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, 1998
EAGLE FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
Virginia 54-1601306
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 391
Berryville, Virginia 22611
(Address of principal executive offices) (Zip Code)
(540) 955-2510
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $2.50
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.[X]
PAGE 1 OF 62 PAGES. Exhibit index on page 35 .
------ ------ ------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 25, 1999 was $35,970,928. The aggregate market value of
the stock was computed using a market rate of $28.00 per share.
The number of shares of Registrant's Common Stock outstanding as of March
25, 1999 was 1,420,287.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1998 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 1999 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 Shareholder 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.............................................. 31
Item 8. Financial Statements and Supplementary Data.............. 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 31
PART III
Item 10. Directors and Executive Officers of the Registrant....... 32
Item 11. Executive Compensation................................... 32
Item 12. Security Ownership of Certain Beneficial Owners
and Management.... ................................... 32
Item 13. Certain Relationships and Related Transactions........... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 33
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 and commercial banking
services, including demand, savings and time deposits and consumer, mortgage and
commercial 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, Picadilly Street 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-nine officers, fifty-two other full-time and
twelve part-time employees as of December 31, 1998. 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>
1998 1997
--------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate
--------- --------- --------- --------- --------- ---------
<S> <C>
ASSETS:
Loans
Taxable $ 83,536 $ 7,189 8.61% $ 81,525 $ 7,184 8.81%
Tax-exempt (1) 1,440 109 7.57% 1,389 107 7.70%
Non-accrual 352 0 0.00% 495 0 0.00%
--------- --------- --------- ---------
Total Loans $ 85,328 $ 7,298 $ 83,409 $ 7,291 8.74%
--------- --------- --------- ---------
Securities
Taxable $ 35,765 $ 2,149 6.01% $ 28,671 $ 1,809 6.13%
Tax-Exempt (1) 4,966 333 6.71% 3,106 219 7.05%
--------- --------- --------- ---------
Total Securities $ 40,731 $ 2,482 6.09% $ 31,777 $ 2,028 6.38%
--------- --------- --------- ---------
Deposits in banks $ 41 $ 2 4.88% $ 0 $ 0 0.00%
--------- --------- --------- ---------
Federal funds sold $ 2,090 $ 114 5.45% $ 1,793 $ 101 5.63%
--------- --------- --------- ---------
Total Earning Assets $128,190 $ 9,896 7.72% $116,979 $ 9,420 8.05%
========= =========
Less: Reserve for
loan losses (800) (817)
Cash and due from banks 4,985 4,643
Bank premises and
equipment, net 4,127 4,122
Other assets 3,413 3,209
--------- ---------
Total Assets $139,915 $128,136
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $ 18,443 $ 0 $ 15,846 $ 0
--------- --------- --------- ---------
NOW accounts $ 16,365 $ 325 1.99% $ 15,062 $ 309 2.05%
Money market accounts 17,488 553 3.16% 16,709 520 3.11%
Savings accounts 13,773 330 2.40% 13,956 341 2.44%
Time deposits 56,604 2,971 5,25% 50,655 2,729 5.39%
--------- --------- --------- ---------
Total Interest-
Bearing Deposits $104,230 $ 4,179 4.01% $ 96,382 $ 3,899 4.05%
Fed funds purchased 305 14 4.59% 115 5 4.35%
Federal Home Loan
Bank advances 233 12 5.15% 0 0 0.00%
--------- --------- --------- ---------
Total Interest-
Bearing Liabilities $104,768 $ 4,205 4.01% $ 96,497 $ 3,904 4.05%
--------- --------- --------- ---------
Other Liabilities $ 1,160 $ 1,143
--------- ---------
Shareholders' Equity $ 15,544 $ 14,650
--------- ---------
Total Liabilities &
Shareholders' Equity $139,915 $128,136
========= =========
Net interest spread 3.71% 4.00%
Interest expense as a percent
of average earning assets 3.28% 3.34%
Net interest margin 4.44% 4.72%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
</TABLE>
Average Balances, Income/Expenses and Average Rates (continued)
(In Thousands) (Fully Taxable Equivalent)
1996
---------------------------------
Average Income/ Average
Balances Expense Rate
--------- --------- ---------
ASSETS:
Loans
Taxable $ 84,772 $ 7,660 9.04%
Tax-exempt (1) 1,410 138 9.79%
Non-accrual 0 0 0.00%
--------- ---------
Total Loans $ 86,182 $ 7,798 9.05%
--------- ---------
Securities
Taxable $ 23,528 $ 1,443 6.13%
Tax-Exempt (1) 3,289 239 7.27%
--------- ---------
Total Securities $ 26,817 $ 1,682 6.27%
--------- ---------
Deposits in banks $ 0 $ 0 0.00%
--------- ---------
Federal funds sold $ 918 $ 51 5.56%
--------- ---------
Total Earning Assets $113,917 $ 9,531 8.37%
=========
Less: Reserve for
loan losses (853)
Cash and due from banks 4,197
Bank premises and
equipment, net 4,097
Other assets 2,858
---------
Total Assets $124,216
=========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $ 12,900 $ 0
--------- ---------
NOW accounts $ 15,262 $ 321 2.10%
Money market accounts 17,393 535 3.08%
Savings accounts 13,594 342 2.52%
Time deposits 49,349 2,656 5,38%
--------- ---------
Total Interest-
Bearing Deposits $ 95,598 $ 3,854 4.03%
Fed funds purchased 974 57 5.85%
Federal Home Loan
Bank advances 0 0 0.00%
--------- ---------
Total Interest-
Bearing Liabilities $ 96,572 $ 3,911 4.05%
--------- ---------
Other Liabilities $ 1,053
---------
Shareholders' Equity $ 13,691
---------
Total Liabilities &
Shareholders' Equity $124,216
=========
Net interest spread 4.32%
Interest expense as a percent
of average earning assets 3.43%
Net interest margin 4.93%
(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
5
<PAGE>
Table 2 - Rate/Volume Variance (In Thousands)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
--------------------------------------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
-------- -------- -------- -------- -------- --------
INTEREST INCOME:
<S> <C> <C> <C> <C> <C> <C>
Loans; taxable $ (9) $ 729 $ (738) $ (476) $ (286) $ (190)
Loans; tax-exempt 24 4 20 (31) (2) (29)
Securities; taxable 340 421 (81) 366 323 43
Securities; tax-exempt 114 124 (10) (20) (13) (7)
Deposits in banks 2 2 0 0 0 0
Federal funds sold 13 16 (3) 50 49 1
-------- -------- -------- -------- -------- --------
Total Interest Income $ 484 $ 1,296 $ (812) $ (111) $ 71 $ (182)
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
NOW accounts $ 16 $ 24 $ (8) $ (12) $ (4) $ (8)
Money market accounts 33 25 8 (15) (20) 5
Savings accounts (11) (5) (6) (1) 5 (6)
Time deposits 242 311 (69) 73 68 5
Federal funds purchased 9 9 0 (52) (40) (12)
Federal Home Loan
Bank advances 12 12 0 (3) (3) 0
-------- -------- -------- -------- -------- --------
Total Interest Expense $ 301 $ 376 $ (75) $ (7) $ 9 $ (16)
-------- -------- -------- -------- -------- --------
Net Interest Income $ 183 $ 920 $ (737) $ (104) $ 62 $ (166)
-------- -------- -------- -------- -------- --------
</TABLE>
6
<PAGE>
Table 3 - Analysis of Allowance for Loans Losses
(In Thousands)
<TABLE>
<CAPTION>
Year Ended
December 31
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Allowance for Loan
<S> <C> <C> <C> <C> <C>
Losses, January 1 $ 749 $ 914 $ 828 $ 808 $ 744
Loans Charged-Off:
Commercial, financial
and agricultural $ 1 $ 4 $ 0 $ 144 $ 52
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 7 42 0 0 48
Consumer 286 640 267 130 122
------ ------ ------ ------ ------
Total Loans Charged-Off $ 294 $ 686 $ 267 $ 274 $ 174
------ ------ ------ ------ ------
Recoveries:
Commercial, financial
and agricultural $ 0 $ 1 $ 6 $ 10 $ 11
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 4 4 0 0 0
Consumer 94 39 57 44 24
------ ------ ------ ------ ------
Total Recoveries $ 98 $ 44 $ 63 $ 54 $ 35
------ ------ ------ ------ ------
Net Charge-Offs $ 196 $ 642 $ 204 $ 220 $ 139
------ ------ ------ ------ ------
Provision for Loan Losses $ 372 $ 477 $ 290 $ 240 $ 203
------ ------ ------ ------ ------
Allowance for Loan
Losses, December 31 $ 925 $ 749 $ 914 $ 828 $ 808
====== ====== ====== ====== ======
Ratio of Net Charge-Offs
to Average Loans: 0.23% 0.77% 0.24% 0.26% 0.18%
====== ====== ====== ====== ======
</TABLE>
7
<PAGE>
Table 4 - Allocation of Allowance for Loan Losses
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Allowance Percentage Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total for Loan of Total
Losses Loans Losses Loans Losses Loans
---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Commercial, financial,
and agricultural $ 352 8.8% $ 323 8.8% $ 365 10.6%
Real Estate: mortgage 110 77.2% 125 74.0% 75 68.4%
Consumer 463 14.0% 301 17.2% 474 21.0%
---------- ---------- ----------
$ 925 $ 749 $ 914
========== ========== ==========
</TABLE>
8
<PAGE>
Table 5 - Loan Portfolio (In Thousands)
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C>
Loans secured by real estate:
Construction and land development $ 2,168 $ 588 $ 1,434 $ 0 $ 0
Secured by farmland 3,565 3,700 4,013 4,112 3,888
Secured by 1-4 family residential 51,444 44,863 45,156 41,411 35,803
Nonfarm, nonresidential loans 16,902 11,141 9,518 10,372 13,698
Loans to farmers (except secured
by real estate) 745 770 1,446 1,605 1,777
Commercial and industrial loans
(except those secured by real estate) 6,463 5,116 6,145 6,349 6,247
Loans to individuals (except those
secured by real estate) 13,603 14,458 19,633 22,508 19,547
All other loans 1,193 1,251 1,732 1,239 1,239
-------- -------- -------- -------- --------
Total loans 96,083 81,887 89,077 87,596 82,199
Less: Unearned discount (150) (462) (1,207) (1,725) (1,565)
-------- -------- -------- -------- --------
Total Loans, Net $95,933 $81,425 $87,870 $85,871 $80,634
======== ======== ======== ======== ========
</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 $14,308 $48,183 $13,588 $74,079
Agricultural production loans 452 282 0 734
Commercial and industrial loans 3,530 2,912 18 6,460
Consumer loans 2,775 9,474 1,218 13,467
All other loans 1,193 0 0 1,193
------- ------- ------- -------
$22,258 $58,851 $14,824 $95,933
======= ======= ======= =======
For maturities over one year:
Interest rates - floating $ 1,521 $ 3,249 $ 4,770
Interest rates - fixed 57,330 11,575 68,905
------- ------- -------
$58,851 $14,824 $73,675
======= ======= =======
</TABLE>
10
<PAGE>
Table 7 - Non-Performing Assets (In Thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 227 $ 437 $ 0 $ 430 $ 0
Restructured loans 0 0 0 0 0
Other real estate owned 0 190 47 47 47
------ ------ ------ ------ ------
Total Non-Performing Assets $ 227 $ 627 $ 47 $ 477 $ 47
====== ====== ====== ====== ======
Loans past due 90 days
accruing interest $ 372 $ 614 $ 967 $1,694 $ 683
====== ====== ====== ====== ======
Allowance for loan losses to
period end loans 0.96% 0.92% 1.04% 0.96% 1.00%
Non-performing assets to
period end loans and other
real estate owned 0.24% 0.77% 0.05% 0.52% 0.06%
</TABLE>
The amount of gross interest income that would have been recorded during the
periods if the non-accrual loans had been current in accordance with their
original terms is incorporated by reference to Note 4 of the Consolidated
Financial Statements which are contained herein as Exhibit 99.1.
