 1996, an
increase of $0.23 million or 22.8%.
On January 1, 1996, the Company adopted FASB No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement has been amended by FASB No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the impairment of loans
that have been separately identified for evaluation is to be measured based on
the present value of expected future cash flows or, alternatively, the
observable market price of the loans or the fair value of the collateral. There
were no impaired loans as of December 31, 1997 and 1996.
The loans past due 90+ days and still accruing interest are primarily
well-secured and in the process of collection and therefore, are not classified
as nonaccrual. Any loan over 90 days past due without being in the process of
collection or where the collection of its principal or interest is doubtful
would be placed on nonaccrual status. Any accrued interest would then be
reversed and future accruals would be discontinued with interest income being
recognized on a cash basis.
The ratio of non-performing assets and other real estate owned to loans
is expected to remain at its low level relative to the Company's peers and
management expects this ratio to decrease in 1998. This expectation is based on
the potential problem loans on December 31, 1997. The amount of classified loans
has decreased by $0.26 million from $2.63 million in 1996 to $2.37 million
during 1997. These loans are primarily well-secured and in the process of
collection and the allowance for loan losses includes $267,225 in specific
allocations for these loans as well as percentage allocations for classified
assets without specific allocations.
27
<PAGE>
SECURITIES
The book value of the securities portfolio as of December 31, 1997 was
$37.4 million, compared to $26.1 million as of December 31, 1996. Securities
increased $11.3 million or 43.3% in 1997 over 1996. The increase from 1996 to
1997 is primarily due to a $7.2 million or 111.0% increase of investment in
obligations of U.S. government corporations and agencies, a $2.4 million or
79.7% increase of investment in obligations of states and political
subdivisions, and a $2.3 million or 15.4% increase of investment in
mortgage-backed securities.
Due to the adoption of FASB No. 115, "Accounting For Certain
Investments in Debt and Equity Securities" as of January 1, 1994, the securities
portfolio was classified into one of two categories: securities held to maturity
and securities available for sale. Securities are classified as held to maturity
when the Company has the intent and ability at the time of purchase to hold the
securities until maturity. Securities held to maturity are disclosed at cost
adjusted for amortization of premiums and accretion of discounts. Securities
with a book value of $33.2 million and a fair value of $33.2 million were
classified as held to maturity as of December 31, 1997. Securities with a book
value of $24.3 million and a fair value of $24.0 million were classified as held
to maturity as of December 31, 1996. This represents an $8.8 million or 36.2%
increase in book value and a $9.2 million or 38.1% increase in fair value in
1997 over 1996.
Securities are classified as available for sale when the Company
intends to hold them for an indefinite period of time. These securities may be
sold due to: increased loan demand, liquidity needs, changes in market interest
rates, regulatory capital requirements, or other related factors. Available for
sale securities are disclosed at fair value. Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the related
deferred tax effect. Securities with a fair value of $4.3 million and a related
unrealized after tax gain of $9,810 were classified as available for sale as of
December 31, 1997. Securities with a fair value of $1.7 million and a related
unrealized after tax loss of $5,030 were classified as available for sale as of
December 31, 1996. This represents a $2.5 million or 144.1% increase in fair
value and a $14,840 or 295.0% increase in unrealized after tax gain in 1997
compared to 1996.
28
<PAGE>
DEPOSITS
Total deposits increased $6.0 million or 5.4% from $111.0 million in
1996 to $117.0 million in 1997. Non-interest bearing demand deposits increased
$2.6 million or 17.1% in 1997 after a $3.2 million or 26.8% increase in 1996
from 1995. Interest checking decreased $1.0 million or 5.8% from $16.8 million
in 1996 to $15.8 million in 1997. Money market accounts decreased $1.0 million
or 5.5% from $17.2 million in 1996 to $16.2 million in 1997. Certificates of
deposit increased $5.2 million or 10.6% from $48.5 million in 1996 to $53.7
million in 1997. Total interest bearing deposits increased $3.4 million or 3.5%
from $95.9 million in 1996 to $99.3 million in 1997. Total deposits are expected
to grow during 1998 due to opening the Old Post Office branch in downtown
Winchester, Virginia and increased marketing efforts.
The Company will continue funding assets with deposit liability
accounts and focus upon core deposit growth as its primary source of liquidity
and stability. Core deposits consist of demand deposits, interest checking
accounts, money market accounts, savings accounts, and time deposits of less
than $100,000. Core deposits totaled $102.1 million or 87.2% of total deposits
in 1997 as compared to $99.7 million or 89.8% of total deposits in 1996.
Certificates of deposit of $100,000 or more totaled $15.0 million or 12.8% of
total deposits in 1997 as compared to $11.3 million or 10.2% of total deposits
in 1996. The Company neither purchases brokered deposits nor solicits deposits
from sources outside of its primary market area.
29
<PAGE>
STOCKHOLDERS' EQUITY
The Company continues to be a strongly capitalized financial
institution. Total stockholders' equity on December 31, 1997 was $15.1 million,
reflecting a percentage of total assets of 11.3% compared to $14.2 million and
11.2% at year-end 1996. Stockholders' equity per share increased $0.55 or 5.4%
from $10.14 per share in 1996 to $10.69 per share in 1997. The return on average
stockholders' equity was 7.59% in 1997, down from 9.58% in 1996. During 1997 the
Company paid $0.32 per share in dividends as compared to $0.30 per share in
1996, an increase of 6.7% The Company has a Dividend Investment Plan that
reinvests the dividends of the shareholder in Company stock. The Dividend
Investment Plan had 41.3% and 42.3% of total outstanding shares at December 31,
1997 and 1996, respectively.
Federal regulatory risk-based capital guidelines were fully phased-in
on December 31, 1992. These guidelines require percentages to be applied to
various assets, including off-balance sheet assets, based on their perceived
risk. Tier I capital consists of total stockholders' equity. Tier II capital is
comprised of Tier I capital plus the allowable portion of the allowance for loan
losses. Financial institutions must maintain a Tier I capital ratio of at least
4% and a Tier II capital ratio of at least 8%. Additionally, a 4% minimum
leverage ratio of stockholders' equity to average assets must be maintained. On
December 31, 1997, the Company's Tier I capital ratio was 17.52% compared to
16.17% in 1996, the Tier II capital ratio was 18.43% compared to 17.27% in 1996
and the leverage ratio was 11.06% compared to 10.90% in 1996. See Note 12 to the
Consolidated Financial Statements as of December 31, 1996 for additional
discussion and analysis of regulatory capital requirements.
30
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Asset and liability management assures liquidity and maintains the
balance between rate sensitive assets and liabilities. Liquidity management
involves meeting the present and future financial obligations of the Company
with the sale or maturity of assets or through the occurrence of additional
liabilities. Liquidity needs are met with cash on hand, deposits in banks,
federal funds sold, securities classified as available for sale and loans
maturing within one year. At year end 1997, liquid assets totaled $28.6 million
which represents 24.2% of total deposits, federal funds purchased and other
liabilities. The Company minimizes liquidity demand by relying on core deposits
which comprise 87.2% of total deposits. With an average remaining life of 4.1
years, the securities portfolio provides a constant source of funds through
paydowns and maturities. As additional sources of liquidity, the Company
maintains short-term borrowing arrangements, namely federal funds lines, with
larger financial institutions. Finally, the Bank's membership in the Federal
Home Loan Bank provides a source of borrowings with a variety of maturities. The
Company's senior management monitors the liquidity position regularly and
formulates a strategy to maintain an interest sensitive position that maximizes
the net interest margin.
