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, 2002
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
PAGE 1 OF 31 PAGES. Exhibit index on page 27 .
------ ------ ------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at June 28, 2002 was $34,315,970. The aggregate market value of
the stock was computed using a market rate of $26.00 per share.
The number of shares of Registrant's Common Stock outstanding as of March
21, 2003 was 1,482,389.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 2003 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 2004 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.............................................. 21
Item 8. Financial Statements and Supplementary Data.............. 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant....... 22
Item 11. Executive Compensation................................... 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management......................................... 22
Item 13. Certain Relationships and Related Transactions........... 22
Item 14. Controls and Procedures.................................. 22
PART IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................... 23
2
PART I
Item 1. Business.
General
The Registrant is headquartered in Berryville, Virginia, and was
incorporated October 2, 1991 by the Bank of Clarke County (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 also has a credit card program which
offers credit cards and merchant services to customers. The Bank makes seasonal
and term commercial loans, both alone and in conjunction with other banks or
governmental agencies. The Bank issues ATM cards and Debit cards to deposit
customers. These cards can be used to withdraw cash at most ATM's through the
Bank's membership in both regional and national networks. These cards can also
be used to make purchases at retailers who accept transactions through the same
regional and national networks. The Bank offers both telephone banking and
internet banking to its customers. Both of these services can be used by
consumer and commercial customers to research account information and transfer
funds between accounts. The internet banking also offers online bill payment to
consumer and commercial customers. The Bank also operates a full-service trust
department. The Bank also has a division, Eagle Investment Services, which sells
non-deposit investment products through a third party provider, UVEST Investment
Services.
The Bank's main office is located in Berryville, Virginia, which is
located in Clarke County. The Bank's primary trade area consists of the Counties
of Clarke and Frederick and the City of Winchester. The Bank has a second Clarke
County location, which is a branch in Boyce, Virginia. The Bank started
construction on a drive-through only branch facility located at 400 McNeil Drive
during January 2003. This branch will offer multiple full-service drive-through
lanes and a drive-up ATM. The Bank has four branches located in Frederick
County. The first is located at 1508 Senseny Road, Winchester, Virginia, the
second at 1460 North Frederick Pike, Winchester, Virginia, the third at 3360
Valley Pike, Winchester, Virginia, and the fourth at 382 Fairfax Pike. The
branch located at 3360 Valley Pike was a former branch facility which was
purchased during October 2002 from Branch Banking and Trust Company of Virginia.
This branch was renovated during the final quarter of 2002 and was opened for
business during January 2003. The Bank has three branches located in The City of
Winchester. The first is located at 625 East Jubal Early Drive, Winchester,
Virginia, the second at 40 West Piccadilly Street, Winchester, Virginia, and the
third at 190 Campus Boulevard, Suite 120, Winchester, Virginia. During September
2002 the Bank purchased a branch site located at the northwest intersection of
Papermill Road and South Pleasant Valley Road in The City of Winchester. The
Bank has not determined when construction will begin on this branch. During
October 2002 the Bank entered into a 30-year land lease for a branch site
located at the intersection of State Route 7 and the access road for Millbrook
High School in Frederick County. The Bank intends to open a branch site on this
property before year-end 2003. Within its primary trade area, the Bank competes
with numerous large and small financial institutions, credit unions, insurance
companies and other non-bank competitors.
The Bank had thirty-two officers, ninety other full-time and eighteen
part-time employees as of December 31, 2002. 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 Loan 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)
2002 2001
--------------------------------- ---------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Rate Balances Expense Rate
--------- --------- --------- --------- --------- ---------
ASSETS:
Loans
Taxable $206,993 $ 13,970 6.75% $156,194 $ 12,243 7.84%
Tax-exempt (1) 1,212 94 7.76% 1,365 103 7.55%
--------- --------- --------- ---------
Total Loans $208,205 $ 14,064 6.75% $157,559 $ 12,346 7.84%
--------- --------- --------- ---------
Securities
Taxable $ 25,249 $ 1,483 5.87% $ 27,121 $ 1,715 6.32%
Tax-Exempt (1) 10,318 653 6.33% 10,843 707 6.52%
--------- --------- --------- ---------
Total Securities $ 35,567 $ 2,136 6.01% $ 37,964 $ 2,422 6.38%
--------- --------- --------- ---------
Deposits in banks $ 155 $ 1 0.65% $ 80 $ 3 3.75%
--------- --------- --------- ---------
Federal funds sold $ 1,603 $ 23 1.43% $ 555 $ 18 3.24%
--------- --------- --------- ---------
Total Earning Assets $245,530 $ 16,224 6.61% $196,158 $ 14,789 7.54%
========= =========
Less: Reserve for
loan losses (2,132) (1,499)
Cash and due from banks 12,961 7,997
Bank premises and
equipment, net 6,547 5,113
Other assets 4,286 4,074
--------- ---------
Total Assets $267,192 $211,843
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $ 43,162 $ 0 $ 30,462 $ 0
--------- --------- --------- ---------
NOW accounts $ 40,463 $ 426 1.05% $ 26,387 $ 225 0.85%
Money market accounts 36,423 657 1.80% 22,690 545 2.40%
Savings accounts 22,250 266 1.20% 16,956 302 1.78%
Time deposits 72,576 2,273 3.13% 81,026 4,382 5.41%
--------- --------- --------- ---------
Total Interest-
Bearing Deposits $171,712 $ 3,622 2.11% $147,059 $ 5,454 3.71%
Fed funds purchased and
securities sold under
agreements to repurchase 7,205 135 1.87% 6,252 238 3.81%
Federal Home Loan
Bank advances 17,071 667 3.91% 6,493 321 4.94%
Trust preferred capital
Notes 3,769 194 5.15% 0 0 0.00%
--------- --------- --------- ---------
Total Interest-
Bearing Liabilities $199,757 $ 4,618 2.31% $159,804 $ 6,013 3.76%
--------- ========= --------- =========
Other Liabilities $ 1,365 $ 1,272
--------- ---------
Shareholders' Equity $ 22,908 $ 20,305
--------- ---------
Total Liabilities &
Shareholders' Equity $267,192 $211,843
========= =========
Net interest spread 4.30% 3.78%
Interest expense as a percent
of average earning assets 1.88% 3.07%
Net interest margin 4.73% 4.47%
(1) Income and rates on tax-exempt assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
Table 1 - Average Balances, Income/Expenses and Average Rates (In Thousands) (Fully Taxable Equivalent)
(continued)
2000
---------------------------------
Average Income/ Average
Balances Expense Rate
--------- --------- ---------
ASSETS:
Loans
Taxable $ 132,647 $ 11,020 8.31%
Tax-exempt (1) 1,557 118 7.58%
--------- ---------
Total Loans $ 134,204 $ 11,138 8.30%
--------- ---------
Securities
Taxable $ 27,694 $ 1,743 6.29%
Tax-Exempt (1) 11,171 735 6.58%
--------- ---------
Total Securities $ 38,865 $ 2,478 6.38%
--------- ---------
Deposits in banks $ 30 $ 2 6.67%
--------- ---------
Federal funds sold $ 224 $ 14 6.25%
--------- ---------
Total Earning Assets $ 173,323 $ 13,632 7.87%
=========
Less: Reserve for
loan losses (1,230)
Cash and due from banks 5,845
Bank premises and
equipment, net 4,254
Other assets 3,755
---------
Total Assets $ 185,947
=========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $ 25,067 $ 0
--------- ---------
NOW accounts $ 21,472 $ 279 1.30%
Money market accounts 18,255 533 2.92%
Savings accounts 15,453 344 2.23%
Time deposits 76,003 4,185 5.51%
--------- ---------
Total Interest-
Bearing Deposits $ 131,183 $ 5,341 4.07%
Fed funds purchased and
securities sold under
agreements to repurchase 5,324 308 5.79%
Federal Home Loan
Bank advances 5,000 251 5.02%
Trust preferred capital 0 0 0.00%
notes
Total Interest-
Bearing Liabilities $141,507 $ 5,900 4.17%
--------- =========
Other Liabilities $ 1,145
---------
Shareholders' Equity $ 18,228
---------
Total Liabilities &
Shareholders' Equity $185,947
=========
Net interest spread 3.70%
Interest expense as a percent
of average earning assets 3.40%
Net interest margin 4.46%
(1) Income and rates on tax-exempt assets are computed on a tax equivalent
basis using a federal tax rate of 34%.