A discussion of the Company's policy for placing loans on non-accrual status is
incorporated by reference to Note 1 of the Consolidated Financial Statements
which are contained herein as Exhibit 99.1.
11
<PAGE>
<TABLE>
Table 8 - Maturity Distribution and Yields of Securities
(In Thousands)
<CAPTION>
Due in one year Due after 1 Due after 5
or less through 5 years through 10 years
---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- -----
<S> <C>
Securities held to maturity:
U.S. Treasury securities $ 0 0.00% $ 0 0.00% $ 122 7.63%
Obligations of U.S. government
corporations and agencies 1,987 5.02% 4,504 6.28% 0 0.00%
Mortgage-backed securities 0 0.00% 2,629 7.12% 4,972 6.73%
Obligations of states and
political subdivisions,
taxable 0 0.00% 2,727 6.40% 375 6.18%
------- ------- -------
Total taxable 1,987 9,860 5,469
Obligations of states and
political subdivisions,
tax-exempt (1) 355 7.60% 2,732 6.74% 5,006 6.33%
------- ------- -------
Total $ 2,342 $12,592 $10,475
------- ------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $ 1,401 5.76% $ 3,825 5.94% $ 0 0.00%
Mortgage-backed securities 1,171 6.21% 4,200 5.94% 2,067 6.21%
Other taxable securities 0 0.00% 0 0.00% 0 0.00%
------- ------- -------
Total taxable $ 2,572 $ 8,025 $ 2,067
------- ------- -------
Obligations of states and
Political subdivision
Tax-exempt 0 0.00% 0 0.00% 498 6.56%
------- ------- -------
Total $ 2,572 $ 8,025 $ 2,565
------- ------- -------
Total securities: $ 4,914 $20,617 $13,040
======= ======= =======
(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>
Due after
10 years and
Equity Securities Total
---------------- ----------------
Amount Yield Amount Yield
------- ----- ------- -----
<S> <C>
Securities held to maturity:
U.S. Treasury securities $ 0 0.00% $ 122 7.63%
Obligations of U.S. government
corporations and agencies 0 0.00% 6,491 5.89%
Mortgage-backed securities 3,009 0.00% 10,610 6.75%
Obligations of states and
political subdivisions,
taxable 0 0.00% 3,102 6.37%
------- -------
Total taxable 3,009 20,325
Obligations of states and
political subdivisions,
tax-exempt (1) 250 6.63% 8,343 6.53%
------- -------
Total $ 3,259 $28,668
------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $ 0 0.00% $ 5,226 5.89%
Mortgage-backed securities 0 0.00% 7,438 6.06%
Other taxable securities 1,252 6.70% 1,252 6.70%
------- -------
Total taxable $ 1,252 $13,916
------- -------
Obligations of state and
Political subdivisions
Tax-exempt 0 0.00% 498 6.56%
------- -------
Total $ 1,252 $14,414
------- -------
Total securities: $ 4,511 $43,082
======= =======
(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>
December 31
---------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C>
Noninterest-bearing $ 21,289 $ 17,774 $ 15,175
-------- -------- --------
Interest-bearing:
NOW accounts 18,053 1.99% 15,796 2.05% 16,773 2.10%
Money market accounts 18,922 3.16% 16,232 3.11% 17,172 3.08%
Regular savings accounts 13,959 2.40% 13,572 2.44% 13,421 2.52%
Certificates of deposit:
Less than $100,000 37,540 5.16% 38,743 5.39% 37,204 5.38%
$100,000 and more 20,477 5.46% 14,962 5.49% 11,343 5.40%
-------- -------- --------
Total interest-bearing $108,921 4.01% $ 99,305 4.05% $ 95,913 4.03%
-------- -------- --------
Total deposits $130,210 $117,079 $111,088
======== ======== ========
</TABLE>
13
<PAGE>
<TABLE>
Table 10 - Maturities of Certificates of Deposit and Other Time
Deposits 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, 1998 $ 12,129 $ 4,609 $ 3,168 $ 541 $ 0 $ 20,447
======== ======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
Table 11 - Risk Based Capital Ratios (In Thousands)
<TABLE>
<CAPTION>
December 31
----------------------------------
1998 1997
-------- --------
<S> <C>
Tier 1 Capital:
Shareholders' Equity $ 15,563 $ 14,445
Tier 2 Capital:
Allowable Allowance for Loan Losses 925 749
-------- --------
Total Capital: $16,488 $ 15,194
======== ========
Risk Adjusted Assets: $102,313 $ 82,443
======== ========
Risk Based Capital Ratios:
Tier 1 to Risk Adjusted Assets 15.21% 17.52%
Total Capital to Risk Adjusted Assets 16.12% 18.43%
</TABLE>
15
<PAGE>
<TABLE>
Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
<CAPTION>
December 31, 1998
------------------------------------------------------
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:
<S> <C> <C> <C> <C> <C>
Loans (net of unearned income) $ 15,062 $ 11,966 $ 57,330 $ 11,575 $ 95,933
Securities and other
interest-earning assets 2,110 2,803 20,724 17.445 43,082
Federal funds sold 2,323 0 0 0 2,323
--------- --------- --------- --------- ---------
Total interest-earning assets $ 19,495 $ 14,769 $ 78,054 $ 29,020 $141,338
--------- --------- --------- --------- ---------
INTEREST-BEARING LIABILITIES:
Certificates of deposit:
$100,000 and more $ 12,129 $ 7,777 $ 541 $ 0 $ 20,447
less than $100,000 11,284 18,729 7,524 3 37,540
Other deposits 50,934 0 0 0 50,934
--------- --------- --------- --------- ---------
Total interest-bearing
liabilities $ 74,347 $ 26,506 $ 8,065 $ 3 $108,921
--------- --------- --------- --------- ---------
Interest sensitivity gap:
Asset sensitive
(Liability sensitive) ($54,852) ($11,737) $ 69,989 $ 29,017 $ 32,417
========= ========= ========= ========= =========
Cumulative interest rate gap: $(54,852) $(66,589) $ 3,400 $ 32,417
========= ========= ========= =========
Ratio of cumulative gap to total
interest earning assets: -38.81% -47.11% 2.41% 22.94%
========= ========= ========= =========
</TABLE>
16
<PAGE>
Item 2. Properties.
The present headquarters building of the Registrant and the Bank,
which is owned, 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, Virginia. The Bank also presently operates
leased branches at 625 East Jubal Early Drive, Winchester, Virginia and 40 West
Piccadilly Street, Winchester, Virginia.
The Bank also purchased a 1.5 acre parcel of land located adjacent to
the Food Lion north of Berryville on Route 340. The site will house a branch in
the future. The Bank also owns a building at 18 North Church Street in
Berryville for future expansion. This site is currently leased and used for
offices.
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 Shareholder
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>
1998 1997 1996 Dividends Per Share
---------------------------------------------------------------------------
High Low High Low High Low 1998 1997 1996
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter $25.00 $24.00 $22.00 $20.50 $19.00 $18.75 $0.08 $0.08 $0.00
2nd Quarter 26.00 25.00 23.00 22.00 19.50 19.00 0.08 0.08 0.11
3rd Quarter 27.00 26.00 24.00 23.00 20.00 19.50 0.08 0.08 0.00
4th Quarter 27.00 27.00 24.00 24.00 20.50 20.00 0.09 0.08 0.19
</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 at
$2.50. 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 starting February 15,
1997. The company paid quarterly dividends during both 1997 and 1998.
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 1,042 holders of record of the Registrant's Common Stock as
of March 25, 1999.
18
<PAGE>
Item 6. Selected Financial Data.
