-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WEhtVn9THgJms5XMqJT8naCmXiLZ+KW23QWisI/7EE7LKKqOq0g3CG+gaHWFIa9a CxqyJqBetfRcQxrdKt06iQ== 0001127264-03-000123.txt : 20031112 0001127264-03-000123.hdr.sgml : 20031112 20031112161934 ACCESSION NUMBER: 0001127264-03-000123 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EAGLE FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000880641 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541601306 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20146 FILM NUMBER: 03994169 BUSINESS ADDRESS: STREET 1: 2 E MAIN ST CITY: BERRYVILLE STATE: VA ZIP: 22611 BUSINESS PHONE: 540-955-2510 MAIL ADDRESS: STREET 1: PO BOX 391 CITY: BERRYVILLE STATE: VA ZIP: 22611 10-Q 1 eagle_10q.txt THIRD QUARTER 2003 REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- Form 10-Q X Quarterly Report Pursuant to Section 13 or 15(d) of the --------- Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 Transition Report Pursuant to Section 13 or 15(d) of the --------- Exchange Act of 1934 - ------------------------------------------------------------------------------- Commission File Number: 0-20146 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.) 2 East Main Street, Berryville, Virginia 22611 (Address of principal executive offices, including zip code) (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 Act). Yes [ ] No [X] The number of shares of the Registrant's Common Stock ($2.50 par value) outstanding as of November 7, 2003 was 1,493,660. 1 EAGLE FINANCIAL SERVICES, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) ............................ 3 Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 ................ 3 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002 ........ 4 Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 2003 and 2002 ........ 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 ....... 6 Notes to Consolidated Financial Statements .............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................................... 9 Item 4. Controls and Procedures ..................................... 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................... 11 Item 2. Changes in Securities and Use of Proceeds ................... 11 Item 3. Defaults Upon Senior Securities ............................. 11 Item 4. Submission of Matters to a Vote of Security Holders ......... 11 Item 5. Other Information ........................................... 11 Item 6. Exhibits and reports on Form 8-K ............................ 12 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Eagle Financial Services, Inc. and Subsidiary Consolidated Balance Sheets As of September 30, 2003 and December 31, 2002
Unaudited Sep 30, 2003 Dec 31, 2002 --------------- --------------- Assets Cash and due from banks $ 9,810,637 $ 14,341,473 Federal funds sold 0 1,857,000 Securities available for sale, at fair value 33,117,777 25,068,025 Securities held to maturity (fair value: 2003,$16,190,486; 2002, $15,861,743) 15,784,103 15,266,757 Loans, net allowance for loan losses of $2,796,950 in 2003 and $2,376,463 in 2002 263,105,110 223,601,868 Bank premises and equipment, net 12,267,134 7,653,104 Other assets 5,378,573 4,779,344 --------------- --------------- Total assets $ 339,463,334 $ 292,567,571 =============== =============== Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest bearing demand deposits $ 60,649,190 $ 50,635,337 Savings and interest bearing demand deposits 146,272,916 113,371,665 Time deposits 63,282,337 72,584,706 --------------- --------------- Total deposits $ 270,204,443 $ 236,591,708 Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 13,280,376 2,909,443 Federal Home Loan Bank advances 20,000,000 20,000,000 Trust preferred capital notes 7,000,000 7,000,000 Other liabilities 1,942,598 1,664,629 Commitments and contingent liabilities 0 0 --------------- --------------- Total liabilities $ 312,427,417 $ 268,165,780 --------------- --------------- Shareholders' Equity Preferred Stock, $10 par value; 500,000 shares authorized and unissued $ 0 $ 0 Common Stock, $2.50 par value; authorized 5,000,000 shares; issued 2003, 1,490,780; issued 2002, 1,478,770 shares 3,726,950 3,696,926 Surplus 3,851,132 3,545,408 Retained Earnings 19,199,536 17,012,437 Accumulated other comprehensive income 258,299 147,020 --------------- --------------- Total shareholders' equity $ 27,035,917 $ 24,401,791 --------------- --------------- Total liabilities and shareholders' equity $ 339,463,334 $ 292,567,571 =============== ===============