5
Table 2 - Rate/Volume Variance (In Thousands)
2002 Compared to 2001 2001 Compared to 2000
--------------------------------------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
-------- -------- -------- -------- -------- --------
INTEREST INCOME:
Loans; taxable $ 1,727 $ 3,017 ($1,290) $ 1,223 $ 1,795 $ (572)
Loans; tax-exempt (9) (12) 3 (15) (15) 0
Securities; taxable (232) (114) (118) (28) (36) 8
Securities; tax-exempt (54) (34) (20) (28) (21) (7)
Deposits in banks (2) (17) 15 1 1 0
Federal funds sold 5 7 (2) 4 6 (2)
-------- -------- -------- -------- -------- --------
Total Interest Income $ 1,435 $ 2,847 ($1,412) $ 1,157 $1,730 $ (573)
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE:
NOW accounts $ 201 $ 139 $ 62 $ (54) $ 105 $ ($159)
Money market accounts 112 191 (79) 12 45 (33)
Savings accounts (36) 825 (861) (42) 39 (81)
Time deposits (2,110) (419) (1,691) 197 272 (75)
Federal funds purchased and
securities sold under
agreements to repurchase (103) 44 (147) (70) 73 (143)
Federal Home Loan
Bank advances 346 397 (51) 70 74 (4)
Trust preferred capital 194 194 0 0 0 0
Notes
-------- -------- -------- -------- -------- --------
Total Interest Expense $($1,396) $ 1,371 $($2,767) $ 113 $ 608 $ (495)
-------- -------- -------- -------- -------- --------
Net Interest Income $ 2,831 $ 1,476 $ 1,355 $ 1,044 $ 1,122 $ ($78)
-------- -------- -------- -------- -------- --------
6
Table 3 - Analysis of Allowance for Loans Losses (In Thousands)
Year Ended
December 31
--------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Allowance for Loan
Losses, January 1 $ 1,797 $1,340 $1,123 $ 925 $ 749
------ ------ ------ ------ ------
Loans Charged-Off:
Commercial, financial
and agricultural $ 34 $ 7 $ 35 $ 73 $ 1
Real estate-construction
and land development 0 0 0 0 0
Real estate-mortgage 0 139 3 27 7
Consumer 154 205 133 137 286
------ ------ ------ ------ ------
Total Loans Charged-Off $ 188 $ 351 $ 171 $ 237 $ 294
------ ------ ------ ------ ------
Recoveries:
Commercial, financial
and agricultural $ 0 $ 0 $ 0 $ 0 $ 0
Real estate-construction
and land development 0 0 0 0 0
Real estate-mortgage 19 5 3 1 4
Consumer 48 90 35 99 94
------ ------ ------ ------ ------
Total Recoveries $ 67 $ 95 $ 38 $ 100 $ 98
------ ------ ------ ------ ------
Net Charge-Offs $ 121 $ 256 $ 133 $ 137 $ 196
------ ------ ------ ------ ------
Provision for Loan Losses $ 700 $ 713 $ 350 $ 335 $ 372
------ ------ ------ ------ ------
Allowance for Loan
Losses, December 31 $2,376 $1,797 $1,340 $1,123 $ 925
====== ====== ====== ====== ======
Ratio of Net Charge-Offs
to Average Loans: 0.06% 0.16% 0.10% 0.13% 0.23%
====== ====== ====== ====== ======
7
Table 4 - Allocation of Allowance for Loan Losses (In Thousands)
2002 2001 2000
---------------------- ---------------------- ----------------------
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 $ 713 8.8% $ 594 8.5% $ 446 9.0%
Real Estate: mortgage 594 77.3% 304 77.1% 224 77.8%
Consumer 1,069 13.9% 899 14.4% 670 13.2%
---------- ---------- ----------
$ 2,376 $ 1,797 $ 1,340
========== ========== ==========
8
Table 5 - Loan Portfolio (In Thousands)
December 31
----------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
Loans secured by real estate:
Construction and land development $ 12,081 $ 10,383 $ 4,396 $ 4,138 $ 2,168
Secured by farmland 2,892 4,778 5,109 6,057 3,565
Secured by 1-4 family residential properties 111,273 93,042 75,809 64,566 51,444
Secured by nonfarm, nonresidential properties 48,459 30,295 25,217 23,457 16,902
Loans to farmers 1,071 1,002 656 495 745
Commercial and industrial loans 18,671 13,912 10,749 9,952 6,463
Consumer installment loans 31,377 25,909 18,749 14,745 13,603
All other loans 154 350 1,372 1,445 1,193
---------- ---------- ---------- ---------- ----------
Total loans 225,978 179,671 142,057 124,855 96,083
Less: Unearned discount 0 (2) (8) (37) (150)
---------- ---------- ---------- ---------- ----------
Total Loans, Net $ 225,978 $ 179,669 $ 142,049 $ 124,818 $ 95,933
========== ========== ========== ========== ==========
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 $ 38,743 $ 100,298 $ 35,664 $ 174,705
Loans to farmers 499 525 47 1,071
Commercial and industrial loans 8,238 9,269 1,164 18,671
Consumer installment loans 4,337 25,040 2,000 31,377
All other loans 132 22 0 154
--------- --------- --------- ---------
$ 51,949 $ 135,154 $ 38,875 $ 225,978
========= ========= ========= =========
For maturities over one year:
Floating rate loans $ 10,849 $ 21,472 $ 32,321
Fixed rate loans 124,305 17,403 141,708
--------- --------- ---------
$ 135,154 $ 38,875 $ 174,029
========= ========= =========
10
Table 7 - Non-Performing Assets (In Thousands)
December 31,
------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Nonaccrual loans $ 0 $2,029 $ 0 $ 156 $ 227
Restructured loans 0 0 0 0 0
Other real estate owned 0 0 0 109 0
------ ------ ------ ------ ------
Total Non-Performing Assets $ 0 $2,029 $ 0 $ 265 $ 227
====== ====== ====== ====== ======
Loans past due 90 days
accruing interest $ 27 $ 8 $ 47 $ 642 $ 372
====== ====== ====== ====== ======
Allowance for loan losses to
period end loans 1.05% 1.00% 0.94% 0.90% 0.96%
Non-performing assets to
period end loans and other
real estate owned 0.00% 1.13% 0.00% 0.21% 0.24%
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 99.2.
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 99.2.