The following Selected Financial Data for the five fiscal years ended December
31, 1998 should be read in conjunction with Item 7, Management's Discussion &
Analysis of Financial Condition and Results of Operations and the Financial
Statements of the Registrant incorporated by reference in response to Item 8,
Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------
1998 1997 1996 1995 1994
Income Statement Data: ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $9,746,590 $9,310,237 $9,402,870 $8,726,902 $7,896,082
Interest Expense 4,204,254 3,904,197 3,910,612 3,584,788 2,722,451
------------ ------------ ------------ ------------ ------------
Net Interest Income $5,542,336 $5,406,040 $5,492,258 $5,142,114 $5,173,631
Less: Provision for
Loan Losses 371,886 476,667 290,000 240,000 203,000
------------ ------------ ------------ ------------ ------------
Net Interest Income after
Provision for Loan Losses $5,170,450 $4,929,373 $5,202,258 $4,902,114 $4,970,631
Non-Interest Income 1,707,712 1,245,781 1,024,770 811,968 590,458
------------ ------------ ------------ ------------ ------------
Net Revenue $6,878,162 $6,175,154 $6,227,028 $5,714,082 $5,561,089
Non-Interest Expense 5,099,167 4,690,999 4,378,387 3,976,155 3,626,679
------------ ------------ ------------ ------------ ------------
Income before Income Taxes $1,778,995 $1,484,155 $1,848,641 $1,737,927 $1,934,410
Applicable Income Taxes 470,190 372,143 537,304 477,237 573,407
------------ ------------ ------------ ------------ ------------
Net Income $1,308,805 $1,112,012 $1,311,337 $1,260,690 $1,361,003
============ ============ ============ ============ ============
Performance Ratios:
Return on Average Assets 0.94% 0.87% 1.06% 1.12% 1.25%
Return on Average Equity 8.42% 7.59% 9.58% 9.94% 11.90%
Dividend Payout Ratio 35.60% 40.38% 31.86% 30.18% 26.17%
Per Share Data (1):
Net Income, basic and diluted $0.93 $0.79 $0.94 $0.91 $0.99
Cash Dividends Declared 0.33 0.32 0.30 0.28 0.26
Book Value 11.42 10.69 10.14 9.44 8.67
Market Price * 27.00 24.00 20.50 18.75 17.50
Average Shares Outstanding 1,413,172 1,404,645 1,392,298 1,383,152 1,369,330
Balance Sheet Data:
Assets $153,124,559 $133,239,401 $126,241,741 $121,492,853 $114,607,016
Loans (Net of
Unearned Income) 95,933,498 81,425,186 87,870,194 85,871,203 80,634,132
Securities 43,081,952 37,418,780 26,089,574 26,618,148 23,833,408
Deposits 130,209,888 117,079,355 111,087,867 105,612,562 99,007,815
Shareholders' Equity 16,193,501 15,058,115 14,196,856 13,120,419 11,969,374
(1) Adjusted for a stock split effected in the form of a 100% stock dividend
of Eagle Financial Services, Inc. stock on December 31, 1996.
* The Company issues one class of stock, Common, which is not listed for
trading on a registered exchange or quoted on the National Association of
Securities Dealers Automated Quotation System (NASDAQ). Trades in the
Company's stock occur sporadically on a local basis. Accordingly, there
is no established public trade market for shares of the Company's stock,
and quotations do not necessarily reflect the price that would be paid in
an active and liquid market.
</TABLE>
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The purpose of this discussion is to focus on the important factors
affecting the Company's financial condition and results of operations. This
discussion should be read in conjunction with the Selected Financial Data and
the Company's Consolidated Financial Statements (including the notes thereto).
The tables which were contained in prior years' Annual Reports with Management's
Discussion and Analysis can be found in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
OVERVIEW
During 1998 total assets of the company increased $19.9 million or
14.92% from $133.2 million at December 31, 1997 to $153.1 at December 31, 1998.
Growth in both loans and securities was funded through an increase in total
deposits and an advance from the Federal Home Loan Bank. Net loans increased
$14.3 million or 17.76% from $80.7 million to $95.0 million at year end 1997 and
1998, respectively. Securities increased $5.7 million or 15.13% from $37.4
million to $43.1 million at year 1997 and 1998, respectively. Total deposits of
the Company increased from $117.1 million to $130.2 million, which represents an
increase of $13.1 million or 11.22% from December 31, 1997 to December 31, 1998.
Shareholders' equity increased $1.1 million or 7.54% during 1998 from $15.1
million to $16.2 million.
For the year ended December 31, 1998, net income totaled $1.3 million,
a $0.2 million or 17.70% increase over 1997 net income of $1.1 million. Earnings
per share were $0.93, $0.79 and $0.94 for 1998, 1997 and 1996, respectively.
This is a $0.15 or 15.96% decrease in 1997 and a $0.14 or 17.72% increase for
1998. Return of average equity for 1998 was 8.42% as compared to 7.59% for 1997
and 9.58% in 1996. Return on average assets for 1998 was 0.94% as compared to
0.87% for 1997 and 1.06% for 1996. During the past five years, the Company has
earned $6.4 million, resulting in an increase in shareholders' equity of 49.18%.
The market value of the Company has risen steadily over the same period. The
market value of the stock has increased from $16.25 per share to $27.00 over the
same five year period which represents an increase of 66.15%
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 $0.1 million or 1.57% in 1997 and increased $0.1
million or 2.52% in 1998 from $5.5 million in 1996, $5.4 million in 1997 and
$5.5 million in 1998. 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 and 4.44% in 1998.
Earning assets yielded 7.72% on a fully taxable equivalent basis in
1998 as compared to 8.05% in 1997 and 8.37% in 1996. The average rate on total
loans decreased from 8.74% in 1997 to 8.55% in 1998 as compared to 9.05% in
1996. The total income earned on loans remained the same at $7.3 million in 1997
and 1998 despite an increase in average loans of $1.9 million or 2.30% as
compared to a $0.5 million or 6.39% decrease in 1997 from $7.8 million in 1996.
Interest earned on securities increased from $1.6 million in 1996 to $2.0
million in 1997 and $2.5 million in 1998, an increase of $0.4 million or 22.01%
and $0.5 million or 22.4% in 1997 and 1998, respectively. The average balance of
securities increased by $9.0 million or 28.18% in 1998 and $5.0 million or
18.50% in 1997. The average rate on securities increased from 6.27% in 1996 to
6.38% in 1997, then decreased to 6.09% in 1998.
Interest expense remained the same at $3.9 million for 1996 and 1997
and increased $0.3 million or 7.71% to $4.2 million in 1998. Average balances on
interest-bearing liabilities increased by $8.3 million or 8.57% from $96.5
million in 1997 to $104.8 million in 1998. The average rate on interest-bearing
liabilities has changed only slightly from 4.05% in 1996 and 1997 to 4.01% in
1998. Interest expense as a percent of average earning assets has decreased from
3.43% in 1996 to 3.34% in 1997 and 3.28% in 1998 and net interest spread has
decreased from 4.32% in 1996 to 4.00% in 1997 and 3.71% in 1998.
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 provision for loan losses decreased
$104,781 from $476,667 in 1997 to $371,886 in 1998 as compared to an increase in
1997 of $186,667 from $290,000 in 1996. The ratio of net charge-offs to average
loans was 0.23% for 1998 compared to 0.77% in 1997 and 0.24% in 1996. The
allowance for loan losses as a percentage of loans decreased from 1.04% at the
end of 1996 to 0.92% at the end of 1997, then increased to 0.96% at the end of
1998. Charged-off loans decreased $393,207 or 57.26% and recoveries increased
$53,584 or 120.08% in 1998 compared to 1997, which resulted in net charge-offs
of $195,273 for 1998 and $642,064 for 1997.
The coverage for the allowance for loan losses over non-performing
assets and loans 90 days past due and still accruing interest was 154.36% in
1998 as compared to 60.35% in 1997 and 90.14% in 1996. Loans 90 days past due
and still accruing interest as a percentage of total loans, net unearned
discount, decreased from 0.75% in 1997 to 0.39% in 1998. The amount of loans
past due greater than 90 days decreased from $614,000 in 1997 to $372,000 in
1998. Of the $372,000, 89.75% are secured by real estate. The allowance for loan
losses as of year end covered net charge-offs 4.74 times in 1998 as compared to
only 1.17 times in 1997.
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 methods utilized consider
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 $0.5 million or 37.08% from $1.2 million
in 1997 to $1.7 million in 1998 and increased $0.2 million or 21.57% in 1997
from $1.0 million in 1996. Other operating income realized an increase of
$291,092 or 148.71% from $195,739 in 1997 to $486,831 in 1998. This increase can
be attributed to commissions received from the sale of non-deposit investment
products through Eagle Investment Services and commissions received from the
origination of mortgages for the secondary market through Eagle Home Funding.
Total other expenses increased $0.4 million or 8.70% from $4.7 million
in 1997 to $5.1 million in 1998 and increased $0.3 million or 7.14% in 1997 from
$4.4 million in 1996. Salaries and wages realized an increase of $366,748 or
18.79% from $1,951,569 in 1997 to $2,318,317 in 1998. This increase can be
attributed to the hiring of personnel necessary to operate the Bank's Old Post
Office Branch and performance salary adjustments received by employees.
The efficiency ratio of the Company, a measure of its performance
based upon the relationship between non-interest expense and operating income,
was 69.46% in 1997 and 68.90% in 1998. It is management's objective to maintain
an efficiency ratio at or below 68.00% for the Company.
23
<PAGE>
LOAN PORTFOLIO
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. The ratio of loans to deposits increased
4.13% from 69.55% in 1997 to 73.68% in 1998. Loans, net of unearned income
increased $14.5 million or 17.82% from $81.4 million to $95.9 million at year
end 1997 and 1998, respectively. 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 $74.1 million or 77.10% of total loans in 1998 and $60.3
million or 73.63% of total loans in 1997 which represents an increase of $13.8
million or 22.87% 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.
24
<PAGE>
RISK ELEMENTS AND NON-PERFORMING ASSETS
Non-performing assets consist of nonaccrual loans, restructured loans,
and other real estate owned (foreclosed properties). Total nonperforming assets
and loans that are 90 days or more past due and still accruing interest was $0.6
million and $1.2 million on December 31, 1998 and 1997, respectively. This is a
decrease of $0.6 million or 51.73%.
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.
The amount of classified loans remained the same at $2.4 million for 1998 and
1997. These loans are primarily well-secured and in the process of collection
and the allowance for loan losses includes $316,260 in specific allocations for
these loans as well as percentage allocations for classified assets without
specific allocations.
