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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
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
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
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.
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
4
Table 1 - Average Balances, Income/Expenses and Average Rates
(In Thousands) (Fully Taxable Equivalent)
1998 1997
--------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate
--------- --------- --------- --------- --------- ---------
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%.
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
Table 2 - Rate/Volume Variance (In Thousands)
1998 Compared to 1997 1997 Compared to 1996
--------------------------------------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
-------- -------- -------- -------- -------- --------
INTEREST INCOME:
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)
-------- -------- -------- -------- -------- --------
6
Table 3 - Analysis of Allowance for Loans Losses
(In Thousands)
Year Ended
December 31
------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Allowance for Loan
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%
====== ====== ====== ====== ======
7
Table 4 - Allocation of Allowance for Loan Losses
(In Thousands)
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
---------- ---------- ---------- ---------- ---------- ----------
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
========== ========== ==========
8
Table 5 - Loan Portfolio (In Thousands)
December 31
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
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
======== ======== ======== ======== ========
9
Table 6 - Maturity Schedule of Selected Loans
(In Thousands)
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
======= ======= =======
10
Table 7 - Non-Performing Assets (In Thousands)
December 31,
------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
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%
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
Table 8 - Maturity Distribution and Yields of Securities
(In Thousands)
Due in one year Due after 1 Due after 5
or less through 5 years through 10 years
---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- -----
Securities held to maturity:
U.S. Treasury securities $ 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%.
Maturity Distribution and Yields of Securities (continued)
(In Thousands)
Due after
10 years and
Equity Securities Total
---------------- ----------------
Amount Yield Amount Yield
------- ----- ------- -----
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%.
12
Table 9 - Deposits and Rates Paid (In Thousands)
December 31
---------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
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
======== ======== ========
13
Table 10 - Maturities of Certificates of Deposit and Other Time
Deposits of $100,000 and More (In Thousands)
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
======== ======== ======== ======== ======== ========
14
Table 11 - Risk Based Capital Ratios (In Thousands)
December 31
----------------------------------
1998 1997
-------- --------
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%
15
Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
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:
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%
========= ========= ========= =========
16
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
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.
1998 1997 1996 Dividends Per Share
---------------------------------------------------------------------------
High Low High Low High Low 1998 1997 1996
---------------------------------------------------------------------------
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
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
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.
Year Ended December 31
------------------------------------------------------------------------
1998 1997 1996 1995 1994
Income Statement Data: ------------ ------------ ------------ ------------ ------------
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.
19
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
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
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
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
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
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
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
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
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
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
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.
At December 31, 1998
Principal Amount Maturing In
- ------------------------------------------------------------------------------------------------------
There- Fair
(In Thousands) 1999 2000 2001 2002 2003 after Total Value
- ------------------------------------------------------------------------------------------------------
Earning assets:
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%
- ------------------------------------------------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------------------------
30
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
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
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
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.
/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.
34
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