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:
Obligations of U.S. government
corporations and agencies 500 5.00% 500 5.42% 0 0.00%
Mortgage-backed securities 0 0.00% 686 6.36% 1,057 5.85%
Obligations of states and
political subdivisions,
taxable 772 5.98% 1,710 6.10% 229 6.28%
------- ------- -------
Total taxable 1,272 2,896 1,286
Obligations of states and
political subdivisions,
tax-exempt (1) 515 6.03% 4,566 6.10% 3,039 6.39%
------- ------- -------
Total $ 1,787 $ 7,462 $ 4,325
------- ------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $ 1,637 1.64% $ 5,623 2.85% $ 0 0.00%
Mortgage-backed securities 0 0.00% 2,697 4.48% 2,053 4.41%
Corporate securities 0 0.00% 6,883 6.71% 2,544 6.54%
Other taxable securities 0 0.00% 0 0.00% 0 0.00%
------- ------- -------
Total taxable $ 1,637 $15,203 $ 4,597
------- ------- -------
Obligations of states and
Political subdivisions,
tax-exempt (1) 0 0.00% 0 0.00% 1,429 7.38%
------- ------- -------
Total $ 1,637 $15,203 $ 6,026
------- ------- -------
Total securities: $ 3,424 $22,665 $10,351
======= ======= =======
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a federal tax rate of 34%.
Table 8 - Maturity Distribution and Yields of Securities (In Thousands)
(continued)
Due after
10 years and
Equity Securities Total
----------------- -----------------
Amount Yield Amount Yield
------- ----- ------- -----
Securities held to maturity:
Obligations of U.S. government
corporations and agencies 0 0.00% 1,000 5.21%
Mortgage-backed securities 1,300 5.99% 3,043 6.02%
Obligations of states and
political subdivisions,
taxable 0 0.00% 2,711 6.08%
------- -------
Total taxable 1,300 6,754
Obligations of states and
political subdivisions,
tax-exempt (1) 393 6.44% 8,513 6.21%
------- -------
Total $ 1,693 $15,267
------- -------
Securities available for sale:
Obligations of U.S. government
corporations and agencies $ 0 0.00% $ 7,260 2.58%
Mortgage-backed securities 0 0.00% 4,750 4.45%
Corporate securities 811 9.80% 10,238 6.91%
Other taxable securities 1,391 5.30% 1,391 5.30%
------- -------
Total taxable $ 2,202 $23,639
------- -------
Obligations of state and
Political subdivisions
Tax-exempt 0 0.00% 1,429 7.38%
------- -------
Total $ 2,202 $25,068
------- -------
Total securities: $ 3,895 $40,335
======= =======
(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
--------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Amount Rate Amount Rate Amount Rate
--------- ------ --------- ------ --------- ------
Noninterest-bearing $ 50,635 $ 36,719 $ 28,189
--------- --------- ---------
Interest-bearing:
NOW accounts 54,639 1.05% 31,041 0.85& 23,487 1.30%
Money market accounts 34,627 1.80% 33,475 2.40% 18,032 2.92%
Regular savings accounts 24,106 1.20% 19,081 1.78% 15,181 2.23%
Certificates of deposit:
Less than $100,000 44,375 3.17% 51,335 5.82% 56,319 5.38%
$100,000 and more 28,210 3.05% 25,698 4.67% 26,849 5.80%
--------- --------- ---------
Total interest-bearing $ 185,957 2.11% $ 160,630 3.71% $ 139,868 4.07%
--------- --------- ---------
Total deposits $ 236,592 $ 197,349 $ 168,057
========= ========= =========
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, 2002 $ 19,227 $ 1,215 $ 3,910 $ 3,858 $ 0 $ 28,210
======== ======== ======== ======== ======== ========
14
Table 11 - Risk Based Capital Ratios (In Thousands)
December 31
------------------------
2002 2001
---------- ----------
Tier 1 Capital:
Common Stock $ 3,697 $ 3,653
Capital Surplus 3,545 3,179
Retained Earnings 17,012 14,408
Other Comprehensive Income:
Minimum Pension Liability (403) 0
Trust Preferred Capital Notes 7,000 0
Goodwill (360) (404)
---------- ----------
$ 30,491 $ 20,836
Tier 2 Capital:
Allowable Allowance for Loan Losses 2,376 1,797
---------- ----------
Total Risk-Based Capital: $ 32,867 $ 22,633
========== ==========
Risk Weighted Assets: $ 221,037 $ 173,952
========== ==========
Risk Based Capital Ratios:
Tier 1 to Risk Weighted Assets 13.79% 11.98%
Total Capital to Risk Weighted Assets 14.87% 13.01%
15
Table 12 - Interest Rate Sensitivity Schedule (In Thousands)
December 31, 2002
-------------------------------------------------------------------
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) $ 69,625 $ 14,645 $ 124,305 $ 17,403 $ 225,978
Securities and other
interest-earning assets 792 2,819 22,738 14,013 40,362
Federal funds sold 1,857 0 0 0 1,857
----------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 72,274 $ 17,464 $ 147,043 $ 31,416 $ 268,197
----------- ----------- ----------- ----------- -----------
INTEREST-BEARING LIABILITIES:
Certificates of deposit:
$100,000 and more $ 19,520 $ 4,944 $ 3,746 $ 0 $ 28,210
less than $100,000 12,586 19,586 12,143 60 44,375
Other deposits 113,372 0 0 0 113,372
Federal funds purchased and
securities sold under
agreements to repurchase 2,909 0 0 0 2,909
Federal Home Loan Bank advances 0 10,000 $ 10,000 0 20,000
Trust preferred capital notes 7,000 0 0 0 7,000
----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities $ 155,387 $ 34,530 $ 25,889 $ 60 $ 215,866
----------- ----------- ----------- ----------- -----------
Interest sensitivity gap:
Asset sensitive
(Liability sensitive) $ (83,113) $ (17,066) $ 121,154 $ 31,356 $ 52,331
=========== =========== =========== =========== ===========
Cumulative interest rate gap: $ (83,113) $ (100,179) $ 20,975 $ 52,331
=========== =========== =========== ===========
Ratio of cumulative gap to total
interest earning assets: -30.99% -37.35% 7.82% 19.51%
=========== =========== =========== ===========
16
Item 2. Properties.
The current headquarters of the Registrant and the Bank, which is
owned, 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, and an ATM. Upon completion of the drive-through
branch facility at 400 McNeil Drive, Berryville, Virginia, the remote
drive-through facility at the headquarters will be closed. The Bank owns and
operates branch offices at 108 West Main Street, Boyce, Virginia, 1508 Senseny
Road, Winchester, Virginia, 40 West Piccadilly Street, Winchester, Virginia, 382
Fairfax Pike, Stephens City, Virginia, 1460 North Frederick Pike, Winchester,
Virginia, and 3360 Valley Pike, Winchester, Virginia. The Bank also operates
leased branches at 625 East Jubal Early Drive, Winchester, Virginia and 190
Campus Boulevard, Winchester, Virginia. The Bank also owns a building at 18
North Church Street in Berryville, Virginia for future expansion. This site is
currently leased and used for offices.
Item 3. Legal Proceedings.
The Company is a defendant in various lawsuits wherein substantial
amounts are claimed. In the opinion of the Company's legal counsel, these suits
are without substantial merit and should not result in judgements which in the
aggregate would have a material adverse effect on the Company's financial
statements.
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.