25
<PAGE>
SECURITIES
The total amount of securities as of December 31, 1998 was $43.1
million, compared to $37.4 million as of December 31, 1997. Securities increased
$5.7 million or 15.13% in 1998 over 1997. The increase from 1997 to 1998 is
primarily due to investments in Obligations of states and political subdivisions
(municipal bonds). These securities increased $6.6 million or 121.88% from 1997
to 1998.
During 1998 the Company adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" effective October 1, 1998.
Paragraph 54 of this Standard allows a reallocation of securities among the
categories established by FAS No. 115. As a result of adoption the Company
transferred Obligations of U.S. government corporations and agencies and
Mortgage-backed securities with a total book value of $12.1 million and a total
fair value of $12.2 million from held to maturity to available for sale. As of
result of adoption, 66.54% percent of the Company's securities were classified
as held to maturity and 33.46% were classified as available for sale at December
31, 1998. The increase in available for sale securities provide additional
liquidity to the Company due to their ability to be sold. This transfer would
also allow the company to sell and replace certain securities if rates change
rapidly and the opportunity to sell mortgage-backed securities when the pool
becomes very small and the expected life of the security extends well beyond its
original average life.
The unrealized gain on available for sale securities increased from
$14,864 to $118,075 at December 31, 1997 and 1998 respectively. This significant
increase in fair value can be attributed to the adoption of FAS No. 133 due to
many of the securities which were transferred having an unrealized gain.
Unrealized gains or losses on available for sale securities are reported as
increases or decreases in shareholders' equity, net of the related deferred tax
effect as Accumulated other comprehensive income.
26
<PAGE>
DEPOSITS
Total deposits increased $13.1 million or 11.21% from $117.1 million
in 1997 to $130.2 million in 1998. Non-interest bearing demand deposits
increased $3.5 million or 19.77% from $17.8 in 1997 to $21.3 in 1998. Savings
and interest bearing demand deposits increased $5.3 million or 11.70% from $45.6
million in 1997 to $50.9 million in 1998. Time deposits increased $4.3 million
or 7.97% from $53.7 million in 1997 to $58.0 in 1998.
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 $109.8 million or 84.30% of total deposits
in 1998 as compared to $102.1 million or 87.22% of total deposits in 1997.
Certificates of deposit of $100,000 or more totaled $20.4 million or 15.70% of
total deposits in 1998 as compared to $15.0 million or 12.78% of total deposits
in 1997. The Company neither purchases brokered deposits nor solicits deposits
from sources outside of its primary market area.
27
<PAGE>
CAPITAL RESOURCES
The Company continues to be a well capitalized financial institution.
Total shareholders' equity on December 31, 1998 was $16.2 million, reflecting a
percentage of total assets of 10.58% compared to $15.1 million and 11.30% at
year-end 1997. Shareholders' equity per share increased $0.73 or 6.83% from
$10.69 per share in 1997 to $11.42 per share in 1998. The return on average
shareholders' equity increased from 7.59% in 1997 to 8.42% in 1998. During 1998
the Company paid $0.33 per share in dividends as compared to $0.32 per share in
1997. The Company has a Dividend Investment Plan that reinvests the dividends of
the shareholder in Company stock.
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 shareholders' 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 shareholders' equity to average assets must be maintained. On
December 31, 1998, the Company's Tier I capital ratio was 15.21% compared to
17.52% in 1997, the Tier II capital ratio was 16.12% compared to 18.43% in 1997
and the leverage ratio was 11.17% compared to 11.06% in 1996. See Note 12 to the
Consolidated Financial Statements as of December 31, 1998 for additional
discussion and analysis of regulatory capital requirements.
28
<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. In January 1998,
the Bank's Board of Directors approved a Year 2000 Compliance Plan which
identifies 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, and data
processing.
The Bank is now well into testing its systems and renovating areas
with known deficiencies. The overall test objective of the Bank is to utilize
proxy testing of systems rather than attempting to simulate future date periods
using production equipment. During October 1998 an employee of the Bank was sent
to the site of our core processing vendor to participate in regional user group
testing for the software. Actual data from a bank was used to test the critical
dates identified by the Federal Financial Institutions Examination Council
(F.F.I.E.C.). A representative from the Bank returned to the vendor's site
during February 1999 to complete testing of the auxiliary products of the
software which the Bank uses. Proxy testing was also utilized to test the
software used for the Bank's Trust Department. Other softwares, which operate in
a microcomputer environment, will be installed on a stand-alone test computer
and tested using future critical dates. During March 1999 the company had its
ATM machines evaluated for Year 2000 readiness. The Bank's maintenance vendor
will be able to upgrade parts and software to ensure these machines will be Year
2000 ready.
The overall cost of preparing for the Year 2000 is not expected to
have a material effect on the Company's consolidated financial statements. The
Bank has incurred nominal fees for participating in proxy testing which cover
the cost of using the vendor's equipment, supplies, and personnel. The Bank will
incur hardware and software costs to upgrade ATM's to be Year 2000 ready. The
Bank is utilizing existing personnel to perform testing and document Year 2000
efforts, therefore, no outside consulting fees will be incurred in achieving
Year 2000 readiness.
Although the Company has no reason to conclude that a failure will
occur, the most likely worst-case Year 2000 scenario would entail a disruption
or failure of the Company's power supplier's or voice and data transmission
supplier's capability to provide power or data transmission services to a
computer system or facility. If such a failure were to occur, the Company would
implement its contingency plan. While it is impossible to quantify the impact of
such a scenario, the most reasonably likely worst-case scenario would entail
diminishment of service levels, some customer inconvenience and additional costs
associated with implementing the contingency plan.
Although the Bank is confident that its efforts will result in a
seamless transition into the Year 2000, a contingency plan has been prepared
which addresses carrying on normal operations despite any Year 2000 problems
which may be encountered. Through a careful plan for processing at the end of
the year, all of the Bank's data and system files will be protected by
performing Year 2000 back-up procedures, in addition to normal back-up
procedures, onto magnetic tapes which will be stored in a designated area. All
year-end reports will be printed for access to account and customer information
in the event that the systems are unable to operate due to a program or utility
company problem which hinders normal processing procedures.
29
<PAGE>
LIQUIDITY AND MARKET RISK
Asset and liability management assures liquidity and maintains the
balance between rate sensitive assets and liabilities. Liquidity management
involves meeting the present and future financial obligations of the Company
with the sale or maturity of assets or through the occurrence of additional
liabilities. Liquidity needs are met with cash on hand, deposits in banks,
federal funds sold, securities classified as available for sale and loans
maturing within one year. At December 31, 1998, liquid assets totaled $44.3
million, which represents 32.38% of total deposits, federal funds purchased and
securities sold under agreements to repurchase, long-term borrowings, and other
liabilities. The Company minimizes liquidity demand by relying on core deposits,
which represent 84.30% of total deposits. Securities provide 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 attempts to maintain an interest sensitive position that maximizes
the net interest margin.
As the holding company of Bank of Clarke County, 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 until maturity. Interest rate risk exposure
of the Company is, therefore, experienced at the Bank level. It is the
responsibility of senior management to enact appropriate interest rate risk
management procedures.
The loan portfolio's primary volatility is due to the concentration
of loans made 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, 1998, 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. Senior 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
Company had negative cumulative twelve month gaps of $37.4 million or 26.23% of
total interest earning assets at December 31, 1998 and $31.8 million or 26.47%
of total interest earning assets at December 31, 1997. The increase of $5.6
million in the negative cumulative twelve month gap can be attributed to the
shifting of certificates of deposit into terms of twelve months or less along
with an increase in fixed and variable loans which mature within one year.
The following tables provide information about the Company's
financial instruments that are sensitive to changes in interest rates as of
December 31, 1997 and 1998. The expected maturities for loans, securities, and
certificates of deposit are the based on the contractual maturity of the
instruments. The expected maturities of money market, savings, and N.O.W.
accounts are based on the Bank's internal interest rate sensitivity analysis
which considers the amount of these accounts which would remain if rates
increased or decreased. The average interest rate for loans is the weighted
average contractual rate of the loans maturing during the period indicated. The
average interest rate for taxable securities is the weighted average yield of
the securities maturing during the period indicated. The average interest rate
for tax-exempt securities is the weighted average tax-equivalent yield assuming
a federal tax rate of 34% for the securities maturing during the period
indicated. The average interest rate for money market, savings, and N.O.W.
accounts is the weighted average annual percentage yield as of December 31, 1997
and 1998 for the amount maturing during the period indicated. The average rate
for certificates of deposit is the weighted average contractual rate of the
certificates maturing during the period indicated.
<TABLE>
<CAPTION>
At December 31, 1998
Principal Amount Maturing In
- ------------------------------------------------------------------------------------------------------
There- Fair
(In Thousands) 1999 2000 2001 2002 2003 after Total Value
- ------------------------------------------------------------------------------------------------------
Earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate loans $16,495 $10,074 $17,154 $11,581 $18,521 $11,575 $85,400 $88,309
Average interest rate 7.99% 8.82% 8.09% 8.27% 7.48% 7.94% 8.03%
Variable rate loans $5,763 $442 $434 $322 $323 $3,249 $10,533 $10,533
Average interest rate 8.57% 8.71% 8.45% 8.47% 8.61% 8.01% 8.40%
Taxable securities $4,559 $4,021 $5,686 $4,704 $3,474 $11,797 $34,241 $34,357
Average interest rate 5.55% 5.98% 6.06% 6.45% 6.69% 6.56% 6.27%
Tax-exempt securities $355 $735 $674 $892 $431 $5,754 $8,841 $8,883
Average interest rate 7.60% 6.49% 6.72% 6.90% 6.90% 6.36% 6.53%
Other interest-earning
assets $2,323 0 0 0 0 0 $2,323 $2,323
Average interest rate 4.62% 0 0 0 0 0 4.62%
Interest-bearing liabilities:
Money market, savings,
and N.O.W. accounts $17,412 $5,878 $5,878 $2,791 $2,791 $16,184 $50,934 $50,934
Average interest rate 2.69% 2.73% 2.73% 2.25% 2.25% 1.75% 2.36%
Certificates of deposit $48,805 $7,466 $1,081 $275 $357 $3 $57,987 $58,500
Average interest rate 4.98% 5.80% 5.02% 5.28% 4.92% 5.27% 5.09%
Long-term borrowings 0 0 0 0 0 $5,000 $5,000 $5,030
Average interest rate 0 0 0 0 0 5.01% 5.01%
Other interest-bearing
Liablities $696 0 0 0 0 0 $696 $696
Average interest rate 3.98% 0 0 0 0 0 3.98%
- ------------------------------------------------------------------------------------------------------
<CAPTION>
At December 31, 1997
Principal Amount Maturing In
- ------------------------------------------------------------------------------------------------------
There- Fair
(In Thousands) 1998 1999 2000 2001 2002 after Total Value
- ------------------------------------------------------------------------------------------------------
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 0 0 0 0 0 $2,300 $2,300
Average interest rate 6.25% 0 0 0 0 0 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>
30
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by Part II, Item 7A., is incorporated herein
by reference to the section titled LIQUIDITY AND MARKET RISK within Part II,
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operation."