Interest rate sensitivity management involves stabilizing the net
interest margin to assure net income growth through various interest rate cycles
and fluctuations. The interest rate sensitivity analysis reflects the earlier of
the maturity or repricing date for interest sensitive assets and liabilities as
of December 31, 1997. The mismatching of the maturity or repricing dates of
interest sensitive assets and liabilities creates "gaps" which measure interest
rate sensitivity. At year end the Company had a negative cumulative twelve-month
gap of $53.3 million or 43.9% of total interest earning assets. A negative gap
normally impacts earnings favorably when interest rates decline and adversely
when interest rates rise. A weakness of the interest rate sensitivity analysis
is that it only provides a general indication of interest sensitivity at a
specific point in time. The Company's goal is to manage interest rate exposure
in order to hedge against interest rate fluctuations. Senior management and the
directorate monitor the interest rate gap regularly and implement strategies
such as maintaining a strong balance sheet with core deposit growth and
practicing conservative banking policies to accomplish this goal.
31
<PAGE>
ACCOUNTING RULE CHANGES
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued in June 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", defers for one year the effective date
(a) of paragraph 15 of Statement 125 and (b) for repurchase agreement,
dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and
237(b) of Statement 125.
FASB Statement No. 130, "Reporting Comprehensive Income", establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Statement 130 is effective for financial statements
beginning after December 15, 1997.
During June of 1997, the FASB issued FASB No. 131, "Disclosure about
Segments of an Enterprise and Related Information." FASB No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement becomes effective for financial statements for periods beginning
after December 31, 1997.
32
<PAGE>
YEAR 2000
During 1997 the Company's subsidiary (the Bank) began to assess the
effect of the Year 2000 on its systems, vendors, and customers. The assessment
of systems is accomplished through in-house testing and receipt of documentation
from manufacturers regarding their product's Year 2000 readiness. The assessment
of vendors is accomplished primarily through receipt of documentation regarding
their planning, testing, and implementation for Year 2000 compliance of their
product(s). The assessment of customers is accomplished through identifying and
assisting commercial customers whose operations may be negatively impacted by
the century date change. In January 1998, the Bank's Board of Directors approved
a Year 2000 Compliance Plan which identified particular steps necessary to
achieve Year 2000 readiness and a timeline for accomplishing these steps. The
plan also named the Bank's Year 2000 committee which includes members of senior
management, operations, data processing, and internal audit.
The Bank uses various hardware and software to conduct its business.
The core data processing applications of the Bank are run in-house and consist
of a mainframe computer and software licensed to the Bank by an outside vendor.
The Bank has received correspondence from its core processing application vendor
which indicates that their software will be Year 2000 ready.
The Bank also relies on a wide area network which allows personal
computers throughout the organization to share resources and centralizes the
administration of personal computer software applications. Vendors of
bank-related software which is installed on the network have sent correspondence
indicating that their software will be Year 2000 ready. Upgrading personal
computers throughout the organization has been a continuous project during 1997
and is expected to continue throughout 1998. These upgrades are expected to
solve any non-compliant personal computer hardware issues related to Year 2000
readiness. Based on the current status of the Bank's Year 2000 assessment, the
cost of Year 2000 readiness is not expected to have a material effect on the
Company's consolidated financial statements.
33
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As the holding company of Bank of Clarke County bank, the Company's
primary component of market risk is interest rate volatility. Fluctuations in
interest rates will impact the amount of interest income and expense the Bank
receives or pays on almost all of its assets and liabilities and the market
value of its interest earning assets and interest-bearing liabilities, excluding
those which have a very short term to maturity. Interest rate risk exposure of
the Company is, therefore, experienced at the Bank level. It is the
responsibility of Bank management to enact appropriate interest rate risk
management procedures.
The loan portfolio's primary volatility is due to the concentration of
loans made in in the Counties of Clarke and Frederick and the City of
Winchester. This subjects the portfolio to fluctuations in the local economy.
The Bank does not subject itself to foreign currency exchange or commodity price
risk due to prohibition through policy and the current nature of operations. As
of December 31, 1997, the Company does not have any hedging transactions in
place such as interest rate swaps or caps.
The Bank's interest rate management strategy is designed to stabilize
net interest income and preserve the capital of the Company. The Bank utilizes
several procedures to analyze the maturities of assets and liabilities along
with their associated rate or yield. Bank management also monitors the economy
closely in order to be knowledgeable of events which may immediately or
eventually effect the pricing of assets and liabilities. The Bank also uses
interest rate sensitivity analysis which measures the term to maturity or
repricing for the interest sensitive assets and liabilities of the Bank.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. The expected maturities for loans, securities, and certificates of deposit
are the based on the contractual maturity of the instruments. The expected
maturties of money market, savings, and N.O.W. accounts are based on the Bank's
internal interest rate sensitivity report which considers the amount of these
accounts which would remain if rates increased. The average interest rates for
loans is the weighted average contractual rate of the loans maturing during the
period indicated. The average interest rates for taxable securities is the
weighted average yield of the securities which mature during the period
indicated. The average interest rates for tax-exempt securities is the weighted
average tax- equivalent yield assuming a federal tax rate of 34% for the
securities which mature during the period indicated. The average interest rates
for money market, savings, and N.O.W. accounts is the weighted average annual
percentage yield as of December 31, 1997 for maturities during the period
indicated. The average rate for certificates of deposits is the weighted average
contractual rate of the certificates which mature during that period.
<TABLE>
<CAPTION>
<S> <C>
Principal Amount Maturing In
- --------------------------------------------------------------------------------------------------------
Fair
There- Value
(In Thousands) 1998 1999 2000 2001 2002 after Total 12/31/97
- --------------------------------------------------------------------------------------------------------
Earning assets:
Fixed rate loans $13,578 $12,446 $13,783 $16,235 $13,815 $4,599 $74,456 $74,072
Average interest rate 8.63% 8.84% 8.86% 8.06% 8.16% 8.76% 8.50%
Variable rate loans $3,217 $279 $582 $488 $486 $1,917 $6,969 $5,195
Average interest rate 9.58% 9.86% 10.08% 9.91% 9.49% 9.50% 9.63%
Taxable securities $2,022 $2,916 $5,953 $3,313 $9,566 $9,954 $33,724 $33,756
Average interest rate 6.02% 6.03% 6.16% 6.25% 6.47% 7.07% 6.50%
Tax-exempt securities $550 $355 $615 $475 $405 $1,280 $3,680 $3,710
Average interest rate 7.03% 7.60% 6.54% 6.91% 7.55% 6.91% 7.00%
Other interest-earning
assets $2,300 - - - - - - - - - - $2,300 $2,300
Average interest rate 6.25% - - - - - - - - - - 6.25%
Interest-bearing liabilities:
Money market, savings,
and N.O.W. accounts $14,666 $5,256 $5,256 $2,680 $2,680 $15,062 $45,600 $45,600
Average interest rate 2.67% 2.67% 2.67% 2.47% 2.47% 2.07% 2.45%
Certificates of deposit $38,775 $10,113 $3,899 $720 $195 $3 $53,705 $54,753
Average interest rate 5.37% 5.62% 6.56% 5.33% 5.52% 5.29% 5.43%
- --------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Item 8. Financial Statements and Supplementary Data
Pursuant to General Instruction G(2) information required by this Item
is incorporated by reference to Part IV, Item 14.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
35
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Part III, Item 10., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998.
Item 11. Executive Compensation.
The information required by Part III, Item 11., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Part III, Item 12., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998.
Item 13. Certain Relationships and Related Transactions.
The information required by Part III, Item 13., is incorporated herein
by reference to the Company's proxy statement, dated April 1, 1998, for the
Company's 1998 Annual Meeting of Shareholders to be held April 15, 1998
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed or incorporated by reference as part of
this report on Form 10-K.
(1) Financial Statements
Financial statements of the registrant for the fiscal year ended December
31, 1997 are incorporated herein by reference to Exhibit 99.1.