2002 2001 2000 Dividends Per Share
---------------------------------------------------------------------------
High Low High Low High Low 2002 2001 2000
---------------------------------------------------------------------------
1st Quarter $24.00 $20.00 $25.50 $24.00 $29.00 $27.50 $0.15 $0.13 $0.11
2nd Quarter 26.00 23.50 25.00 23.00 28.00 25.50 0.16 0.13 0.11
3rd Quarter 26.50 25.50 24.00 23.85 25.50 25.00 0.16 0.14 0.12
4th Quarter 28.00 26.50 24.00 23.50 26.00 25.00 0.17 0.15 0.12
The Company's dividend policy was changed during 1997 to pay quarterly
dividends beginning February 15, 1997. The company has paid quarterly dividends
during each of years after the policy change.
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 1,306 holders of record of the Registrant's Common Stock as
of March 21, 2002.
18
Item 6. Selected Financial Data.
The following Selected Financial Data for the five fiscal years ended December
31, 2002 should be read in conjunction with Item 7, Management's Discussion and
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
------------------------------------------------------------------------
2002 2001 2000 1999 1998
Income Statement Data: ------------ ------------ ------------ ------------ ------------
Interest and Dividend Income $ 15,970,038 $ 14,514,207 $ 13,342,966 $ 11,014,989 $ 9,746,590
Interest Expense 4,618,148 6,012,603 5,899,537 4,485,143 4,204,254
------------ ------------ ------------ ------------ ------------
Net Interest Income $ 11,351,890 $ 8,501,604 $ 7,443,429 $ 6,529,846 $ 5,542,336
Provision for Loan Losses 700,000 712,500 350,000 335,000 371,886
------------ ------------ ------------ ------------ ------------
Net Interest Income after
Provision for Loan Losses $ 10,651,890 $ 7,789,104 $ 7,093,429 $ 6,194,846 $ 5,170,450
Noninterest Income 3,468,152 2,983,504 2,175,228 2,024,649 1,707,712
------------ ------------ ------------ ------------ ------------
Net Revenue $ 14,120,042 $ 10,772,608 $ 9,268,657 $ 8,219,495 $ 6,878,162
Noninterest Expenses 9,081,685 7,375,872 6,576,135 5,982,827 5,099,167
------------ ------------ ------------ ------------ ------------
Income before
Income Taxes $ 5,038,357 $ 3,396,736 $ 2,692,522 $ 2,236,668 $ 1,778,995
Applicable Income Taxes 1,494,456 952,044 677,696 551,538 470,190
------------ ------------ ------------ ------------ ------------
Net Income $ 3,543,901 $ 2,444,692 $ 2,014,826 $ 1,685,130 $ 1,308,805
============ ============ ============ ============ ============
Performance Ratios:
Return on Average Assets 1.33% 1.15% 1.08% 1.05% 0.94%
Return on Average Equity 15.47% 12.04% 11.05% 10.08% 8.42%
Shareholders' Equity
to Assets 8.34% 9.04% 9.82% 9.79% 10.58%
Dividend Payout Ratio 26.51% 32.62% 32.81% 32.06% 35.60%
Per Share Data:
Net Income, basic
and diluted $ 2.41 $ 1.68 $ 1.40 $ 1.18 $ 0.93
Cash Dividends Declared 0.64 0.55 0.46 0.38 0.33
Book Value 16.77 14.69 13.33 12.19 11.42
Market Price * 27.50 24.00 25.50 29.00 27.00
Average Shares Outstanding 1,469,995 1,452,416 1,439,129 1,423,312 1,413,172
Balance Sheet Data:
Assets $292,567,571 $237,641,939 $196,133,288 $178,377,761 $153,124,559
Loans 225,978,331 179,668,892 142,049,516 124,817,215 95,933,498
Securities 40,334,782 36,972,829 37,918,656 40,587,858 43,081,952
Deposits 236,591,708 197,348,451 168,056,776 148,888,478 130,209,888
Shareholders' Equity 24,401,791 21,472,707 19,265,486 17,460,848 16,193,501
* 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 Company also files an annual statement on Form 10-K with the Securities and
Exchange Commission (S.E.C.) which contains financial tables on which parts of
this discussion are based. The Company's Form 10-K may be obtained from the
EDGAR database on the S.E.C.'s web site at www.sec.gov, from the Investor
Relations section of the web site www.bankofclarke.com, or by request from the
Company's transfer agent.
CRITICAL ACCOUNTING POLICIES
The financial statements of the Company are prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP). The financial information contained within these statements is, to a
significant extent, based on measurements of the financial effects of
transactions and events that have already occurred. A variety of factors could
affect the ultimate value that is obtained when earning income, recognizing an
expense, recovering an asset or relieving a liability. The Company uses
historical loss factors as one element in determining the inherent loss that may
be present in the loan portfolio. Actual losses could differ significantly from
the historical factors that are used. In addition, GAAP itself may change from
one previously acceptable method to another method. Although the economics of
the transactions would be the same, the timing of events that would impact the
transactions could change.
The allowance for loan losses is an estimate of the losses that may be
sustained in the Company's loan portfolio. The allowance for loan losses is
based on two accounting principles: (1) Statement of Financial Accounting
Standards (SFAS) No. 5 Accounting for Contingencies, which requires that losses
be accrued when their occurrence is probable and they are estimable, and (2)
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires
that losses be accrued based on the differences between the loan balance and the
value of its collateral, the present value of future cash flows, or the price
established in the secondary market. The Company's allowance for loan losses has
three basic components: the formula allowance, the specific allowance and the
unallocated allowance. Each of these components is determined based upon
estimates that can and do change when actual events occur. The formula allowance
uses historical experience factors to estimate future losses and, as a result,
the estimated amount of losses can differ significantly from the actual amount
of losses which would be incurred in the future. However, the potential for
significant differences is mitigated by continuously updating the loss history
of the Company. The specific allowance is based upon the evaluation of specific
loans on which a loss may be realized. Factors such as past due history, ability
to pay, and collateral value are used to identify those loans on which a loss
may be realized. Each of these loans is then classified as to how much loss
would be realized on their disposition. The sum of the losses on the individual
loans becomes the Company's specific allowance. This process is inherently
subjective and actual losses may be greater than or less than the estimated
specific allowance. The unallocated allowance captures losses that are
attributable to various economic events which may affect a certain loan type
within the loan portfolio or a certain industrial or geographic sector within
the Company's market. As the loans are identified which are affected by these
events or losses are experienced on the loans which are affected by these
events, they will be recognized within the specific or formula allowances.
OVERVIEW
Total assets of the Company increased $54.9 million or 23.11% during
2002 from $237.6 million at December 31, 2001 to $292.6 million at December 31,
2002. Net loans increased $45.7 million or 25.71% from $177.9 million to $223.6
million at December 31, 2001 and 2002, respectively. Securities increased $3.4
million or 9.09% from $37.0 million to $40.3 million at December 31, 2001 and
2002, respectively. The increase in total assets was funded by deposit growth, a
Federal Home Loan Bank advance, and the issuance of trust preferred capital
notes. Total deposits increased $39.2 million or 19.89% from $197.3 million to
$236.5 million at December 31, 2001 to December 31, 2002. Federal Home Loan Bank
advances increased $10.0 million during 2002 from $10.0 million at December 31,
2001 to $20.0 million at December 31, 2002. The Company issued $7.0 million is
trust preferred capital notes during 2002 and invested the proceeds in its
subsidiary, Bank of Clarke County. Shareholders' equity increased $2.9 million
or 13.64% during 2002 from $21.5 million to $24.4 million at December 31, 2001
and 2002, respectively.