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.
31
<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 March 25, 1999, for the
Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999.
Item 11. Executive Compensation.
The information required by Part III, Item 11., is incorporated herein
by reference to the Company's proxy statement, dated March 25, 1999, for the
Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999.
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 March 25, 1999, for the
Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999.
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 March 25, 1999, for the
Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999
32
<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, 1998 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 1998 Annual Report to
Shareholders for the year ended December
31, 1998 (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, 1998 (incorporated herein as
Exhibit 99.1).
1. Independent Auditor's Report.
2. Consolidated Balance Sheets - At
December 31, 1998 and 1997.
3. Consolidated Statements of Income
Years ended December 31, 1998, 1997,
and 1996.
4. Consolidated Statements of Changes in
Shareholders' Equity Years ended
December 31, 1998, 1997, and 1996.
5. Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997,
and 1996.
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 1998.
33
<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 25th 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 25, 1998
- ------------------------- Executive Officer
Lewis M. Ewing and Director (principal
executive officer)
/s/ JOHN R. MILLESON Vice President, Secretary/ March 25, 1998
- ------------------------- Treasuer (principal financial
John R. Milleson officer)
/s/ JAMES W. MCCARTY, JR. Vice President, Chief March 25, 1998
- ------------------------- Financial Officer
James W. McCarty, Jr. (principal accounting officer)
/s/ JOHN D. HARDESTY Chairman of the Board March 25, 1998
- ------------------------- and Director
John D. Hardesty
/s/ J. FRED JONES Director March 25, 1998
- -------------------------
J. Fred Jones
Director March 25, 1998
- -------------------------
Marilyn C. Beck
Director March 25, 1998
- -------------------------
Thomas T. Byrd
Director March 25, 1998
- -------------------------
Thomas T. Gilpin
/s/ MARY BRUCE GLAIZE Director March 25, 1999
- -------------------------
Mary Bruce Glaize
/s/ JOHN F. MILLESON, JR. Director March 25, 1998
- -------------------------
John F. Milleson, Jr.
/s/ ROBERT W. SMALLEY, JR. Director March 25, 1998
- -------------------------
Robert W. Smalley, Jr.
/s/ RANDALL G. VINSON Director March 25, 1998
- -------------------------
Randall G. Vinson
Director March 25, 1999
- -------------------------
James R. Wilkins, Jr.
</TABLE>
34
<PAGE>
EAGLE FINANCIAL SERVICES, INC.
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
EXHIBIT NUMBER DESCRIPTION
-------------- ----------------------------------------
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, 1998.
1. Independent Auditor's Report.
2. Consolidated Balance Sheets At
December 31, 1998 and 1997.
3. Consolidated Statements of Income
Years ended December 31, 1998, 1997,
and 1996.
4. Consolidated Statements of Changes
in Shareholders' Equity Years ended
December 31, 1998, 1997, and 1996.
5. Consolidated Statements of Cash
Flows Years ended December 31, 1998,
1997, and 1996.
6. Notes to Consolidated Financial
Statements.
35
EXHIBIT 11
EAGLE FINANCIIAL SERVICES, INC. AND SUBSIDIARY
Computations of Weighted Average Shares Outstanding and Earnings Per Share
(Shares Outstanding End of Month)
1998 1997 1996
Shares Shares Shares
Outstanding Outstanding Outstanding
(As Restated)
------------- ------------- -------------
1,408,485 1,399,885 1,390,570
1,410,433 1,402,153 1,390,570
1,410,433 1,402,153 1,390,570
1,410,433 1,402,153 1,390,570
1,412,320 1,404,356 1,390,570
1,412,320 1,404,356 1,390,570
1,412,320 1,404,356 1,394,026
1,414,165 1,406,454 1,394,026
1,414,165 1,406,454 1,394,026
1,416,310 1,406,454 1,394,026
1,418,341 1,408,485 1,394,026
1,418,341 1,408,485 1,394,026
------------- ------------- -------------
16,958,066 16,855,744 16,707,576
12 12 12
- ------------ ------------- ------------- -------------
Weighted
Average
Shares
Outstanding 1,413,172 1,404,645 1,392,298
- ------------ ------------- ------------- -------------
Net Income 1,308,805 1,112,012 1,311,337
- ------------ ------------- ------------- -------------
Earnings Per
Share, Basic
and Assuming
Dilution 0.93 0.79 0.94
- ------------ ------------- ------------- -------------
36
<PAGE>
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.
37
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,306
<INT-BEARING-DEPOSITS> 7
<FED-FUNDS-SOLD> 2,323
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,414
<INVESTMENTS-CARRYING> 28,668
<INVESTMENTS-MARKET> 28,825
<LOANS> 95,933
<ALLOWANCE> 925
<TOTAL-ASSETS> 153,125
<DEPOSITS> 130,210
<SHORT-TERM> 696
<LIABILITIES-OTHER> 1,025
<LONG-TERM> 5,000
<COMMON> 3,546
0
0
<OTHER-SE> 12,648
<TOTAL-LIABILITIES-AND-EQUITY> 153,125
<INTEREST-LOAN> 7,261
<INTEREST-INVEST> 2,369
<INTEREST-OTHER> 116
<INTEREST-TOTAL> 9,746
<INTEREST-DEPOSIT> 4,179
<INTEREST-EXPENSE> 4,204
<INTEREST-INCOME-NET> 5,542
<LOAN-LOSSES> 372
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,099
<INCOME-PRETAX> 1,779
<INCOME-PRE-EXTRAORDINARY> 1,779
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,309
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
<YIELD-ACTUAL> 4.45
<LOANS-NON> 227
<LOANS-PAST> 372
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,042
<ALLOWANCE-OPEN> 749
<CHARGE-OFFS> 294
<RECOVERIES> 98
<ALLOWANCE-CLOSE> 925
<ALLOWANCE-DOMESTIC> 316
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 609
</TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Berryville, Virginia
FINANCIAL REPORT
DECEMBER 31, 1998
CONTENTS
INDEPENDENT AUDITOR'S REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of shareholders' equity Consolidated statements of
cash flows Notes to consolidated financial statements
39
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors
Eagle Financial Services, Inc. and Subsidiary
Berryville, Virginia
We have audited the accompanying consolidated balance sheets of Eagle
Financial Services, Inc. and Subsidiary, as of December 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the years ended December 31, 1998, 1997, and 1996. 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 have 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, 1998 and 1997, and
the results of their operations and their cash flows for the years ended
December 31, 1998, 1997, and 1996, in conformity with generally accepted
accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 22, 1999
40
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
<CAPTION>
<S> <C>
1998 1997
--------------- ---------------
Assets
Cash and due from banks $ 5,313,475 $ 5,242,309
Federal funds sold 2,323,000 2,300,000
Securities held to maturity (fair value:
1998, $43,239,752; 1997, $37,466,068) 43,081,952 37,418,780
Loans, net of unearned discounts 95,933,498 81,425,186
Less allowance for loan losses (925,171) (748,558)
--------------- ---------------
Net loans $ 95,008,327 80,676,628
Bank premises and equipment, net 4,117,903 4,060,501
Other real estate owned 0 189,688
Other assets 3,279,902 3,351,495
--------------- ---------------
Total assets $ 153,124,559 $ 133,239,401
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest bearing $ 21,289,370 $ 17,774,480
Savings and Interest bearing 50,933,486 45,600,236
Time deposits 57,987,032 53,704,639
--------------- ---------------
Total deposits $ 130,209,888 $ 117,079,355
Federal funds purchased and securities
sold under agreements to repurchase 695,915 0
Federal Home Loan Bank advances 5,000,000 0
Other liabilities 1,025,255 1,101,931
Commitments and contingent liablities 0 0
--------------- ---------------
Total liabilities $ 136,931,058 $ 118,181,286
--------------- ---------------
Shareholders' Equity
Preferred Stock, $10 par value;
500,000 shares authorized
and unissued $ 0 $ 0
Common Stock, $2.50 par value;
authorized 1,500,000 shares;
issued 1998, 1,418,341; issued
1997, 1,408,485 shares 3,545,853 3,521,213
Surplus 2,307,615 2,107,826
Retained Earnings 10,262,104 9,419,266
Accumulated other comprehensive income 77,929 9,810
--------------- ---------------
Total shareholders' equity $ 16,193,501 $ 15,058,115
--------------- ---------------
Total liabilities and
shareholders' equity $ 153,124,559 $ 133,239,401
=============== ===============
See Notes to Consolidated Financial Statements.