(2) Financial Statement Schedules
All financial statement schedules are omitted because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
(3) Exhibits
The following exhibits, when applicable, are filed with this Form 10-K or
incorporated by reference to previous filings.
Number Description
--------- -----------------------------------------
Exhibit 2. Not applicable.
Exhibit 3. (i) Articles of Incorporation of Registrant
(incorporated herein by reference to
Exhibit 3.1 of Registrant's Form S-4
Registration Statement, Registration No.
33-43681.)
(ii) Bylaws of Registrant (incorporated
herein by reference to Exhibit 3.2 of
Registrant's Form S-4 Registration
Statement, Registration No. 33-43681)
Exhibit 4. Not applicable.
Exhibit 9. Not applicable.
Exhibit 10. Material Contracts.
10.1 Description of Executive Supplemental
Income Plan (incorporated by reference
to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1996).
10.2 Lease Agreement between Bank of Clarke
County (tenant) and Winchester
Development Company (landlord) dated
August 1, 1992 for the branch office at
625 East Jubal Early Drive, Winchester,
Virginia (incorporated herein by
reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for
the year ended December 31, 1995).
10.3 Lease Agreement between Bank of Clarke
County (tenant) and Winchester
Development Company (landlord) dated July
1, 1997 for an office at 615 East Jubal
Early Drive, Winchester, Virginia
(incorporated herein by reference to
Exhibit 10.3 of the Company's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997).
10.4 Lease Agreement between Bank of Clarke
County (tenant) and Steven R.
Koman(landlord) dated December 2, 1997
for the branch office at 40 West
Piccadilly Street, Winchester, Virginia
(incorporated herein as Exhibit 10.4 of
the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
Exhibit 11. Computation of Per Share Earnings
(incorporated herein as Exhibit 11).
Exhibit 12. Not applicable.
Exhibit 13. Portions of the 1997 Annual Report to
Shareholders for the year ended December
31, 1997 (filed herein).
Exhibit 16. Not applicable.
Exhibit 18. Not applicable.
Exhibit 21. Subsidiaries of the Registrant
(incorporated herein as Exhibit 21).
Exhibit 22. Not applicable.
Exhibit 23. Not applicable.
Exhibit 24. Not applicable.
Exhibit 27. Financial Data Schedule (incorporated
herein as Exhibit 27).
Exhibit 99. Additional Exhibits
99.1 The following consolidated financial
statements of the Company including the
related notes and the report of the
independent auditors for the year ended
December 31, 1997 (incorporated herein as
Exhibit 99.1).
1. Independent Auditor's Report.
2. Consolidated Balance Sheets -
At December 31, 1997 and 1996.
3. Consolidated Statements of Income -
Years ended December 31, 1997, 1996,
and 1995.
4. Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1997, 1996, and 1995.
5. Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996,
and 1995.
6. Notes to Consolidated Financial
Statements.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1997.
37
<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 20th day of
March, 1998.
Eagle Financial Services, Inc.
By: /s/ LEWIS M. EWING
---------------------------------
Lewis M. Ewing, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ LEWIS M. EWING President, Chief March 20, 1998
- ------------------------- Executive Officer
Lewis M. Ewing and Director (principal
executive officer)
/s/ JOHN R. MILLESON Vice President, Secretary/ March 20, 1998
- ------------------------- Treasuer (principal financial
John R. Milleson officer)
/s/ JAMES W. MCCARTY, JR. Vice President, Chief March 20, 1998
- ------------------------- Financial Officer
James W. McCarty, Jr. (principal accounting officer)
/s/ JOHN D. HARDESTY Chairman of the Board March 20, 1998
- ------------------------- and Director
John D. Hardesty
/s/ J. FRED JONES Director March 20, 1998
- -------------------------
J. Fred Jones
Director March 20, 1998
- -------------------------
Marilyn C. Beck
Director March 20, 1998
- -------------------------
Thomas T. Byrd
Director March 20, 1998
- -------------------------
Thomas T. Gilpin
Director March 20, 1998
- -------------------------
Douglas McIntire
/s / JOHN F. MILLESON, JR. Director March 20, 1998
- -------------------------
John F. Milleson, Jr.
/s/ ROBERT W. SMALLEY, JR. Director March 20, 1998
- -------------------------
Robert W. Smalley, Jr.
/s/ RANDALL G. VINSON Director March 20, 1998
- -------------------------
Randall G. Vinson
</TABLE>
38
<PAGE>
EAGLE FINANCIAL SERVICES, INC.
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
EXHIBIT NUMBER DESCRIPTION
-------------- ----------------------------------------
10.4 Lease Agreement between Bank of Clarke
County (tenant) and Steven R.
Koman(landlord) dated December 2, 1997
for the branch office at 40 West
Piccadilly Street, Winchester, Virginia.
11 Computation of Per Share Earnings .
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
99.1 The following consolidated financial
statements of the Company including the
related notes and the report of the
independent auditors for the year ended
December 31, 1997.
1. Independent Auditor's Report.
2. Consolidated Balance Sheets -
At December 31, 1997 and 1996.
3. Consolidated Statements of Income -
Years ended December 31, 1997, 1996,
and 1995.
4. Consolidated Statements of Changes in
Stockholders' Equity Years ended
December 31, 1997, 1996, and 1995.
5. Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996,
and 1995.
6. Notes to Consolidated Financial
Statements.
39
EXHIBIT 10.4
THIS LEASE AGREEMENT, made this 2nd day of December, 1997, by Steven R.
Koman (herein Lessor) and Bank of Clarke County (herein Lessee):
WITNESSETH: That for valuable consideration, Lessee does hereby lease from
Lessor and Lessor does hereby lease to Lessee the property located at 40 West
Piccadilly Street in Winchester, Virginia, containing 3,317 Square Feet, more or
less, as more particularly described by the attached drawings, together with the
exclusive right of entrance to the property from the Piccadilly Street entrance
and the eight (8) parking spaces closest to Piccadilly Street.
The parties hereto agree to the following terms:
1. Term of Lease. The term of the lease shall be five (5) years,
commencing January 1, 1998 and terminating at midnight, December 31, 2002.
2. Rental. Lessee shall pay to Lessor the sum of Two Thousand Six Hundred
Dollars ($2,600.00) per month, payable in advance on or before the 1st day of
each month, with the first payment being due on or before January 1, 1998,
towards which a deposit of One Hundred Dollars ($100.00) has this day been paid.
3. RENEWAL OPTION. Provided Lessee is not then in default hereunder, the
Lessee shall have the right to exercise an option for a second five (5) year
term on the same terms and conditions as contained herein, except that the
monthly rent shall be increased to Two Thousand Eight Hundred Dollars
($2,800.00), if Lessee notifies Lessor in writing at least ninety (90) days
prior to the termination of the original five (5) year term that Lessee intends
to exercise its renewal option.
4. ADDITIONS AND ALTERATIONS. Lessee shall have the right to make
additions and alterations to the premises for the purpose of making the premises
useable for banking purposes, including the installation of security devises,
equipment, a vault, an ATM machine and a drive-in facility (the location and
design for the latter two (2) items has not been agreed upon and has not been
approved by the City, but the parties agree to work together in good faith in an
attempt to find a location for each and to secure the City approval. Inability
to secure a location for either or to secure City approval will not invalidate
the lease.) At the termination of the lease, Lessee shall remove all additions
and alterations, together with all trade fixtures and personal property owned or
installed by the Lessee. In addition, the Lessee shall return the premises at
the end of the lease in as good an order and repair as when received, reasonable
wear and tear excepted. All additions and alterations will be completed in a
workmanlike manner.
5. POSSESSION. Lessee shall be entitled to the immediate possession of the
premises.