Net income was $3.5 million for 2002, which represents a $1.1 million
or 44.96% increase over net income of $2.4 million for 2001. Net income for 2000
was $2.0 million. Earnings per share were $2.41, $1.68 and $1.40 for 2002, 2001
and 2000, respectively. This represents a $0.73 or 43.45% increase for 2002 as
compared to 2001 and a $0.28 or 20.00% increase for 2001 as compared to 2000.
Return on average equity was 15.47% for 2002 as compared to 12.04% for 2001 and
11.05% for 2000. Return on average assets was 1.33% for 2002 as compared to
1.15% for 2001 and 1.08% for 2000. Increases in earning assets, net interest
margin and noninterest income contributed to increases in net income during 2002
and 2001.
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 was $11.4 million for 2002, $8.5 million for 2001 and $7.4
million for 2000, which represents increases of $2.9 million or 33.53% for 2002
and $1.1 million or 14.22% for 2001. The amount of net interest income is
derived from the volume of earning assets and the rates earned on those assets
as compared to the cost of funds. The difference between rates on earning assets
and the cost of funds is measured by the net interest margin. The net interest
margin was 4.73% for 2002 as compared to 4.47% for 2001 and 4.46% for 2000. The
Company realized an increase in net interest margin during 2002 from a greater
decrease in the average rate on interest-bearing liabilities than in the
tax-equivalent yield on earning assets.
The tax-equivalent yield on earning assets was 6.61% for 2002 as
compared to 7.54% in 2001 and 7.87% in 2000. The tax-equivalent yield on total
loans decreased to 6.75% for 2002 from 7.84% for 2001 as compared to 8.30% for
2000. The tax-equivalent yield on loans was decreased by changes in the yield
curves and indices that are used to price loans and by customers refinancing
their existing mortgage into a lower rate product. Total tax-equivalent interest
earned on loans was $14.1 million for 2002 as compared to $12.3 million for 2001
and $11.1 million for 2000. This represents an increase of $1.8 million or
13.92% for 2002 and an increase of $1.2 million or 10.85% for 2001. The average
balance of loans was $208.2 million for 2002, $157.6 million for 2001 and $134.2
million for 2000. This represents an increase of $50.6 million or 32.14% for
2002 and an increase of $23.4 million or 17.40% for 2001. The tax-equivalent
yield on securities was 6.01% for 2002 as compared to 6.38% for 2001 and 2000.
The tax-equivalent yield on securities decreased because securities that were
purchased during 2002 had a significantly lower yield than the securities being
held at December 31, 2001. During 2002, the Company primarily purchased
obligations of U.S. government corporations and agencies, and mortgage-backed
securities. Because these securities are risk-free with regard to credit
quality, their yields are lower than the yields on other types of securities
being held by the Company. Total tax-equivalent interest earned on securities
was $2.1 million for 2002 as compared to $2.4 million for 2001 and $2.5 million
for 2000. This represents a decrease $0.3 million or 11.81% for 2002 and a
decrease of $0.1 million or 2.26% for 2001. The average balance of securities
was $35.6 million for 2002, $38.0 million for 2001 and $38.9 million for 2000.
This represents a decrease of $2.4 million or 6.32% for 2002 and a decrease of
$0.9 million or 2.31% for 2001.
The average rate on interest-bearing liabilities was 2.31% for 2002 as
compared to 3.76% for 2001 and 4.17% for 2000. A substantial portion of the
decrease in the average rate on interest-bearing liabilities during 2002 can be
attributed to the maturity of higher rate certificates of deposit, which were
issued during 2000 and 2001. The remainder of the decrease in the average rate
on interest-bearing liabilities can be attributed to the repricing of deposits
in response to monetary policy actions and yield curve changes. Interest expense
was $4.6 million for 2002 as compared to $6.0 million for 2001 and $5.9 million
for 2000. This represents a decrease of $1.4 million or 23.20% for 2002 and an
increase of $0.1 million or 1.92% for 2001. The average balance of
interest-bearing liabilities was $199.8 million for 2002, $159.8 million for
2001 and $141.5 million in 2000. This represents an increase of $40.0 million or
25.00% for 2002 and an increase of $18.3 million or 12.93% for 2001. Interest
expense as a percent of average earning assets was 1.88% for 2002, 3.07% for
2001 and 3.40% for 2000. Net interest spread increased from 3.70% in 2000 to
3.78% in 2001 and 4.30% in 2002.
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 as
discussed within the section Critical Accounting Policies above. The provision
for loan losses was $700,000 for 2002, $712,500 for 2001 and $350,000 for 2000.
This represents a decrease of $12,500 for 2002 and an increase of $362,500 for
2001. Charged-off loans were $188,132, $350,540 and $170,518 for 2002, 2001 and
2000, respectively. Recoveries were $67,332, $95,217 and $37,988 for 2002, 2001
and 2000, respectively. Net charge-offs were $120,800, $255,323 and $132,530 for
2002, 2001 and 2000, respectively. The allowance for loan losses as a percentage
of loans was 1.05%, 1.00% and 0.94% at the end of 2002, 2001 and 2000,
respectively. The allowance for loan losses at year-end covered net charge-offs
during the year by 19.67 times for 2002, 7.04 times for 2001 and 10.11 times for
2000. The ratio of net charge-offs to average loans was 0.06%, 0.16% and 0.10%
for 2002, 2001 and 2000, respectively.
NONINTEREST INCOME AND EXPENSES
Total noninterest income was $3,468,152, $2,983,504 and $2,175,228
during 2002, 2001 and 2000, respectively. This represents an increase of
$484,648 or 16.24% for 2002 and an increase of $808,276 or 37.16% for 2001.
Service charges on deposit accounts were $1,061,198, $924,846 and $742,026
during 2002, 2001 and 2000, respectively. This represents an increase of
$136,352 or 14.74% for 2002 and an increase of $182,352 or 24.64% for 2001. The
increase in 2002 can be attributed to new demand deposit and savings accounts
obtained through the subsidiary's branch network. The Sunnyside branch, which
opened during April 2002, had approximately 650 demand deposit and savings
accounts with a total balance of $5.9 million by December 31, 2002. The increase
in 2001 can be attributed to new demand deposit and savings accounts and
increases in the fee schedule for those account types. Other service charges and
fees were $1,735,475, $1,317,379 and $964,223 during 2002, 2001 and 2000,
respectively. This represents an increase of $418,096 or 31.74% for 2002 and and
increase of $353,156 or 36.63% for 2001. The increases during 2001 and 2002 can
be attributed to increases in commissions received from the sale of non-deposit
investment products through Eagle Investment Services, fees generated from the
origination of mortgage loans for the secondary market, and fees generated from
the Bank's ATM/debit card and credit card programs.
Total noninterest expenses were $9,081,685, $7,375,872 and $6,576,135
during 2002, 2001 and 2000, respectively. This represents an increase of
$1,705,813 or 23.13% for 2002 and an increase of $799,737 or 12.16% for 2001.
Salaries and employee benefits were $5,295,123, $4,157,713 and $3,575,431 during
2002, 2001 and 2000, respectively. This represents an increase of $1,137,410 or
27.36% for 2002 and an increase of $582,282 or 16.29% for 2001. The increases in
2001 and 2002 for salaries and employee benefits can be attributed to annual
salary adjustments and the hiring of additional personnel to accommodate the
continued growth of the Company. Occupancy expenses were $507,353, $430,914 and
$513,400 during 2002, 2001 and 2000, respectively. This represents an increase
of $76,439 or 17.74% for 2002 and a decrease of $82,486 or 16.07% for 2001.