</TABLE>
41
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C>
Interest Income
Interest and fees on loans $ 7,261,271 $ 7,255,085 $ 7,750,646
Interest on federal funds sold 114,207 101,842 51,219
Interest on securities held to maturity:
Taxable interest income 1,308,419 1,617,097 1,308,152
Interest income exempt from
federal income taxes 217,573 145,016 158,070
Interest and dividends on securities
available for sale:
, Taxable 766,511 142,480 90,459
Interest income exempt from
Federal income taxes 2,215 0 0
Dividends 74,612 48,717 44,324
Interest on deposits in banks 1,782 0 0
--------------- --------------- ---------------
Total interest income $ 9,746,590 $ 9,310,237 $ 9,402,870
--------------- --------------- ---------------
Interest Expense
Interest on deposits $ 4,178,511 $ 3,899,598 $ 3,853,810
Interest on federal funds purchased and
securities sold under agreements
to repurchase 14,079 4,599 56,802
Interest on Federal Home Loan Bank advances 11,664 0 0
--------------- --------------- ---------------
Total interest expense $ 4,204,254 $ 3,904,197 $ 3,910,612
--------------- --------------- ---------------
Net interest income $ 5,542,336 $ 5,406,040 $ 5,492,258
Provision For Loan Losses 371,886 476,667 290,000
--------------- --------------- ---------------
Net interest income after
provision for loan losses $ 5,170,450 $ 4,929,373 $ 5,202,258
--------------- --------------- ---------------
Other Income
Trust Department income $ 342,769 $ 233,180 $ 199,587
Service charges on deposits 545,782 532,277 522,436
Other service charges and fees 336,682 289,465 196,232
Gain (loss) on equity investment (4,352) (4,880) 595
Other operating income 486,831 195,739 105,920
--------------- --------------- ---------------
$ 1,707,712 $ 1,245,781 $ 1,024,770
--------------- --------------- ---------------
Other Expenses
Salaries and wages $ 2,318,317 $ 1,951,569 $ 1,732,542
Pension and other employee benefits 508,343 491,913 478,669
Occupancy expenses 355,468 332,916 323,962
Equipment expenses 485,775 468,785 472,462
Stationary and supplies 179,543 190,154 150,313
Postage 127,784 119,713 126,724
Credit card expense 152,647 101,156 93,637
Bank franchise tax 103,586 95,344 113,484
ATM network fees 71,188 119,827 129,385
Other operating expenses 796,516 819,622 757,209
--------------- --------------- ---------------
$ 5,099,167 $ 4,690,999 $ 4,378,387
--------------- --------------- ---------------
Income before income taxes $ 1,778,995 $ 1,484,155 $ 1,848,641
Income Tax Expense 470,190 372,143 537,304
--------------- --------------- ---------------
Net Income $ 1,308,805 $ 1,112,012 $ 1,311,337
=============== =============== ===============
Earnings Per Share
Net income per common share,
basic and diluted $ 0.93 $ 0.79 0.94
=============== =============== ===============
See Notes to Consolidated Financial Statements.
</TABLE>
42
<PAGE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C>
Balance, December 31, 1995 $ 1,738,212 $ 1,782,186 $ 9,612,627 $ (12,606) $13,120,419
Comprehensive income:
Net income - 1996 1,311,337 1,311,337 1,311,337
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of deferred
income taxes of $3,903 7,576 7,576 7,576
-----------
Total comprehensive income $ 1,318,913
===========
Issuance of common stock, dividend
investment plan (4,662 shares) 11,656 163,875 175,531
Dividends declared ($0.30 per share) (417,826) (417,826)
Issuance of common stock, stock split
effected in the form of a 100% stock
dividend (699,943 shares) 1,749,857 (1,749,857) 0
Discretionary transfer from retained
earnings 1,749,857 (1,749,857) 0
Fractional shares purchased (11) (170) (181)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 $ 3,499,714 $ 1,945,891 $ 8,756,281 $ (5,030) $14,196,856
Comprehensive income:
Net income - 1997 1,112,012 $ 1,112,012 1,112,012
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of deferred
income taxes of $7,645 14,840 14,840 14,840
-----------
Total comprehensive income $ 1,126,852
===========
Issuance of common stock, dividend
investment plan (8,603 shares) 21,507 161,992 183,499
Dividends declared ($0.32 per share) (449,027) (449,027)
Fractional shares purchased (8) (57) (65)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 3,521,213 $ 2,107,826 $ 9,419,266 $ 9,810 $15,058,115
Comprehensive income:
Net income - 1998 1,308,805 $ 1,308,805 1,308,805
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of deferred
income taxes of $35,092 68,119 68,119 68,119
-----------
Total comprehensive income $ 1,376,924
===========
Issuance of common stock to Employee
Stock Ownership Plan (2,145 shares) 5,363 28,534 33,897
Issuance of common stock, dividend
investment plan (7,715 shares) 19,288 171,357 190,645
Dividends declared ($0.33 per share) (465,967) (465,967)
Fractional shares purchased (11) (102) (113)
----------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 $ 3,545,853 $ 2,307,615 $10,262,104 $ 77,929 $16,193,501
=========== =========== =========== ============ ===========
See Notes to Consolidated Financial Statements
</TABLE>
43
<PAGE>
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S><C>
Cash Flows from Operating Activities
Net income $ 1,308,805 $ 1,112,012 $ 1,311,337
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation amortization 344,249 389 ,742 399,076
Amortization of intangible assets 50,817 50,675 52,496
(Income) loss on equity investment 4,352 4,880 (595)
Provision for loan losses 371,886 476,667 290,000
(Gain) on sale of other real estate owned (14,652) 0 0
Premium amortization (discount accretion)
on securities, net 633 63,141 (2,854)
Deferred tax (benefit) (27,506) 60,807 (891)
Changes in assets and liabilities:
(Increase) decrease in other assets 4,436 (540,104) (805,499)
Increase (decrease) in other liabilities (111,768) 144,913 64,145
-------------- -------------- --------------
Net cash provided by operating activities $ 1,931,252 $ 1,762,733 $ 1,307,215
-------------- -------------- --------------
Cash Flows from Investing Activities
Proceeds from maturities and principal
payments of securities held to maturity $ 21,117,817 $ 5,995,036 $ 5,128,436
Proceeds from maturities and principal
payments of securities available for sale 5,612,602 377,000 1,748,844
Purchases of securities held to maturity (25,295,813) (14,873,594) (6,178,873)
Purchases of securities available for sale (6,995,200) (2,868,304) (155,500)
Purchases of bank premises and equipment (362,157) (198,568) (1,157,029)
Proceeds from sale of other real estate owned 204,340 0 0
Net (increase) decrease in loans (14,703,585) 5,659,861 (2,203,140)
-------------- -------------- --------------
Net cash (used in) investing activities $ (20,421,996) $ (5,908,569) $ (2,817,262)
-------------- -------------- --------------
Cash Flows from Financing Activities
Net increase in demand deposits,
money market, and savings accounts $ 8,848,140 $ 834,027 $ 7,222,447
Net increase (decrease) in certificates
of deposits 4,282,393 5,157,461 (1,747,141)
Net increase in federal funds purchased and
securities sold under agreements to repurchase 695,915 0 (1,867,000)
Proceeds from Federal Home Loan Bank advances 5,000,000 0 0
Proceeds from issuance of common stock to ESOP 33,897 0 0
Cash dividends paid (275,322) (265,528) (242,295)
Fractional shares purchased (113) (65) (181)
-------------- -------------- --------------
Net cash provided by financing activities $ 18,584,910 $ 5,725,895 $ 3,365,830
-------------- -------------- --------------
Increase in cash and
cash equivalents $ 94,166 $ 1,580,059 $ 1,855,783
Cash and Cash Equivalents
Beginning 7,542,309 5,962,250 4,106,467
-------------- -------------- --------------
Ending $ 7,636,475 $ 7,542,309 $ 5,962,250
============== ============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,321,635 $ 3,907,348 $ 3,960,889
============== ============== ==============
Income taxes $ 295,522 $ 439,616 592,372
============== ============== ==============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Issuance of common stock,
dividend investment plan $ 190,645 $ 183,499 $ 175,531
============== ============== ==============
Unrealized gain on securities
available for sale $ 103,211 $ 22,485 $ 11,479
============== ============== ==============
Other real estate acquired in settlement
of loans $ 0 $ 143,083 $ 0
============== ============== ==============
See Notes to Consolidated Financial Statements
</TABLE>
44
<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 Department 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 a separate component of other
comprehensive income, 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, 1998
and 1997.
As of October 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Paragraph 54 of the Standard allows a reallocation of securities
among the three categories outlined above. As a result of adoption, the Company
transferred securities with an amortized cost of $12,135,479 and a fair value of
$12,249,003 from Held to Maturity to Available for Sale.
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, forward, swap or option contract, or other
financial instruments with similar characteristics. The Company does not have
any derivative financial instruments as defined under this statement.
Other Real Estate Owned
Other real estate owned is carried at the lower of estimated market value or the
carrying amount of the loan. A reserve for other real estate owned is maintained
to recognize estimated selling costs or declines in value. Provisions for
estimated selling costs or declines in value, net gains and losses on the sale
of other real estate owned, and net direct expenses attributable to these
properties are included in other operating expenses. Assets, other than real
estate, acquired in the settlement of loans are recorded as other assets.
Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
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 loan, 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 loans.
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 No. 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 it is 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 judgement 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 No. 114 at
December 31, 1998 and 1997.
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 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 amount 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 FASB No. 106, 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 defined benefit pension plan
covering substantially all full-time employees. In 1998, the Company adopted
FASB No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This pronouncement does not change the measurement or recognition of
amounts in the Company's financial statements applicable to its defined benefit
plan. FASB No. 132 standardizes the disclosure requirements for pensions by
requiring certain additional information on changes in the benefit obligations
and fair values of plan assets and by eliminating certain disclosures.
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 exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share are very similar to the
previously reported fully diluted earnings per share.
Weighted average shares were 1,413,172, 1,404,645 and 1,392,298 for the years
ended 1998, 1997 and 1996, respectively after giving retroactive effect to the
100% stock dividend declared in 1996. The Corporation had no potential dilution
of common stock as of December 31, 1998, 1997 and 1996.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130
established new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires other
comprehensive income to include the unrealized gains or losses on available for
sale securities, which prior to adoption were reported separately in
shareholders' equity. The financial statements for previous periods have been
reclassified to conform to the requirements of SFAS No. 130.