6. TAXES AND UTILITIES. Lessor shall pay all real estate taxes assessed
against the premises and all water and sewer supplied to the premises, unless
the Lessee's premises are separately metered. All other utility expenses,
including electricity, heat and telephone, shall be paid by the Lessee.
7. DAMAGE TO PREMISES. Lessee shall save harmless Lessor from all claims
for damage to property or to persons, arising from Lessee's use and occupancy of
the leased premises, or asserted by any employees, customers or invitees of the
Lessee, except to the extent such claims arise from the negligence of Lessor,
its employees, agents, invitees or licensees or as otherwise covered by
insurance.
8. Maintenance of the Leased Premises. Lessor covenants and agrees to keep
the structural portion of the leased premises, including but not limited to the
roof and walls, in good condition and repair and shall maintain the parking lot,
including the removal of snow. Lessee shall maintain the interior of the leased
premises, including any breakage of glass in exterior windows and doors and
shall maintain (including the removal of snow and debris) from the steps leading
to the leased premises from Piccadilly Street and the sidewalk along Piccadilly
Street.
9. Use and Enjoyment. Lessor covenants that it has the right to enter into
this lease and that it will fully perform all obligations hereunder; the Lessor
has title to the leased premises hereby demised and that Lessee shall have
peaceful possession and quiet enjoyment of the leased premises so long as the
Lessee pays the rent and other charges as herein provided and observes and
performs all of its covenants and obligations hereunder.
10. Destruction and Damage. In the event the leased premises are destroyed
by fire or other cause, or so damaged as to render the leased premises
untenantable, the Lessor shall:
A. Restore the leased premises by rebuilding or making repairs within
one hundred twenty (120) days from the date of such damage or destruction
(provided such rebuilding or repair can be completed in one hundred twenty (120)
days) in which event this lease shall continue in full force and effect, with an
abatement of rent and all other charges to the Lessee for the period during
which the leased premises are untenantable; or
B. If the repairs and rebuilding cannot be completed within said one
hundred twenty (120) days, then this lease shall terminate as of the date of
said destruction or damage.
The Lessor shall give Lessee written notice of its election under
this paragraph within fifteen (15) days after the said destruction or damage on
or to the leased premises.
11. Default. If Lessee defaults in any of its obligations under this
agreement, including the payment of rent, payments for personal property and all
other amounts due under this lease, and such failure shall continue for a period
of ten (10) days after written notice thereof is given by Lessor to Lessee, then
the Lessor shall have the immediate right to terminate this lease. If the lease
is terminated, the rent for the entire term shall become due and payable,
subject to set-off and mitigation on the part of the Lessor, and the Lessee
shall deliver possession immediately of all the leased property to the Lessor.
If, on four (4) separate occasions, Lessor gives Lessee written
notice under this paragraph after Lessee is in default of its payment under this
lease, then Lessee shall not be entitled to said ten (10) day written notice and
any default in the payment of rent or other payments due hereunder shall
immediately grant Lessor the right to terminate this lease as set forth above.
12. Sub-Lease. The Lessee shall not have the right to sub-lease the leased
property nor to assign this lease without first obtaining the written consent of
the Lessor, who shall not unreasonably withhold its consent.
13. Notices. Any notices or demands required or permitted by law or any
provisions of this lease shall be in writing, and if the same is to be served
upon Lessor or Lessee may be personally delivered to Lessor or my be deposited
in the United States mail, registered or certified with return receipt
requested, postage prepaid and addressed to Lessor at P. O. Box 411, Winchester,
Virginia 22604, or to Lessee at P. O. Box 391, Berryville, Virginia 22611.
Either party shall have the right to specify from time to time changes to its
address for purposes of this lease upon giving the other party ten (10) days
advance written notice of such change.
14. INSPECTIONS. The Lessor may inspect the premises at reasonable times
during business hours and during the last three (3) months of the term, or the
renewal thereof, the Lessor may show the premises to others and may post thereon
a notice for re-renting the premises. Lessor may enter the premises before or
after usual business hours if there is an emergency involving the health,
welfare or safety of the building, its occupants or its neighbors.
15. Rental Restriction. Lessor will not permit any other portion of the
building in which the leased premises is located to be used for banking or any
other financial services nor to be used for a stock brokerage.
16. First Right of Refusal. Neither the Lessor nor any successor in title
to the Lessor shall sell the above described real estate without first offering
the property in writing to the Lessee upon certain terms and prices set forth in
the written notice. The Lessee shall have an option to purchase the property for
said price for a period of thirty (30) days after receiving notice. If the
Lessee does not exercise its option, Lessor shall have the right to sell said
property at said price and upon said terms for a period of ninety (90) days
thereafter. If the property is not so sold, the property will continue to be
subject to this restriction.
17. Miscellaneous. This lease agreement merges all understandings and
agreements between the parties hereto with respect to the leased premises,
constitutes the entire agreement between the parties with respect to the leased
premises, and shall inure to the benefit and be binding upon the Lessor and the
Lessee and their respective successors and permitted assigns. Both parties are
aware that the property was constructed prior to 1970 and may or may not have
been painted with paint that contained lead.
IN WITNESS WHEREOF, the parties hereto have executed this lease as of
the date first above written.
LESSOR:
/s/ Steven R. Koman
----------------------------
Steven R. Koman
LESSEE:
BANK OF CLARKE COUNTY
By: /s/ John R. Milleson
-------------------------
John R. Milleson
Executive Vice President and
Chief Administrative Officer
40
EXHIBIT 11
EAGLE FINANCIIAL SERVICES, INC. AND SUBSIDIARY
Computations of Weighted Average Shares Outstanding and Earnings Per Share
(Shares Outstanding End of Month)
1997 1996 1995
Shares Shares Shares
Outstanding Outstanding Outstanding
(As Restated) (As Restated)
------------ ------------ -------------
1,399,885 1,390,570 1,381,348
1,402,153 1,390,570 1,381,348
1,402,153 1,390,570 1,381,348
1,402,153 1,390,570 1,381,348
1,404,356 1,390,570 1,381,348
1,404,356 1,390,570 1,381,348
1,404,356 1,394,026 1,384,954
1,406,454 1,394,026 1,384,954
1,406,454 1,394,026 1,384,954
1,406,454 1,394,026 1,384,954
1,408,485 1,394,026 1,384,954
1,408,485 1,394,026 1,384,954
------------ ------------- -------------
16,855,744 16,707,576 16,597,812
12 12 12
- ------------ ------------ ------------- -------------
Weighted
Average
Shares
Outstanding 1,404,645 1,392,298 1,383,152
- ------------ ------------ ------------- -------------
Net Income 1,112,012 1,311,337 1,260,690
- ------------ ------------ ------------- -------------
Earnings Per
Share, Basic
and Assuming
Dilution 0.79 0.94 0.91
- ------------ ------------ ------------- -------------
41
EXHIBIT 21
The only subsidiary of the Registrant is Bank of Clarke County, a
Virginia banking corporation, located in Berryville, Clarke County, Virginia. It
is owned 100% by the Registrant.