Equipment expenses were $779,548, $683,184 and $632,097 during 2002, 2001 and
2000, respectively. This represents an increase of $96,364 or 14.11% for 2002
and an increase of $51,087 or 8.08% for 2001. The increase during 2002 can be
attributed to computer hardware upgrades and the installation of a new telephone
system. The increase during 2001 can be attributed to software installations and
upgrades.
The efficiency ratio of the Company, a measure of its performance
based upon the relationship between noninterest expenses and operating income,
was 60.25% for 2002, 63.15% for 2001 and 66.37% for 2000. The decreases in the
efficiency ratio can be attributed to the percentage increase in tax-equivalent
net interest income and noninterest income being greater than the percentage
increase in noninterest expenses. It is management's objective to maintain an
efficiency ratio at or below 65.00% for the Company.
INCOME TAXES
Income tax expense was $1,494,456, $952,044 and $677,696 for the years
ended December 31, 2002, 2001 and 2000, respectively. The increase in income tax
expense can be attributed to increased taxable earnings at the federal statutory
income tax rate of 34%. These amounts correspond to an effective tax rate of
29.66%, 28.03% and 25.17% for 2002, 2001 and 2000, respectively. Note 7 to the
Consolidated Financial Statements provides a reconciliation between income tax
expense computed using the federal statutory income tax rate and the Company's
actual income tax expense. In addition, Note 7 to the Consolidated Financial
Statements provides information regarding the principal items giving rise to
deferred taxes for 2002 and 2001.
LOAN PORTFOLIO
The Company's primary use of funds is supporting lending activities
from which it derives the greatest amount of interest income. Loans, net of
unearned income, were $226.0 million, $179.7 million and $142.0 million at
December 31 2002, 2001 and 2000, respectively. This represents an increase of
$46.3 million or 25.77% for 2002 and an increase of $37.7 million or 26.48% for
2001. The Company's significant loan growth during 2002 and 2001 was
accomplished through competitive loan pricing, experienced loan officers, and
continuous sales efforts. The ratio of loans to deposits was 95.51%, 91.04% and
84.52% for December 31, 2002, 2001 and 2000, 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 $174.7 million or 77.31%, $138.5
million or 77.09%, and $110.5 million or 77.81% of total loans at December 31,
2002, 2001, and 2000, respectively. This represents an increase of $36.2 million
or 26.14% for 2002 and $28.0 million or 25.30% for 2001. 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. Consumer installment loans were $31.4 million or 13.88%, $25.9 million
or 14.42% and $18.7 million or 13.20% of total loans at December 31, 2002, 2001
and 2000, respectively. This represents an increase of $5.5 million or 21.10%
for 2002 and $7.2 million or 38.19% for 2001. Commercial and industrial loans
were $18.7 million or 8.26%, $13.9 million or 7.74% and $10.7 million or 7.57%
of total loans at December 31, 2002, 2001 and 2000. This represents an increase
of $4.8 million or 34.21% for 2002 and $3.2 million or 29.43% for 2001.
RISK ELEMENTS AND NON-PERFORMING ASSETS
Non-performing assets consist of nonaccrual loans, restructured loans,
and other real estate owned (foreclosed properties). There were no
non-performing assets as of December 31, 2000 or 2002. Total non-performing
assets were $2,029,379 as of December 31, 2001, which resulted in a ratio of
non-performing assets to loans and other real estate owned of 1.13%.
Total loans past due 90 days or more and still accruing interest were
$26,674 or 0.012%, $7,827 or 0.004% and $46,713 or 0.033% of total loans at
December 31, 2002, 2001 and 2000, respectively. The loans past due 90 days or
more and still accruing interest are secured and in the process of collection,
therefore, they 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. Upon
being placed on nonaccrual status, accrued interest would be reversed from
income and future accruals would be discontinued with interest income being
recognized on a cash basis. Management evaluates borrowers on an ongoing basis
to identify those loans on which a loss may be realized. The methods for
identifying these loans and establishing estimated losses for these loans are
discussed in the section Critical Accounting Policies above. Once management
determines that a loan requires a specific allowance, it becomes a potential
problem loan. The amount of potential problem loans was $1,021,153 and $976,192
at December 31, 2002 and 2001, respectively. This represents an increase of
$44,961 or 4.61% during 2002. These loans are primarily well-secured and in the
process of collection and the allowance for loan losses includes $70,483 in
specific allocations for these loans.
SECURITIES
The total amount of securities as of December 31, 2002 was $40.4
million as compared to $37.0 million as of December 31, 2001, which represents
an increase of $3.3 million or 9.09% during 2002. The increase in 2002 was to
provide additional collateral to pledge for public and other deposits as
required by law and to maintain adequate liquidity as discussed within the
section Liquidity and Market Risk below.
The Company had $15.3 million and $20.2 million in securities
classified as held to maturity at December 31, 2002 and 2001, respectively,
which represents a decrease of $4.9 million or 24.64% during 2002. The Company
had $25.1 million and $16.7 million in securities classified as available for
sale at December 31, 2002 and 2001, respectively, which represents an increase
of $8.4 million or 49.99% during 2002. The Company allowed held to maturity
securities to mature and paydown during the year and used these proceeds to
invest in available for sale securities. The ability to dispose of available for
sale securities prior to maturity provides management more options to react to
future rate changes and provides more liquidity when needed to meet short-term
obligations.
The Company had an unrealized gain on available for sale securities in
the amount of $834,787 at December 31, 2002 as compared to an unrealized gain in
the amount of $352,229 at December 31, 2001. This resulted in a total unrealized
gain of $482,558 during 2002. This unrealized gain can be attributed to changes
in interest rates during 2002. Unrealized gains or losses on available for sale
securities are reported within shareholders' equity, net of the related deferred
tax effect, as accumulated other comprehensive income.
DEPOSITS
Total deposits were $236.6 million and $197.3 million at December 31,
2002 and 2001, respectively, which represents an increase of $39.3 million or
19.89% during 2002. Noninterest bearing demand deposits increased $13.9 million
or 37.90% to $50.6 million at December 31, 2002 from $36.7 million at December
31, 2001. Savings and interest bearing demand deposits increased $29.8 million
or 35.62% to $113.4 million at December 31, 2002 from $83.6 million at December
31, 2001. Time deposits decreased $4.4 million or 5.77% to $72.6 million at
December 31, 2002 from $77.0 million at December 31, 2001. The increases in
demand deposits and savings and interest bearing demand deposits can be
attributed to deposit accounts gained through the subsidiary's branch network.
The decrease in time deposits can be attributed to the migration of maturing
certificates of deposit into accessible accounts without fixed terms.
The Company attempts to fund asset growth with deposit accounts and
focus upon core deposit growth as its primary source of funding. Core deposits
consist of demand deposits, interest-bearing demand deposits, money market
accounts, savings accounts, and time deposits of less than $100,000. Core
deposits totaled $208.4 million or 88.08% of total deposits at December 31, 2002
as compared to $171.7 million or 86.98% of total deposits at December 31, 2001.
Certificates of deposit of $100,000 or more totaled $28.2 million or 11.92% of
total deposits at December 31, 2002 as compared to $25.7 million or 13.02% of
total deposits at December 31, 2001. Although allowed by policy, the Company has
not utilized brokered certificates of deposits as a source of funding. Also, the
Company does not solicit deposits from outside of its primary market area.