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.
45
<PAGE>
Note 2. Securities
The amortized costs and fair values of securities being held to maturity as of
December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------- -------------
1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 121,981 $ 10,275 $ 0 $ 132,256
Obligations of U.S. government
corporations and agencies 6,490,582 89,380 (2,000) 6,577,962
Mortgage-backed securities 10,609,645 19,470 (40,705) 10,588,410
Obligations of states and
political subdivisions 11,445,246 117,939 (36,559) 11,526,626
------------- ------------- ------------- -------------
$ 28,667,454 $ 237,064 $ (79,264) $ 28,825,254
============= ============= ============= =============
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
============= ============= ============= =============
</TABLE>
The amortized cost and fair value of securities being held to maturity as of
December 31, 1998, 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>
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 2,341,728 $ 2,344,257
Due after one year through five years 9,962,656 10,126,834
Due after five years through ten years 5,503,425 5,513,419
Due after ten years 250 000 252,334
Mortgage-backed securities 10,609,645 10,588,410
------------- ------------
$ 28,667,454 $ 28,825,254
============= ============
Amortized costs and fair values of securities available for sale as of December
31, 1998 and 1997, are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ------------- -------------
1998
-------------------------------------------------------------
Obligations of U.S. government
corporations and agencies $ 5,150,116 $ 80,943 $ (5,000) $ 5,226,059
Mortgage-backed securities 7,421,338 23,069 (5,961) 7,438,446
Obligations of states and
Political subdivisions 497,157 1,111 0 498,268
Other 1,227,812 27,500 (3,587) 1,251,725
------------- ------------- ------------- -------------
$ 4 243 258 $ 132,623 $ (14,548) $ 14,414,498
============= ============= ============= =============
<CAPTION>
1997
-------------------------------------------------------------
Obligations of U.S. government
corporations and agencies $ 3,501,058 $ 17,432 $ (2,568) $ 3,515,922
Other 742,200 0 0 742,200
------------- ------------- ------------- -------------
$ 4,243,258 $ 17,432 $ (2,568) $ 4,258,122
============= ============= ============= =============
The amortized cost and fair value of securities available for sale as of
December 31, 1998, 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.
Amortized Fair
Cost Value
------------- -------------
Due in one year or less $ $ 1,400,035 $ 1,400,843
Due after one year through five years 3,750,081 3,825,216
Due after five years through ten years 497,157 498,268
Mortgage backed securities 7,421,338 7,438,446
Other 1,227,812 1,251,725
------------- -------------
$ 14,296,423 $ 14,414,498
============= =============
</TABLE>
Proceeds from maturities and principal payments of securities being held to
maturity during 1998, 1997 and 1996 were $21,117,817, $5,995,036 and $5,128,436.
There were no sales of securities being held to maturity during 1998, 1997 and
1996.
Proceeds from maturities and principal payments of securities available for sale
during 1998, 1997 and 1996 were $5,612,602, $377,000 and $1,748,844. There were
no sales of securities available for sale during 1998, 1997 and 1996.
Securities having a book value of $11,423,378 and $8,473,317 at December 31,
1998 and 1997, were pledged to secure public deposits and for other purposes
required by law.
46
<PAGE>
Note 3. Loans, Net
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31
------------------------------
1998 1997
----------- -----------
(thousands)
Loans secured by real estate:
Construction and land development $ 2,168 $ 588
Secured by farmland 3,565 3,700
Secured by 1-4 family residential 51,444 44,863
Nonfarm, nonresidential loans 16,902 11,141
Loans to farmers (except secured by real estate) 745 770
Commercial and industrial loans
(except those secured by real estate) 6,463 5,116
Loans to individuals (except those
secured by real estate) 13,603 14,458
Loans to U.S. state and political subdivisions 1,093 1,155
All other loans 100 97
----------- -----------
Total loans $ 96,083 $ 81,888
Less:
Unearned income (150) (462)
Allowance for loan losses (925) (749)
----------- -----------
Loans, net $ 95,008 $ 80,677
=========== ===========
47
<PAGE>
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<CAPTION>
December 31
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Balance, beginning $ 748,558 $ 913,955 $ 828,104
Provision charged to operating
expense 371,886 476,667 290,000
Recoveries added to the allowance 98,208 44,624 63,561
Loan losses charged to the allowance (293,481) (686,688) (267,710)
------------- ------------- -------------
Balance, ending $ 925,171 $ 748,558 $ 913,955
============= ============= =============
</TABLE>
Nonaccrual loans excluded from the impaired loan disclosure under FASB 114
amounted to $227,256 and $437,261 at December 31, 1998 and 1997, respectively.
If interest would have been accrued, such income would have been approximately
$24,712 for 1998 and $11,021 for 1997. There were no loans on which the accrual
of interest was discontinued or reduced in 1996.
48
<PAGE>
Note 5. Bank Premises and Equipment, Net
The major classes of bank premises and equipment and the total accumulated
depreciation are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31
-----------------------------
1998 1997
------------- -------------
Land $ 787,918 $ 787,918
Land held for future branch site 150,587 150,587
Buildings and improvements 3,625,862 3,546,330
Furniture and equipment 2,950,633 2,668,100
------------- -------------
$ 7,515,000 $ 7,152,935
Less accumulated depreciation 3,397,097 3,092,434
------------- -------------
Bank premises and equipment, net $ 4,117,903 $ 4,060,501
============= =============
</TABLE>
Depreciation expense on furniture and equipment was $304,755, $351,058, and
$370,450 for the years ended December 31, 1998, 1997, and 1996, respectively.
49
<PAGE>
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum denomination of
$100,000, was approximately $20,447,339 and $14,961,859 at December 31, 1998 and
1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
1999 $ 48,804,445
2000 7,466,794
2001 1,080,348
2002 274,271
2003 and thereafter 361,174
-------------
$ 57,987,032
=============
50
<PAGE>
Note 7. Income Taxes
Net deferred tax (liabilities) consist of the following components as of
December 31, 1998 and 1997.
December 31
--------------------------
1998 1997
------------ ------------
Deferred tax assets:
Allowance for loan losses $ 213,345 $ 164,159
Deferred compensation 111,526 101,039
Accrued postretirement benefits 76,648 91,189
Reserve for other real estate owned 0 2,040
Non-accrual interest 8,402 6,908
------------ ------------
$ 409,921 $ 365,335
------------ ------------
Deferred tax liabilities:
Property and equipment $ 321,050 $ 305,804
Prepaid pension costs 84,471 82,637
Securities available for sale 40,146 5,054
------------ ------------
$ 445,667 $ 393,495
------------ ------------
$ (35,746) $ (28,160)
============ ============
The provision for income taxes charged to operations for the years ended
December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
December 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Current tax expense $ 497,696 $ 311,336 $ 538,195
Deferred tax (benefit) (27,506) 60,807 (891)
------------ ------------ ------------
$ 470,190 $ 372,143 $ 537,304
============ ============ ============
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, 1998, 1997 and 1996, due to the
following:
<CAPTION>
1998 1997 1996
------------ ------------ ------------
Computed "expected" tax expense $ 604,858 $ 504,613 $ 628,538
(Decrease) increase in income taxes
resulting from:
Tax-exempt interest (86,684) (63,985) (74,765)
Nontaxable life insurance (4,471) (8,712) 0
Low income housing credits (46,227) (44,454) (48,000)
Other 2,714 (15,319) 31,531
------------ ------------ ------------
$ 470,190 $ 372,143 $ 537,304
============ ============ ============
</TABLE>
51
<PAGE>
Note 8. Pension and Postretirement Benefit Plan
The following tables provide a reconciliation of the changes in the benefit
obligation and fair value of assets for 1998 and 1997 and a statement of the
funded status as of December 31, 1998 and 1997 for the pension plan and
postretirement benefit plan of the Company.
<TABLE>
<CAPTION>
<S> <C>
Pension Benefits Postretirement Benefits
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
Change in Benefit Obligation
Benefit obligation, beginning $ 1,488,638 $ 1,219,706 $ 157,632 $ 157,743
Service cost 80,962 62,353 0 0
Interest cost 117,129 95,716 12,611 12,619
Actuarial (gain) loss 0 157,373 0 (490)
Benefits paid (137,423) (46,510) (12,000) (12,240)
------------- ------------- ------------- -------------
Benefits obligation, ending $ 1,549,306 $ 1,488,638 $ 158,243 $ 157,632
------------- ------------- ------------- -------------
Change in Plan Assets
Fair value of plan assets,
beginning $ 1,469,557 $ 1,127,104 $ 0 $ 0
Actual return on plan assets 220,610 233,696 0 0
Employer contributions 85,769 155,267 12,000 12,240
Benefits paid (137,423) (46,510) (12,000) (12,240)
------------- ------------- ------------- -------------
Fair value of plan assets,
ending $ 1,638,513 $ 1,469,557 $ 0 $ 0
------------- ------------- ------------- -------------
Funded status
Funded status, beginning $ 89,207 $ (19,081) $ (158,243) $ (157,632)
Unrecognized net actuarial loss 65,306 171,964 30,917 33,529
Unrecognized net obligation
at transition (38,539) (51,383) (3,722) (3,722)
Unrecognized prior service cost 114,873 126,418 0 0
------------- ------------- ------------- -------------
Net amount recognized $ 230,847 $ 227,918 $ (131,048) $ (127,825)
============= ============= ============= =============
The following table provides the components of net periodic benefit cost for the
years ended December 31, 1998, 1997 and 1996:
<CAPTION>
Pension Benefits Postretirement Benefits
------------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
Components of Net Periodic
Benefit Cost
Service cost $ 80,962 $ 62,353 $ 57,734 $ 0 $ 0 $ 0
Interest cost 117,129 95,716 87,942 12,659 12,611 12,619
Expected return on
plan assets (115,602) (94,519) (80,060) 0 0 0
Amortization of prior
service costs 11,545 11,545 11,545 0 0 0
Amortization of net
obligation at transition (12,844) (12,844) (12,844) 2,612 2,612 2,612
Recognized net actuarial
gain 1,650 2,271 5,109 0 0 0
---------- ---------- ---------- ---------- ---------- ----------
Net periodic benefit cost $ 82,840 $ 64,522 $ 69,426 $ 15,271 $ 15,223 $ 15,231
========== ========== ========== ========== ========== ==========
</TABLE>
The weighted average discount rates used for the pension calculations was 8.00%,
the expected return on plans assets was 8.00% and the rate of compensation
increase was 6.00% for all periods. For measurement purposes, a 9.38% annual
rate of increase in per capita health care costs of covered benefits was assumed
for 1998, 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, 1998 would be increased by $4,083 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 1998 would be increased by $325. The weighted average
discount rate used in estimating the accumulated postretirement benefit
obligation was 8.00% for 1998, 1997 and 1996.