42
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,194
<INT-BEARING-DEPOSITS> 48
<FED-FUNDS-SOLD> 2,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,258
<INVESTMENTS-CARRYING> 33,161
<INVESTMENTS-MARKET> 33,208
<LOANS> 81,425
<ALLOWANCE> 749
<TOTAL-ASSETS> 133,239
<DEPOSITS> 117,079
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,102
<LONG-TERM> 0
0
0
<COMMON> 3,521
<OTHER-SE> 11,537
<TOTAL-LIABILITIES-AND-EQUITY> 133,239
<INTEREST-LOAN> 7,255
<INTEREST-INVEST> 1,953
<INTEREST-OTHER> 102
<INTEREST-TOTAL> 9,310
<INTEREST-DEPOSIT> 3,900
<INTEREST-EXPENSE> 3,904
<INTEREST-INCOME-NET> 5,406
<LOAN-LOSSES> 477
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,691
<INCOME-PRETAX> 1,484
<INCOME-PRE-EXTRAORDINARY> 1,484
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,112
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 4.72
<LOANS-NON> 437
<LOANS-PAST> 614
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 668
<ALLOWANCE-OPEN> 914
<CHARGE-OFFS> 687
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 749
<ALLOWANCE-DOMESTIC> 500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 249
</TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Berryville, Virginia
FINANCIAL REPORT
DECEMBER 31, 1997
C O N T E N T S
INDEPENDENT AUDITOR'S REPORT ON THE
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of changes in stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
44
<PAGE>
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, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for the years ended December 31, 1997, 1996, and 1995. 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, 1997 and 1996, and
the results of its operations and its cash flows for the years ended December
31, 1997, 1996, and 1995, in conformity with generally accepted accounting
principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 22, 1998
45
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1996
<CAPTION>
<S> <C>
Assets 1997 1996
---------------- ----------------
Cash and due from banks $ 5 242 309 $ 4 409 250
Securities (fair value: 1997, $37,466,068;
1996, $25,786,814) (Note 2) 37 418 780 26 089 574
Federal funds sold 2 300 000 1 553 000
Loans, net of unearned discounts (Notes 3 and 11) 81 425 186 87 870 194
Less allowance for loan losses (Note 4) (748 558) (913 955)
---------------- ----------------
Net loans 80 676 628 86 956 239
Bank premises and equipment, net (Note 5) 4 060 501 4 251 675
Other real estate owned 189 688 46 605
Other assets 3 351 495 2 935 398
---------------- ----------------
Total assets $ 133 239 401 $ 126 241 741
================ ================
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing demand deposits $ 17 774 480 $ 15 175 041
Savings and interest bearing demand deposits 45 600 236 47 365 648
Time deposits (Note 6) 53 704 639 48 547 178
---------------- ----------------
Total deposits $ 117 079 355 $ 111 087 867
Other liabilities 1 101 931 957 018
Commitments and contingent liabilities
(Notes 10, 15 and 17) - - - -
---------------- ----------------
Total liabilities $ 118 181 286 $ 112 044 885
================ ================
Stockholders' Equity
Preferred stock, $10 par value; 500,000 shares
authorized and unissued $ - - $ - -
Common stock, $2.50 par value; authorized 1,500,000
shares; issued 1997, 1,408,485 shares; issued
1996, 1,399,885 shares 3 521 213 3 499 714
Surplus 2 107 826 1 945 891
Retained earnings (Note 13) 9 419 266 8 756 281
Unrealized gain (loss) on securities available for sale, net 9 810 (5 030)
---------------- ----------------
Total stockholders' equity $ 15 058 115 $ 14 196 856
---------------- ----------------
Total liabilities and stockholders' equity $ 133 239 401 $ 126 241 741
================ ================
See Notes to Consolidated Financial Statements.
46
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
------------- ------------- --------------
Interest Income
Interest and fees on loans $ 7 255 085 $ 7 750 646 $ 7 483 952
Interest on federal funds sold 101 842 51 219 54 740
Interest on securities held to maturity:
Taxable interest income 1 617 097 1 308 152 833 620
Interest income exempt from federal income taxes 145 016 158 070 158 409
Interest and dividends on securities available for sale:
Taxable interest income 142 480 90 459 158 215
Dividends 48 717 44 324 37 966
------------- ------------- --------------
Total interest income $ 9 310 237 $ 9 402 870 $ 8 726 902
------------- ------------- --------------
Interest Expense
Interest on deposits $ 3 899 598 $ 3 853 810 $ 3 525 861
Interest on federal funds purchased 4 599 56 802 56 144
Interest on Federal Home Loan Bank advances - - - - 2 783
------------- ------------- --------------
Total interest expense $ 3 904 197 $ 3 910 612 $ 3 584 788
------------- ------------- --------------
Net interest income $ 5 406 040 $ 5 492 258 $ 5 142 114
Provision for loan losses (Note 4) 476 667 290 000 240 000
------------- ------------- --------------
Net interest income after provision
for loan losses $ 4 929 373 $ 5 202 258 $ 4 902 114
------------- ------------- --------------
Other Income
Trust Department income $ 233 180 $ 199 587 $ 145 318
Service charges on deposit accounts 532 277 522 436 374 082
Other service charges and fees 289 465 196 232 181 853
Income (loss) on equity investment (4 880) 595 (18 689)
Other operating income 195 739 105 920 129 404
------------- ------------- --------------
$ 1 245 781 $ 1 024 770 $ 811 968
------------- ------------- --------------
See Notes to Consolidated Financial Statements.
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
------------- ------------- --------------
Other Expenses
Salaries and wages $ 1 951 569 $ 1 732 542 $ 1 492 105
Pension and other employee benefits
(Notes 8, 9 and 16) 491 913 478 669 443 291
Occupancy expenses 332 916 323 962 241 353
Equipment expenses 468 785 472 462 378 102
FDIC assessment 13 362 2 000 111 904
Stationery and supplies 190 154 150 313 154 605
Postage 119 713 126 724 125 253
Credit card expense 101 156 93 637 99 004
Bank franchise tax 95 344 113 484 124 865
ATM network fees 119 827 129 385 89 723
Other operating expenses 806 260 755 209 715 950
------------- ------------- --------------
$ 4 690 999 $ 4 378 387 $ 3 976 155
------------- ------------- --------------
Income before income taxes $ 1 484 155 $ 1 848 641 $ 1 737 927
Income Tax Expense (Note 7) 372 143 537 304 477 237
------------- ------------- --------------
Net income $ 1 112 012 $ 1 311 337 $ 1 260 690
============= ============= ==============
Earnings Per Share
Net income per common share,
basic and diluted $ .79 $ .94 $ .91
============= ============= ==============
See Notes to Consolidated Financial Statements.
47
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Retained Available for
Stock Surplus Earnings Sale, Net Total
------------ ------------ ------------- ------------ -------------
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 ($.28
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
------------ ------------ ------------- ------------ -------------
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 ($.30
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 87 (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
------------ ------------ ------------- ------------ -------------
See Notes to Consolidated Financial Statements.
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
(Continued)
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Retained Available for
Stock Surplus Earnings Sale, Net Total
------------ ------------ ------------- ------------ -------------
Balance, December 31, 1996 $ 3 499 714 $ 1 945 891 $ 8 756 281 $ (5 030) $ 14 196 856
Net income - 1997 - - - - 1 112 012 - - 1 112 012
Issuance of common stock
- dividend investment plan
(8,603 shares) (Note 14) 21 507 161 992 - - - - 183 499
Dividends declared ($0.32
per share) - - - - (449 027) - - (449 027)
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes
of $7,645 - - - - - - 14 840 14 840
Fractional shares purchased (8) (57) - - - - (65)
------------ ------------ ------------- ------------ -------------
Balance, December 31, 1997 $ 3 521 213 $ 2 107 826 $ 9 419 266 $ 9 810 $ 15 058 115
============= ============= ============= ============ =============
See Notes to Consolidated Financial Statements.