CAPITAL RESOURCES
The Company continues to be a well capitalized financial institution.
Total shareholders' equity on December 31, 2002 was $24.4 million, reflecting a
percentage of total assets of 8.34%, as compared to $21.5 million and 9.04% at
December 31 2001. Shareholders' equity per share increased $1.81 or 12.32% to
$16.77 per share at December 31, 2002 from $14.69 per share at December 31,
2001. The return on average shareholders' equity increased to 15.47% for 2002
from 12.04% for 2001. During 2002 the Company paid $0.64 per share in dividends
as compared to $0.55 per share for 2001. The Company has a Dividend Investment
Plan that reinvests the dividends of the shareholder in Company stock.
Federal regulatory risk-based capital guidelines require percentages
to be applied to various assets, including off-balance sheet assets, based on
their perceived risk in order to calculate risk-weighted assets. Tier I capital
consists of total shareholders' equity plus qualifying trust preferred
securities outstanding less net unrealized gains and losses on available for
sale securities, goodwill and other intangible assets. Total capital is
comprised of Tier I capital plus the allowable portion of the allowance for loan
losses and any excess trust preferred securities that do not qualify as Tier I
capital. The $7.0 million in trust preferred securities, issued by the Company
during 2002, qualifies as Tier I capital because this amount does not exceed 25%
of total capital, including the trust preferred securities. Financial
institutions must maintain a Tier I risk-based capital ratio of at least 4% and
a total risk-based capital ratio of at least 8%. Additionally, they must
maintain a minimum Tier I leverage ratio of 4%. As of December 31, 2002, the
Company's Tier I risk-based capital ratio was 13.79% compared to 11.98% in 2001,
the total risk-based capital ratio was 14.87% compared to 13.01% in 2001 and the
leverage ratio was 10.69% compared to 9.07% in 2001. See Note 12 to the
Consolidated Financial Statements as of December 31, 2002 for additional
discussion and analysis of regulatory capital requirements.
LIQUIDITY AND MARKET RISK
Liquidity management involves meeting the present and future financial
obligations of the Company with the sale or maturity of assets or with 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, 2002, liquid assets
totaled $93.2 million as compared to $64.3 million at December 31, 2001. These
amounts represent 34.76% for 2002 and 29.75% for 2001, of total liabilities. The
Company minimizes liquidity demand by utilizing core deposits to fund asset
growth. Securities provide a constant source of liquidity through paydowns and
maturities. Also, the Company maintains short-term borrowing arrangements,
namely federal funds lines of credit, with larger financial institutions as an
additional source of liquidity. Finally, the Bank's membership with the Federal
Home Loan Bank of Atlanta provides a source of borrowings with numerous rate and
term structures. The Company's senior management monitors the liquidity position
regularly and attempts to maintain a position which utilizes available funds
most efficiently.
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. Asset / liability
management attempts to maximize the net interest income of the Company by
adjusting the volume and price of rate sensitive assets and liabilities. The
Company 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, 2002, the Company did not have any hedging transactions in place
such as interest rate swaps, floors or caps.
The Bank's interest rate management strategy is designed to maximize
net interest income and preserve the capital of the Company. The following
paragraphs provide the results from various simulations that the Bank's
financial instruments are periodically subjected to. These models are based on
actual data from the Bank's financial statements and assumptions about the
performance of certain financial instruments. Prepayment assumptions are applied
to all mortgage related assets, which includes real estate loans and
mortgage-backed securities. Prepayment assumptions are based on a median rate at
which principal payments are received on these assets over their contractual
term. The rate of principal payback is assumed to increase when rates fall and
decrease when rates rise. Term assumptions are applied to nonmaturity deposits,
which includes demand deposits, NOW accounts, savings accounts, and money market
accounts. Demand deposits, NOW accounts, and savings accounts are generally
assumed to have a term greater than one year since the total amount outstanding
does not fluctuate with changes in interest rates. Money market accounts are
assumed to be more interest rate sensitive, therefore, a majority of the amount
outstanding is assumed to have a term of less than one year.
The Bank uses interest rate sensitivity analysis which uses the term
to maturity or repricing for rate sensitive assets and liabilities to measure
how well they match. Differences in the terms of rate sensitive assets and
liabilities create gaps, which are analyzed for each term segment and analyzed
cumulatively. Management focuses on the static 1-year cumulative gap to measure
its short-term sensitivity position. The Company had negative static 1-year
cumulative gaps of 10.72% and 25.87% of total rate sensitive assets at December
31, 2002 and 2001, respectively. The negative gap indicates a liability
sensitive position, which is expected by management since deposits have
relatively short terms with most having a variable rate and loans have longer
terms with most having a fixed rate. The decrease in the negative static 1-year
cumulative gap from 2001 to 2002 reflects a shift in the preference of some
borrowers as they utilize lower variable rate terms versus higher fixed rate
terms. Because this analysis is only a general indication of the Bank's interest
rate sensitivity and is based on the balance sheet's composition at a single
point of time, no policy limits are established with regard to the negative
static 1-year cumulative gap.
The Bank also measures the change in net income assuming rates would
increase or decrease by 200 basis points. If rates decreased by 200 basis
points, net income would have decreased by 4.80% in 2002 and increased by 10.06%
in 2001 as compared to net income in a stable rate environment. Conversely, if
rates increased by 200 basis points, net income would have increased by 2.66% in
2002 and decreased by 10.62% in 2001 as compared to net income in a stable rate
environment. The results for 2001, like interest rate sensitivity analysis,
indicate that the Bank is liability sensitive due to the percentage change in
net income being larger when rates increase by 200 basis points. The results for
2002 reflect that the bank is slightly asset sensitive, however, the results
actually reflect the overall low interest rate environment of the economy.
Additional interest rate decreases would decrease the yield on assets through
the repricing of variable rate loans, but in the current interest rate
environment it becomes more difficult to decrease the cost of funds through
repricing deposits. The income simulation results for 2002 as compared to 2001
indicate that changes in the balance sheet's structure have decreased the
volatility of net interest income because the percentages of change for both
interest rate assumptions are lower in 2002 as compared to 2001.
Finally, the Bank measures the change in present value of its balance
sheet assuming rates would increase or decrease by 200 basis points. This
simulation applies these rate changes to the net present value of the balance
sheet which is derived by subtracting the net present value of liabilities from
the net present value of assets. If rates decreased by 200 basis points, the net
present value of the balance sheet would have decreased by 11.90% in 2002 and
6.66% in 2001. Conversely, if rates increased by 200 basis points, the net
present value of the balance sheet would have decreased by 2.33% in 2002 and
10.05% in 2001. This simulation confirms the Bank's liability sensitive position
for 2001 since the net present value of the balance sheet changes by a greater
percentage in a rising rate environment. This simulation also reflects the
Bank's asset sensitive position for 2002 since the net present value of the
sheet changes by a greater percentage in a falling rate environment.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 31, 2001, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 01-6, Accounting by Certain
Entities (Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others, to reconcile and conform the accounting and financial
reporting provisions established by various AICPA industry audit guides. This
Statement is effective for annual and interim financial statements issued for
fiscal years beginning after December 15, 2001, and did not have a material
impact on the Company's consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued
Statement 145, Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. The amendment to Statement 13 eliminates an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission of
Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The
provisions of this Statement related to Statement 13 are effective for
transactions occurring after May 15, 2002, with early application encouraged.
In June 2002, the Financial Accounting Standards Board issued
Statement 146, Accounting for Costs Associated with Exit or Disposal Activities.
