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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2004

For the transition period from              to             

Commission file number: 0-20146

EAGLE FINANCIAL SERVICES, INC.

(Exact name of Registrant as specified in its charter)

(540) 955-2510

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the Registrant’s Common Stock ($2.50 par value) outstanding as of May 11, 2004 was 1,500,089.

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EAGLE FINANCIAL SERVICES, INC.

INDEX TO FORM 10-Q

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Balance Sheets

See Notes to Consolidated Financial Statements

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EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Income

(Unaudited)

See Notes to Consolidated Financial Statements

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EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

See Notes to Consolidated Financial Statements

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EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

See Notes to Consolidated Financial Statements

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EAGLE FINANCIAL SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2004

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America from interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2004 and December 31, 2003, the results of operations and cash flows for the three months ended March 31, 2004 and 2003. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”).

Eagle Financial Services, Inc. owns 100% of Bank of Clarke County (the “Bank”) and Eagle Financial Statutory Trust I (the “Trust”). The consolidated financial statements include the accounts of Eagle Financial Services, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations.

The results of operations for the three month period ended March 31, 2004, are not necessarily indicative of the results to be expected for the full year.

NOTE 1. Stock-Based Compensation

The Company has a stock-based compensation plan which it accounts for under the recognition and measurement principles of the Accounting Principles Board opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of the Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation,” to its stock-based compensation plan for the three months ended March 31, 2004 and 2003.

NOTE 2. Earnings Per Common Share

Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury method. The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

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NOTE 3. Securities

The amortized costs and fair values of securities available for sale at March 31, 2004 and December 31, 2003 are as follows:

Proceeds from the sale of securities available for sale during 2004 were $2,021,941. Gross gains of $144,235 and gross losses of $281 were realized on sales during 2004. There were no sales of securities available for sale during 2003.

The following table summarizes the fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous gross unrealized loss position, at March 31, 2004:

The total gross unrealized loss on securities available for sale is comprised of three securities which were purchased during the previous twelve months. These securities have not suffered credit deterioration and the Company has the ability to hold these issues until maturity and, therefore, the gross unrealized losses are considered temporary at March 31, 2004.

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The amortized costs and fair values of securities held to maturity at March 31, 2004 and December 31, 2003 are as follows:

The following table summarizes the fair value and gross unrealized losses for securities held to maturity, totaled by the length of time that individual securities have been in a continuous gross unrealized loss position, at March 31, 2004:

The total gross unrealized loss on securities held to maturity is comprised of two securities which were purchased during the previous twelve months. These securities have not suffered credit deterioration and the Company has the ability to hold these issues until maturity and, therefore, the gross unrealized losses are considered temporary at March 31, 2004.

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NOTE 4. Loans

Net loans at March 31, 2004 and December 31, 2003 are summarized as follows:

NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

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NOTE 6. Pension and Postretirement Benefit Plans

The following table provides the components of net periodic benefit cost for the three months ended March 31, 2004 and 2003:

As stated in Note 9 to the consolidated financial statements in the 2003 Form 10-K, the Company intends to contribute $200,000 to its pension plan during 2004. The Company did not make a contribution during the first quarter of 2004.

NOTE 7. Trust Preferred Capital Notes

On May 23, 2002, Eagle Financial Statutory Trust I (the Trust), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities, also known as trust preferred securities. On June 26, 2002, $7,000,000 of trust preferred securities were issued through a pooled underwriting totaling approximately $554,000,000. The securities have a LIBOR-indexed floating rate of interest. The interest rate at March 31, 2004 was 4.56%. The securities have a mandatory redemption date of June 26, 2032, and are subject to varying call provisions beginning June 26, 2007. The principal asset of the Trust is $7,000,000 of the Company’s junior subordinated debt securities with maturities and interest rates like the trust preferred securities.

The trust preferred securities may be included in Tier I capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier I capital, including total trust preferred securities. The portion of the trust preferred securities not considered as Tier I capital, if any, may be included in Tier 2 capital. The total amount ($7,000,000) of trust preferred securities issued by the Trust can be included in the Company’s Tier I capital.

The obligations of the Company with respect to the issuance of the trust preferred securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the trust preferred securities.

Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related trust preferred securities.

NOTE 8. Recent Accounting Pronouncements

The Financial Accounting Standards Board has not issued any accounting pronouncements during the first quarter of 2004 that are relevant to the Company’s financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 can be estimated, 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.

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RESULTS OF OPERATIONS

Net Income

Net income for the first three months of 2004 was $896,032, a decrease of $17,259 or 1.9% as compared to net income for the first three months of 2003 of $913,291. Earnings per share, basic and diluted, were $0.62 and $0.60 for the first three months of 2003 and 2004, respectively.

Return on average assets (ROA) measures how efficiently the Company uses its assets to produce net income. The ROA of the Company for the first three months of 2003 and 2004 was 1.24% and 1.01%, respectively. Return on average equity (ROE) measures the utilization of shareholders’ equity in generating net income. The ROE of the Company for the first three months of 2003 and 2004 was 14.75% and 12.52%, respectively.

Net Interest Income

Net interest income is the Company’s primary source of earnings. Net interest income was $3,525,327 and $2,979,218 for the first three months of 2004 and 2003, respectively. This represents an increase of $546,109 million or 18.3%.

Tax equivalent net interest income divided by total average earnings assets equals the net interest margin. The net interest margin for the first three months of 2003 and 2004 was 4.47% and 4.39%, respectively. The yield on earning assets decreased from 5.86% to 5.58% and the cost of interest bearing liabilities decreased from 1.75% to 1.50% for the first three months of 2003 and 2004, respectively.

Provision 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 Critical Accounting Policies section above. The provision for loan losses was $175,000 for the first three months of 2004 as compared to $125,000 for the first three months of 2003.

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Noninterest Income

Total noninterest income for the first three months of 2003 and 2004 was $908,464 and $961,820, respectively, which represents an increase of $53,356 or 5.9%.

The Company earned $143,954 on the sale of securities during the first quarter of 2004. These sales were comprised of mortgage-backed securities and corporate securities.

Trust Department income decreased $49,869 or 31.8% from $156,967 for the first quarter of 2003 to $107,098 for the first quarter of 2004. The amount of Trust Department income is determined by the number of active accounts and total assets under management. Income can fluctuate due to the number of estates settled within any period.

Service charges on deposit accounts increased $29,487 or 9.9% from $299,339 to $328,826 for the first three months of 2003 and 2004, respectively. The amount of service charges on deposit accounts is derived from the volume of demand and savings accounts and the Company has continued to see an increase in these account types.

Other service charges and fees decreased $76,984 or 17.9% from $429,078 for the first three months of 2003 to $352,094 for the first three months of 2004. A significant portion of this can be attributed to a decrease in the amount of fees received from the origination of mortgage loans for the secondary market. The Company expects this trend to continue as interest rate increases on mortgage products have made refinancing less attractive to homeowners.

Noninterest Expenses