48
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
------------- ------------- --------------
Cash Flows from Operating Activities
Net income $ 1 112 012 $ 1 311 337 $ 1 260 690
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 389 742 399 076 287 456
Amortization of intangible assets 50 675 52 496 12 600
(Income) loss on equity investment 4 880 (595) 18 689
Provision for loan losses 476 667 290 000 240 000
Premium amortization (discount accretion)
on securities, net 63 141 (2 854) 8 532
Deferred tax (benefit) expense 45 917 (891) (37 710)
Changes in assets and liabilities:
(Increase) in other assets (525 214) (805 499) (86 106)
Increase in other liabilities 144 913 64 146 263 045
------------- ------------- --------------
Net cash provided by operating activities $ 1 762 733 $ 1 307 216 $ 1 967 196
------------- ------------- --------------
Cash Flows from Investing Activities
Proceeds from maturities and principal payments
of securities held to maturity $ 5 995 036 $ 5 128 436 $ 5 820 188
Proceeds from maturities and principal payments
of securities available for sale 377 000 1 748 844 496 000
Purchases of securities held to maturity (14 873 594) (6 178 873) (8 704 650)
Purchases of securities available for sale (2 868 304) (155 500) (243 400)
Purchases of bank premises and equipment (198 568) (1 157 029) (837 492)
Net decrease (increase) in loans 5 659 861 (2 203 140) (5 456 584)
------------- ------------- --------------
Net cash (used in) investing activities $ (5 908 569) $ (2 817 262) $ (8 925 938)
------------- ------------- --------------
See Notes to Consolidated Financial Statements.
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
------------- ------------- --------------
Cash Flows from Financing Activities
Net increase in demand deposits,
money market and savings accounts $ 834 027 $ 7 222 447 $ 727 513
Net increase (decrease) in certificates of deposit 5 157 461 (1 747 141) 5 877 234
Increase (decrease) in federal funds purchased - - (1 867 000) 1 867 000
Net (decrease) in Federal Home Loan
Bank advances - - - - (3 000 000)
Cash dividends paid (265 528) (242 295) (220 137)
Fractional shares purchased (65) (181) - -
------------- ------------- --------------
Net cash provided by financing activities $ 5 725 895 $ 3 365 830 $ 5 251 610
------------- ------------- --------------
Increase (decrease) in cash and cash
equivalents $ 1 580 059 $ 1 855 783 $ (1 707 132)
Cash and Cash Equivalents
Beginning 5 962 250 4 106 467 5 813 599
------------- ------------- --------------
Ending $ 7 542 309 $ 5 962 250 $ 4 106 467
============= ============= ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3 907 348 $ 3 960 889 $ 3 412 668
============= ============= ==============
Income taxes $ 439 616 $ 592 372 $ 542 248
============= ============= ==============
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of common stock - dividend investment plan $ 183 499 $ 175 531 $ 160 345
============= ============= ==============
Unrealized gain on securities available for sale $ 22 485 $ 11 479 $ 167 410
============= ============= ==============
Other real estate acquired in settlement of loans $ 143 083 $ - - $ - -
============= ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements.
49
<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
Eagle Financial Services, Inc. owns 100% of Bank of Clarke
County (the "Bank"). An additional subsidiary, Eagle Home
Funding, Inc. is a wholly-owned subsidiary of the Bank. The
consolidated financial statements include the accounts of
Eagle Financial Services, Inc. and its wholly-owned
subsidiary. All significant intercompany accounts have been
eliminated.
Trust Assets
Securities and other property held by the Trust Division in a
fiduciary or agency capacity are not assets of the Company
and are not included in the accompanying consolidated
financial statements.
Securities
Investments are to be 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.
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, 1997 and 1996.
Derivative Financial Instruments
FASB No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" requires
various disclosures for derivative financial instruments
which are futures, forwards, swaps 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. 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.
The Company has 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.
The Company considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These
loans are not subject to impairment under FASB 114. A loan is
considered impaired when it is probable that the Company will
be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement.
Factors involved in determining impairment include, but are
not limited to, expected future cash flows, financial
condition of the borrower, and the current economic
conditions. A performing loan may be considered impaired, if
the factors above indicate a need for impairment. A loan on
nonaccrual status may not be impaired if in the process of
collection or there is an insignificant shortfall in payment.
An insignificant delay of less than 30 days or a shortfall of
less than 5% of the required principal and interest payment
generally does not indicate an impairment situation, if in
management's judgment the loan will be paid in full. Loans
that meet the regulatory definitions of doubtful or loss
generally qualify as an impaired loan under FASB 114.
Charge-offs for impaired loans occur when the loan, or
portion of the loan is determined to be uncollectible, as is
the case for all loans. The Company had no loans subject to
FASB 114 at December 31, 1997 and 1996.
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.
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.
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 Per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported
fully diluted earnings per share.
Weighted average shares were 1,404,645, 1,392,298 and
1,383,152 for the years ended 1997, 1996 and 1995,
respectively after giving retroactive effect to the 100%
stock dividend declared in 1996. The Corporation had no
potential common stock as of December 31, 1997, 1996 and
1995.
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.
50
<PAGE>
Note 2. Securities
The amortized costs and fair values of securities being held to
maturity as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- --------- ---------- ---------------
1997
----------------------------------------------------------------------
U.S. Treasury securities $ 371 922 $ 7 570 $ (1 037) $ 378 455
Obligations of U.S. government
corporations and agencies 10 148 139 54 127 (23 805) 10 178 461
Mortgage-backed securities 17 257 777 56 959 (83 326) 17 231 410
Obligations of states and
political subdivisions 5 382 820 41 677 (4 877) 5 419 620
-------------- --------- ---------- ---------------
$ 33 160 658 $ 160 333 $ (113 045) $ 33 207 946
============== ========= ========== ===============
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
============== ========= ========== ===============
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1997, 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 $ 1 299 941 $ 1 299 595
Due after one year through five years 12 700 837 12 740 723
Due after five years through ten years 1 652 103 1 685 148
Due after ten years 250 000 251 070
Mortgage-backed securities 17 257 777 17 231 410
------------ ------------
$33 160 658 $ 33 207 946
============ ============
Amortized costs and fair values of securities available for sale
as of December 31, 1997 and 1996, are as follows:
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------ ----------- ------------ ------------
1997
--------------------------------------------------------
Obligations of U.S.
government corporations
and agencies $ 3 501 058 $ 17 432 $ (2 568) $ 3 515 922
Other 742 200 - - - - 742 200
------------ ----------- ------------ ------------
$ 4 243 258 $ 17 432 $ (2 568) $ 4 258 122
============ =========== ============ ============
<CAPTION>
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
============ =========== ============ ============
The amortized cost and fair value of securities available for sale
as of December 31, 1997, by contractual maturity, are shown below.
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 750 000 $ 748 656
Due after one year through five years 2 751 058 2 767 266
Other 742 200 742 200
------------ ------------
$ 4 243 258 $ 4 258 122
============ ============
</TABLE>
Proceeds from maturities and principal payments of securities
being held to maturity during 1997, 1996 and 1995 were
$5,995,036, $5,128,436 and $5,820,188. There were no sales of
securities being held to maturity during 1997, 1996 and 1995.
Proceeds from maturities and principal payments of securities
available for sale during 1997, 1996 and 1995 were $377,000,
$1,748,844 and $496,000. There were no sales of securities
available for sale during 1997, 1996 and 1995.
Securities having a book value of $8,473,317 and $6,967,840 at
December 31, 1997 and 1996, were pledged to secure public
deposits and for other purposes required by law.