This Statement requires recognition of a liability, when incurred, for costs
associated with an exit or disposal activity. The liability should be measured
at fair value. The provisions of the Statement are effective for exit or
disposal activities initiated after December 31, 2002.
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets.
Accordingly, goodwill is no longer subject to amortization over its estimated
useful life, but is subject to at least an annual assessment for impairment by
applying a fair value based test. Additionally, the Statement 142 requires that
acquired intangible assets (such as core deposit intangibles) be separately
recognized if the benefit of the asset can be sold, transferred, licensed,
rented, or exchanged, and amortized over their estimated useful life. Branch
acquisition transactions were outside the scope of the Statement and therefore
any intangible asset arising from such transactions remained subject to
amortization over their estimated useful life.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, Acquisitions of Certain Financial Institutions. The Statement
amends previous interpretive guidance on the application of the purchase method
of accounting to acquisitions of financial institutions, and requires the
application of Statement No. 141, Business Combinations, and Statement No. 142
to branch acquisitions if such transactions meet the definition of a business
combination. The provisions of the Statement do not apply to transactions
between two or more mutual enterprises. In addition, the Statement amends
Statement No. 144, Accounting for the Impairment of Long-Lived Assets, to
include in its scope core deposit intangibles of financial institutions.
Accordingly, such intangibles are subject to a recoverability test based on
undiscounted cash flows, and to the impairment recognition and measurement
provisions required for other long-lived assets held and used.
The adoption of Statement No. 142, 145, 146 and 147 did not have a
material impact on the Company's consolidated financial statements.
The Financial Accounting Standards Board issued Statement No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of Statement No. 123, in December 2002. The Statement amends Statement
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, the Statement amends the disclosure requirements of Statement 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Finally, this Statement amends
APB Opinion No. 28, Interim Financial Reporting, to require disclosure about the
effects of stock options in interim financial information. The amendments to
Statement No. 123 are effective for financial statements for fiscal years ending
after December 15, 2002. The amendments to APB No. 28 are effective for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. Early application is encouraged for both
amendments. This statement was not applicable to the Company during 2002.
FORWARD LOOKING STATEMENTS
Certain statements contained in this annual report that are not
historical facts may be forward looking statements. The forward looking
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from historical or expected results. Readers
are cautioned not to place undue reliance on these forward looking statements.
20
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 15.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
21
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 24, 2003, for the
Company's 2003 Annual Meeting of Shareholders to be held April 16, 2003.
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 24, 2003, for the
Company's 2003 Annual Meeting of Shareholders to be held April 16, 2003.
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 24, 2003, for the
Company's 2003 Annual Meeting of Shareholders to be held April 16, 2003.
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 24, 2003, for the
Company's 2003 Annual Meeting of Shareholders to be held April 16, 2003.
Item 14. Controls and Procedures
Under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within ninety (90) days of the filing date of this
Annual Report on Form 10-K. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these controls and
procedures are effective. There were no significant changes in the internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
Disclosure controls and procedures are the Company's controls and
other procedures that are designed to ensure that information, required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act, is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
22
PART IV
Item 15. 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, 2002 are incorporated herein by reference to Exhibit 99.2.
(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 Real
Estate Management, Inc. (landlord) dated
March 20, 2000 for the branch office at
190 Campus Boulevard, Suite 120,
Winchester, Virginia (incorporated herein
by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000).
10.4 Lease Agreement between Bank of Clarke
County (lessee) and MBC, L.C. (lessor)
dated October 25, 2002 for a parcel of
land to be used as a branch site located
on State Route 7 in Winchester, Virginia
and described as Lot #1 on the lands
of MBC, L.C. plat (incorporated herein
by reference to Exhibit 10.4 of
the Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
2002).
Exhibit 11. Computation of Per Share Earnings
(incorporated herein as Exhibit 11).
Exhibit 12. Not applicable.
Exhibit 13. Portions of the 2002 Annual Report to
Shareholders for the year ended December 31,
2002 (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 99. Additional Exhibits
99.1 Certification Pursuant to 18 U.S.C. Sec-
tion 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(incorporated herein as Exhibit 99.1).
99.2 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, 2002 (incorporated herein as
Exhibit 99.2).
1. Independent Auditor's Report.
2. Consolidated Balance Sheets -
At December 31, 2002 and 2001.
3. Consolidated Statements of Income -
Years ended December 31, 2002, 2001, and
2000.
4. Consolidated Statements of Changes in
Shareholders' Equity -
Years ended December 31, 2002, 2001, and
2000.
5. Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2001, and
2000.
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 2002.
23
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 24th day of
March, 2003.
Eagle Financial Services, Inc.
By: /s/ JOHN R. MILLESON
---------------------------------
John R. Milleson, 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/ JOHN R. MILLESON President, Chief Executive March 24, 2003
- ------------------------- Officer, and Director
John R. Milleson (principal executive officer)
/s/ JAMES W. MCCARTY, JR. Vice President, Chief March 24, 2003
- ------------------------- Financial Officer, and
James W. McCarty, Jr. Secretary-Treasurer
(principal financial officer)
/s/ JOHN D. HARDESTY Chairman of the Board March 24, 2003
- ------------------------- and Director
John D. Hardesty
/s/ LEWIS M. EWING Director March 24, 2003
- -------------------------
Lewis M. Ewing
/s/ THOMAS T. BYRD Director March 24, 2003
- -------------------------
Thomas T. Byrd
/s/ THOMAS T. GILPIN Director March 24, 2003
- -------------------------
Thomas T. Gilpin
/s/ MARY BRUCE GLAIZE Director March 24, 2003
- -------------------------
Mary Bruce Glaize
/s/ ROBERT W. SMALLEY, JR. Director March 24, 2003
- -------------------------
Robert W. Smalley, Jr.
/s/ RANDALL G. VINSON Director March 24, 2003
- -------------------------
Randall G. Vinson
/s/ JAMES T. VICKERS Director March 24, 2003
- -------------------------
James T. Vickers
/s/ JAMES R. WILKINS, JR. Director March 24, 2003
- -------------------------
James R. Wilkins, Jr.
24
SECTION 302 CERTIFICATION
I, John R. Milleson, certify that:
1. I have reviewed this Annual Report on Form 10-K of Eagle Financial Services,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ JOHN R. MILLESON
- --------------------------
John R. Milleson.
President and Chief Executive Officer
25
SECTION 302 CERTIFICATION
I, James W. McCarty, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K of Eagle Financial Services,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ JAMES W. MCCARTY, JR.
- --------------------------
James W. McCarty, Jr.
Vice President, Chief Financial Officer, and Secretary-Treasurer
26
EAGLE FINANCIAL SERVICES, INC.
EXHIBIT INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
EXHIBIT NUMBER DESCRIPTION
-------------- ----------------------------------------
11 Computation of Per Share Earnings .
21 Subsidiaries of the Registrant.
99.1 Certification Pursuant to 18 U.S.C. Sec-
tion 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(incorporated herein as Exhibit 99.1).
99.2 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, 2002.
1. Independent Auditor's Report.
2. Consolidated Balance Sheets -
At December 31, 2002 and 2001.
3. Consolidated Statements of Income -
Years ended December 31, 2002, 2001, and
2000.
4. Consolidated Statements of Changes
in Shareholders' Equity -
Years ended December 31, 2002, 2001, and
2000.
5. Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2001, and
2000.
6. Notes to Consolidated Financial
Statements.
27