52
<PAGE>
Note 9. Employee Benefits
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 1998, 1997 or 1996. 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, 1998 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 $33,175 in 1998 and $8,160 in 1997 and
1996.
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
1998, 1997, and 1996 based on the present value of the retirement benefits,
amounted to $43,589, $47,590 and $38,499, 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.
53
<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, 1998 under these leases is $241,610, which is due as follows:
Due in the year ending December 31, 1999 $ 98,046
2000 68,514
2001 37,800
2002 37,250
------------
$ 241,610
============
The total rental expense was $106,087, $52,955 and $49,035 in 1998, 1997 and
1996, 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, 1998 and 1997, the amount of
daily average required balances were approximately $952,000 and $752,000,
respectively.
The Company is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue, and is
developing a remediation plan to resolve the issue. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Company is heavily
dependent on computer processing in the conduct of its business activities.
Failure of these systems could have a significant impact on the Company's
operations.
See Note 15 with respect to financial instruments with off-balance-sheet risk.
54
<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 shareholders (commonly referred to as related parties) on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. These persons and firms were indebted
to the Company for loans totaling $3,697,036 and $916,493 at December 31, 1998
and 1997, respectively. During 1998, total principal additions were $4,316,861
and total principal payments were $1,536,318.
55
<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, 1998,
that the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated $ 16,488 16.12% >=$ 8,185 8.00% N/A
Bank of Clarke County $ 15,229 15.01% >=$ 8,118 8.00% >=$ 10,148 10.00%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $ 15,563 15.21% >=$ 4,093 4.00% N/A
Bank of Clarke County $ 14,304 14.10% >=$ 4,059 4.00% >=$ 6,089 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $ 15,563 11.17% >=$ 5,575 4.00% N/A
Bank of Clarke County $ 14,304 10.32% >=$ 5,546 4.00% >=$ 6,933 5.00%
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% >=$ 6,573 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% >=$ 5,224 4.00% N/A
Bank of Clarke County $ 14,123 10,84% >=$ 5,211 4.00% >=$ 6,514 5.00%
</TABLE>
56
<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, 1998, the aggregate amount of
unrestricted funds, which could be transferred from the Bank to the Parent
Company without prior regulatory approval, amounted to $2,078,789 or 12.8% of
the consolidated net assets.
57
<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 shareholders.
It is based on 95% of the stock's fair market value on each dividend record
date.
58
<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 contractual notional amount of the Company's exposure to
off-balance-sheet risk as of December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 1997
------------- -------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 23,101,413 $ 9,651,769
Standby letters of credit 150,750 139,631
</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 granting loans to customers. The
Company holds real estate and bank deposits as collateral supporting those
commitments for which collateral is deemed necessary. At December 31, 1998, 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, 1998 exceeded the insurance limits of the
Federal Deposit Insurance Corporation by $1,323,923.
59
<PAGE>
Note 16. 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
(FHLB) of Atlanta. Advances bear interest at a fixed or floating rate depending
on the terms and maturity of each advance and numerous renewal options are
available to the Company. These advances are secured by the Company's real
estate loan portfolio. The unused line of credit totaled $8,000,000 and
$13,000,000 at December 31, 1998 and 1997, respectively. A $5,000,000 advance
was taken during 1998 which has a ten year term and a fixed rate of 4.94% for
the first six years. After six years, FHLB may convert the advance to an indexed
floating interest rate for the final four years of the term. If the advance
converts to a floating interest rate, the Company may pay back all or part of
the advance without a prepayment penalty.
The Company had unused lines of credit totaling $12,200,000 with other
nonaffiliated banks at December 31, 1998.
60
<PAGE>
Note 17. 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.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of all other deposits and borrowings is determined using the discounted cash
flow method. The discount rate was equal to the rate currently offered on
similar products.
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, 1998 and 1997, the difference between the carrying amounts and fair
values of loan commitments and standby letters of credit were immaterial.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(in thousands) (in thousands)
Financial assets:
Cash and short-term investments $ 7,636,475 $ 7,636,475 $ 7,542,309 $ 7,542,309
Securities 43,081,952 43,239,752 37,418,780 37,466,068
Loans 95,008,327 97,917,000 80,676,628 79,267,000
------------ ------------ ------------ ------------
Total financial assets $145,726,754 $148,793,227 $125,637,717 $124,275,377
============ ============ ============ ============
Financial liabilities:
Deposits $130,209,888 $130,750,000 $117,079,355 $118,113,000
Federal funds purchased and
securities sold under agree-
ments to repurchase 695,915 696,000 0 0
Federal Home Loan Bank advances 5,000,000 5,030,000 0 0
------------ ------------ ------------ ------------
Total financial liabilities $135,905,803 $136,476,000 $117,079,355 $118,113,000
============ ============ ============ ============
</TABLE>
61
<PAGE>
<TABLE>
Note 18. Condensed Financial Information - Parent Company Only
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Balance Sheets
December 31, 1998 and 1997
<CAPTION>
<S><C>
1998 1997
-------------- --------------
Assets
Cash held in subsidiary bank $ 27,093 $ 50,278
Securities 986,393 5,000
Investment in subsidiary, at cost,
plus undistributed net income 14,916,718 14,736,435
Equity investment in Johnson Williams
Limited Partnership 262,057 266,409
Other Assets 9,748 0
-------------- --------------
Total assets $ 16,202,009 $ 15,058,122
============== ==============
Liabilities and Shareholders' Equity
Other liabilities $ 8,508 $ 7
-------------- --------------
Shareholders' Equity
Preferred stock $ 0 $ 0
Common stock 3,545,853 3,521,213
Surplus 2,307,615 2,107,826
Retained earnings 10,262,104 9,419,266
Accumulated other comprehensive income 77,929 9,810
-------------- --------------
Total shareholders' equity $ 16,193,501 $ 15,058,115
-------------- --------------
Total liabilities and
shareholders' equity $ 16,202,009 $ 15,058,122
============== ==============
</TABLE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Income
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C>
Income
Dividends from subsidiary $ 1,130,000 $ 223,000 $ 200,000
Interest and dividends on
securities available for sale 27,514 773 1,414
------------- ------------- -------------
Total income $ 1,157,514 $ 223,773 $ 201,414
------------- ------------- -------------
Expenses
Amortization of organizational costs $ 0 $ 0 $ 13,023
Legal expense 1,710 1,409 565
Other operating expenses 17,178 20,914 22,989
------------- ------------- -------------
Total expenses $ 18,888 $ 22,323 $ 36,577
------------- ------------- -------------
Other Income
Income (loss) on equity investment $ (4,352) $ (4,880) $ 595
------------- ------------- -------------
Income before allocated tax
benefits and equity in
undistributed net income
of subsidiary $ 1,134,274 $ 196,570 $ 165,432
Allocated Income Tax Benefit (45,852) (53,440) (57,797)
------------- ------------- -------------
Income before equity in
undistributed net income
of subsidiary $ 1,180,126 $ 250,010 $ 223,229
Equity in Undistributed Net Income
of Subsidiary 128,679 862,002 1,088,108
------------- ------------- -------------
Net income $ 1,308,805 $ 1 112 012 $ 1 311 337
============= ============= =============
</TABLE>
<TABLE>
EAGLE FINANCIAL SERVICES, INC.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
<S> <C>
1998 1997 1996
------------- ------------- -------------
Cash Flows from Operating Activities
Net income $ 1,308,805 $ 1,112,012 $ 1,311,337
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of organizational costs 0 0 13,023
(Income) loss on equity investment 4,352 4,880 (595)
(Discount accretion) on securities (77) 0 0
Undistributed earnings of subsidiary (128,679) (862,002) (1,088,108)
Changes in assets and liabilities:
Decrease in prepaid expenses 0 453 11,267
Decrease in income tax credits receivable 0 0 48,000
(Increase) in other assets (9,748) 0 0
Increase (decrease) in other liabilities (7) 7 0
------------- ------------- -------------
Net cash provided by operating activities $ 1,174,646 $ 255,350 $ 294,924
------------- ------------- -------------
Cash Flows from Investing Activities
Purchase of securities available for sale $ (1,255,293) $ 0 $ (51,000)
Proceeds from maturities of securities
available for sale 299,000 55,000 0
------------- ------------- -------------
Net cash provided by (used in)
investing activities $ (956,293) $ 55,000 $ (51,000)
------------- ------------- -------------
Cash Flows from Financing Activities
Cash dividends paid $ (275,322) $ (265,528) $ (242,295)
Fractional shares purchased (113) (65) (181)
Proceeds from issuance of common
Stock to ESOP 33,897 0 0
------------- ------------- -------------
Net cash (used in) financing activities $ (241,538) $ (265,593) $ (242,476)
------------- ------------- -------------
Increase (decrease) in cash $ (23,185) $ 44,757 $ 1,448
Cash
Beginning $ 50,278 $ 5,521 $ 4,073
------------- ------------- -------------
Ending $ 27,093 $ 50,278 $ 5,521
============= ============= =============
Supplemental Schedule of Noncash Financing Activities
Issuance of common stock-
dividend investment plan $ 190,645 $ 183,499 $ 175,531
============= ============= =============
Unrealized gain on securities
available for sale $ 103,211 $ 22,485 $ 11,479
============= ============= =============
</TABLE>
62
<PAGE>