51
<PAGE>
Note 3. Loans, Net
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
-----------------------------
1997 1996
---------- ----------
(thousands)
Loans secured by real estate:
Construction and land development $ 588 $ 1 434
Secured by farmland 3 700 4 013
Secured by 1-4 family residential 44 863 45 156
Nonfarm, nonresidential loans 11 141 9 518
Loans to farmers (except secured by real estate) 770 1 446
Commercial and industrial loans
(except those secured by real estate) 5 116 6 145
Loans to individuals (except those
secured by real estate) 14 458 19 633
Loans to U.S. state and political subdivisions 1 155 1 517
All other loans 97 215
---------- ----------
Total loans $ 81 888 $ 89 077
Less:
Unearned income (462) (1 207)
Allowance for loan losses (749) (914)
---------- ----------
Loans, net $ 80 677 $ 86 956
========== ==========
52
<PAGE>
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<CAPTION>
December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
Balance, beginning $ 913 955 $ 828 104 $ 807 617
Provision charged to operating
expense 476 667 290 000 240 000
Recoveries added to the allowance 44 624 63 561 54 960
Loan losses charged to the allowance (686 688) (267 710) (274 473)
------------ ------------ ------------
Balance, ending $ 748 558 $ 913 955 $ 828 104
============ ============ ============
</TABLE>
Nonaccrual loans excluded from the impaired loan disclosure under
FASB 114 amounted to $437,261 at December 31, 1997. If interest
would have been accrued, such income would have been approximated
$11,021 for 1997. There were no loans on which the accrual of
interest was discontinued or reduced in 1996.
53
<PAGE>
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,
----------------------------
1997 1996
------------ ------------
Land $ 787 918 $ 787 918
Land held for future branch site 150 587 150 587
Buildings and improvements 3 546 330 3 534 056
Furniture and equipment 2 668 100 2 685 566
------------ ------------
$ 7 152 935 $ 7 158 127
Less accumulated depreciation 3 092 434 2 906 452
------------ ------------
Bank premises and equipment, net $ 4 060 501 $ 4 251 675
============ ============
</TABLE>
Depreciation expense was $389,742, $399,076 and $287,456 for the
years ended December 31, 1997, 1996 and 1995, respectively.
54
<PAGE>
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was approximately $14,961,859 and
$11,343,027 in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of time deposits
are as follows:
1998 $ 38 770 989
1999 10 112 647
2000 3 899 483
2001 723 400
2002 and thereafter 198 120
------------
$ 53 704 639
============
55
<PAGE>
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1997 and 1996:
December 31,
------------------------
1997 1996
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 164 159 $ 224 213
Deferred compensation 101 039 86 082
Accrued postretirement benefits 91 189 72 915
Reserve for other real estate
owned 2 040 2 040
Securities available for sale - - 2 591
Non-accrual interest 6 908 - -
----------- -----------
$ 365 335 $ 387 841
----------- -----------
Deferred tax liabilities:
Property and equipment $ 305 804 $ 294 407
Prepaid pension costs 82 637 53 142
Securities available for sale 5 054 - -
----------- -----------
$ 393 495 $ 347 549
----------- -----------
$ (28 160) $ 40 292
=========== ===========
The provision for income taxes charged to operations for the
years ended December 31, 1997, 1996 and 1995 consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
December 31,
-------------------------------------
1997 1996 1995
---------- ----------- -----------
Current tax expense $ 311 336 $ 538 195 $ 514 947
Deferred tax (benefit) 60 807 (891) (37 710)
---------- ----------- -----------
$ 372 143 $ 537 304 $ 477 237
========== =========== ===========
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, 1997, 1996 and 1995, due to the following:
<CAPTION>
1997 1996 1995
---------- ------------ ------------
Computed "expected" tax expense $ 504 613 $ 628 538 $ 590 895
(Decrease) increase in income taxes
resulting from:
Tax-exempt interest (63 985) (74 765) (75 477)
Nontaxable life insurance (8 712) - - - -
Low income housing credits (44 454) (48 000) (46 227)
Other (15 319) 31 531 8 046
---------- ------------- -----------
$ 372 143 $ 537 304 $ 477 237
========== ============= ===========
</TABLE>
56
<PAGE>
Note 8. Defined Benefit Pension Plan
The amount of expense recognized for the Company's pension plan
totaled $64,522, $69,426 and $66,884 for the years ended December
31, 1997, 1996, and 1995, respectively. The components of the
pension cost charged against expense for 1997, 1996 and 1995,
consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
1997 1996 1995
------------- ------------- -------------
Service cost (benefits earned) $ 62 353 $ 57 734 $ 51 682
Interest cost on projected
benefit obligation 95 716 87 942 82 421
Actual return on plan assets (233 696) (108 168) (66 948)
Gain or loss to the extent
recognized 2 271 5 109 - -
Net amortization and deferral 137 878 26 809 (271)
------------- ------------- -------------
$ 64 522 $ 69 426 $ 66 884
============= ============= =============
The following table sets forth the plan's funded status as of
December 31, 1997 and 1996, respectively.
<CAPTION>
1997 1996
------------- -------------
Actuarial present value of benefit obligations:
Vested benefits $ 1 121 406 $ 1 025 392
============= =============
Accumulated benefits $ 1 137 819 $ 1 040 589
============= =============
Projected benefits $ (1 331 265) $ ( 1 219 706)
Plan assets at fair value 1 469 557 1 127 104
------------- -------------
Funded status $ 138 292 $ (92 602)
Unrecognized net loss 14 591 156 039
Prior service costs attributable to
plan amendments 126 418 137 963
Unrecognized (net asset) at date of
initial application (51 383) (64 227)
------------- -------------
Prepaid pension cost $ 227 918 $ 137 173
============= =============
</TABLE>
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 in 1997 and
1996. The expected long-term rate of return on plan assets was 8%
in 1997 and 1996.
57
<PAGE>
Note 9. Employee Benefits
The Company has established an Employee Stock Ownership Plan
(ESOP) to provide additional retirement benefits to substantially
all employees. There were no contributions in 1997, 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 was leveraged to the extent that money was
borrowed during 1995 to purchase available stock. The debt
related to these borrowings was guaranteed by the Company. At
December 31, 1997 and 1996, 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 $8,160 in 1997 and 1996, respectively.
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 1997, 1996 and 1995 based on the present
value of the retirement benefits, amounted to $47,590, $38,499
and $34,899, 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.
58
<PAGE>
Note 10. Commitments and Contingencies
In the normal course of business, the Company makes various
commitments and incurs certain contingent liabilities which are
not reflected in the accompanying financial statements. These
commitments and contingent liabilities include various
guarantees, commitments to extend credit and standby letters of
credit. The Company does not anticipate any material losses as a
result of these commitments.
The Bank leases certain facilities under operating leases which
expire at various dates through 2002. These leases require
payment of certain operating expenses and contain renewal
options. The total minimum rental commitment at December 31, 1997
under these leases is $319,548, which is due as follows:
Due in the year ending December 31, 1998 $ 91 111
1999 91 763
2000 74 274
2001 31 200
2002 31 200
-----------
$ 319 548
===========
The total rental expense was $45,576, $49,035 and $43,669 in
1997, 1996 and 1995, 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, 1997 and 1996, the amount of daily
average required balances was approximately $752,000 and
$744,000, respectively.
See Note 15 with respect to financial instruments with
off-balance sheet risk.
59
<PAGE>
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
$1,069,521 and $808,061 at December 31, 1997 and 1996,
respectively. During 1997, total principal additions were
$1,297,259 and total principal payments were $1,035,799.
60
<PAGE>
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.
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, 1997, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from the
Federal Reserve Bank 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 Purposes Action Provisions
---------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- --------- -------
(Amount in Thousands)
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 15 194 18.43% <=$ 6 595 = 8.00% N/A
Bank of Clarke County $ 14 872 18.10% <=$ 6 574 = 8.00% <=$ 8 217 <=10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 14 445 17.52% <=$ 3 298 = 4.00% N/A
Bank of Clarke County $ 14 123 17.19% <=$ 3 287 = 4.00% <=$ 4 930 <= 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 14 445 11.06% <=$ 5 222 = 4.00% N/A
Bank of Clarke County $ 14 123 10.84% <=$ 5 210 = 4.00% <=$ 6 513 <= 5.00%
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 14 454 17.27% <=$ 6 697 = 8.00% N/A
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% N/A
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% N/A
Bank of Clarke County $ 13 202 10.66% <=$ 4 955 = 4.00% <=$ 6 194 <= 5.00%
</TABLE>
61
<PAGE>
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, 1997, the aggregate amount of unrestricted funds,
which could be transferred from the Bank to the Parent Company
without prior regulatory approval, amounted to $2,985,374 or
19.8% of the consolidated net assets.
62
<PAGE>
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.
63
<PAGE>
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.
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, 1997 and
1996, is as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 1996
------------- -------------
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $ 9 651 769 $ 10 160 277
Standby letters of credit $ 139 631 $ 46 631
</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, 1997, 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, 1997
exceeded the insurance limits of the Federal Deposit Insurance
Corporation by approximately $1,391,513.
64
<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, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
<S> <C>
1997 1996 1995
---------- ---------- ----------
Service cost-benefits attributable
to service during the year $ 12 763 $ 11 818 $ 11 452
Interest on accumulated postretire-
ment benefit obligation 36 239 33 567 35 701
Amortization of transition obligation 20 189 20 189 20 189
Net amortization and deferral (2 480) (2 896) (2 239)
---------- ---------- ----------
$ 66 711 $ 62 678 $ 65 103
========== ========== ==========
The following table sets forth the plan's obligation recognized
in the accompanying balance sheets at December 31, 1997 and 1996:
<CAPTION>
1997 1996
---------- -----------
Accumulated postretirement benefit obligation:
Retirees $ 157 632 $ 157 743
Other fully eligible participants 81 488 75 452
Other active participants 243 685 213 817
---------- -----------
$ 482 805 $ 447 012
========== ===========
Plan assets:
Accumulated postretirement
benefit obligation $ (482 805) $ (459 108)
Unrecognized transition obligation 302 840 323 029
Unrecognized net experience (gains) (93 701) (83 116)
---------- -----------
Obligation included on balance sheet $ (273 666) $ (219 195)
========== ===========
</TABLE>
For measurement purposes, a 10 percent annual rate of increase in
per capita health care costs of covered benefits was assumed for
1997, 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, 1997 would be
increased by $17,300 and the aggregate of the service and
interest cost components of net periodic postretirement benefit
cost for the year ended December 31, 1997 would be increased by
$1,300.
The weighted average discount rate used in estimating the
accumulated postretirement benefit obligation was 8% for 1997 and
1996.
65
<PAGE>
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. 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, 1997 and 1996.
The Company had unused lines of credit totaling $11,700,000 with
nonaffiliated banks at December 31, 1997.
66
<PAGE>
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.
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, 1997 and 1996, 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>
1997 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Financial assets:
Cash and short-term
investments $ 7 542 309 $ 7 542 309 $ 5 962 250 $ 5 962 250
Securities 37 418 780 37 466 068 26 089 574 25 786 814
Loans 81 425 186 79 267 000 87 870 194 85 659 000
Less: allowance
for loan losses (748 558) - - (913 955) - -
------------ ------------ ------------ ------------
Total financial
assets $125 637 717 $124 275 377 $119 008 063 $117 408 064
============ ============ ============ ============
Financial liabilities:
Deposits $117 079 355 $118 113 000 $111 087 867 $111 186 000
------------ ------------ ------------ ------------
Total financial
liabilities $117 079 355 $118 113 000 $111 087 867 $111 186 000
------------ ------------ ------------ ------------
</TABLE>
67
<PAGE>
<TABLE>
Note 19. Condensed Financial Information - Parent Company Only
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Balance Sheets
December 31, 1997 and 1996
<CAPTION>
Assets 1997 1996
------------- -------------
<S> <C>
Cash $ 50 278 $ 5 521
Prepaid expenses - - 453
Securities 5 000 60 000
Investment in subsidiary, at cost,
plus undistributed net income 14 736 435 13 859 593
Equity investment in Johnson Williams
Limited Partnership 266 409 271 289
------------- -------------
Total assets $ 15 058 122 $ 14 196 856
============= =============
Liabilities and Stockholders' Equity
Liabilities
Other liabilities $ 7 $ - -
------------- ------------
Stockholders' Equity
Preferred stock $ - - $ - -
Common stock 3 521 213 3 499 714
Surplus 2 107 826 1 945 891
Retained earnings 9 419 266 8 756 281
Unrealized gain (loss) on
securities available for
sale, net 9 810 (5 030)
------------- ------------
Total stockholders' equity $ 15 058 115 $ 14 196 856
------------- ------------
Total liabilities and
stockholders' equity $ 15 058 122 $ 14 196 856
============= ============
</TABLE>
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Income
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C>
Income
Dividends from subsidiary $ 223 000 $ 200 000 $ 200 000
Interest on securities 773 1 414 2 561
------------ ------------ ------------
Total income $ 223 773 $ 201 414 $ 202 561
------------ ------------ ------------
Expenses
Amortization of organizational costs $ - - $ 13 023 $ 12 600
Legal expense 1 409 565 1 376
Other operating expenses 20 914 22 989 29 163
------------ ------------ ------------
Total expenses $ 22 323 $ 36 577 $ 43 139
------------ ------------ ------------
Other Income
Income (loss) on equity investment $ (4 880) $ 595 $ (18 689)
Other - - - - 25 064
------------ ------------ ------------
Total other income $ (4 880) $ 595 $ 6 375
------------ ------------ ------------
Income before allocated tax
benefits and undistributed
net income of subsidiary $ 196 570 $ 165 432 $ 165 797
Allocated Income Tax Benefit (53 440) (57 797) (59 629)
------------ ------------ ------------
Income before equity in
undistributed net income
of subsidiary $ 250 010 $ 223 229 $ 225 426
Equity in Undistributed Net Income
of Subsidiary 862 002 1 088 108 1 035 264
------------ ------------ ------------
Net income $ 1 112 012 $ 1 311 337 $ 1 260 690
============ ============ ============
</TABLE>
Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
<CAPTION>
<S> <C>
1997 1996 1995
------------ ------------ -----------
Cash Flows from Operating Activities
Net income $ 1 112 012 $ 1 311 337 $ 1 260 690
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of organizational costs - - 13 023 12 600
(Income) loss on equity investment 4 880 (595) 18 689
Undistributed earnings of subsidiary (862 002) (1 088 108) (1 035 264)
Changes in assets and liabilities:
(Increase) decrease in prepaid
expenses 453 11 267 (11 630)
(Increase) decrease in income tax
credits receivable - - 48 000 (48 000)
Increase in other liabilities 7 - - - -
------------ ------------ -----------
Net cash provided by
operating activities $ 255 350 $ 294 924 $ 197 085
------------ ------------ -----------
Cash Flows from Investing Activities
Purchase of securities $ - - $ (51 000) $ (220 000)
Proceeds from maturities of securities 55 000 - - 246 000
------------ ------------ -----------
Net cash provided by (used in)
investing activities $ 55 000 $ (51 000) $ 26 000
------------ ------------ -----------
Cash Flows from Financing Activities
Cash dividends paid $ (265 528) $ (242 295) $ (220 137)
Fractional shares purchased (65) (181) - -
------------ ------------ -----------
Net cash (used in)
financing activities $ 265 593) $ (242 476) $ (220 137)
------------ ------------ -----------
Increase in cash $ 44 757 $ 1 448 $ 2 948
Cash
Beginning 5 521 4 073 1 125
------------ ------------ -----------
Ending $ 50 278 $ 5 521 $ 4 073
============ ============ ===========
Supplemental Schedule of Noncash
Financing Activities
Issuance of common stock
- dividend investment pla $ 183 499 $ 175 531 $ 160 345
============ ============ ===========
Unrealized gain on securities
available for sale $ 22 485 $ 11 479 $ 167 410
============ ============ ===========
</TABLE>
68