3 Eagle Financial Services, Inc. and Subsidiary Consolidated Statements of Income (Unaudited) For the Periods Ended September 30, 2003 and 2002
Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Interest Income Interest and fees on loans $ 3,857,859 $ 3,651,403 $ 11,213,816 $ 10,393,184 Interest on federal funds sold 7,970 4,763 37,665 5,005 Interest on securities held to maturity: Taxable interest income 90,123 127,057 277,815 420,430 Interest income exempt from federal income taxes 81,365 88,989 246,345 277,755 Interest and dividends on securities available for sale: Taxable interest income 268,486 189,342 770,825 591,203 Interest income exempt from federal income taxes 16,048 16,048 48,144 49,834 Dividends 30,183 37,491 97,400 110,086 Interest on deposits in banks 479 232 865 507 --------------- --------------- --------------- --------------- Total interest income $ 4,352,513 $ 4,115,325 $ 12,692,875 $ 11,848,004 --------------- --------------- --------------- --------------- Interest Expense Interest on deposits $ 633,106 $ 887,414 $ 2,160,459 $ 2,768,564 Interest on federal funds purchased and securities sold under agreements to repurchase 17,561 34,123 37,669 125,968 Interest on Federal Home Loan Bank advances 201,507 157,723 597,946 465,905 Interest on trust preferred capital notes 79,890 95,381 248,235 100,570 --------------- --------------- --------------- --------------- Total interest expense $ 932,064 $ 1,174,641 $ 3,044,309 $ 3,461,007 --------------- --------------- --------------- --------------- Net interest income $ 3,420,449 $ 2,940,684 $ 9,648,566 $ 8,386,997 Provision For Loan Losses 105,000 163,100 475,000 585,000 --------------- --------------- --------------- --------------- Net interest income after provision for loan losses $ 3,315,449 $ 2,777,584 $ 9,173,566 $ 7,801,997 --------------- --------------- --------------- --------------- Noninterest Income Trust Department income $ 97,370 $ 164,494 $ 366,116 $ 383,264 Service charges on deposits 325,173 269,905 936,793 775,506 Other service charges and fees 538,060 460,264 1,481,707 1,225,996 Securities gains 0 0 0 36,036 Other operating income 51,921 67,306 108,364 125,863 --------------- --------------- --------------- --------------- $ 1,012,524 $ 961,969 $ 2,892,980 $ 2,546,665 --------------- --------------- --------------- --------------- Noninterest Expenses Salaries and wages $ 1,350,925 $ 1,094,333 $ 3,703,441 $ 3,044,462 Pension and other employee benefits 302,431 269,368 886,175 735,537 Occupancy expenses 151,032 130,596 465,919 359,575 Equipment expenses 172,273 187,170 566,970 546,933 Credit card expense 46,605 77,819 105,969 207,073 Stationary and supplies 77,113 49,104 203,500 170,626 Other operating expenses 643,809 499,429 1,827,412 1,451,890 --------------- --------------- --------------- --------------- $ 2,744,188 $ 2,307,819 $ 7,759,386 $ 6,516,096 --------------- --------------- --------------- --------------- Income before income taxes $ 1,583,785 $ 1,431,734 $ 4,307,160 $ 3,832,566 Income Tax Expense 477,815 423,839 1,304,452 1,151,126 --------------- --------------- --------------- --------------- Net Income $ 1,105,970 $ 1,007,895 $ 3,002,708 $ 2,681,440 =============== =============== =============== =============== Net income per common share, basic and diluted $ 0.74 $ 0.69 $ 2.02 $ 1.83 =============== =============== =============== ===============
4 Eagle Financial Services, Inc. and Subsidiary Consolidated Statements of Shareholders' Equity For the Nine Months Ended September 30, 2003 and 2002 Unaudited
Accumulated Other Common Retained Comprehensive Comprehensive Stock Surplus Earnings Income Income Total ------------- ------------- ------------- ------------- ------------- ------------- Balance, December 31, 2001 $ 3,653,487 $ 3,178,848 $ 14,407,901 $ 232,471 $ 21,472,707 Comprehensive income: Net income 2,681,440 $ 2,681,440 2,681,440 Other comprehensive income: Unrealized holding gains arising during the period, net of deferred income taxes of $130,924 254,147 Reclassification adjustment, net of deferred income taxes of $12,252 (23,784) ------------- Other comprehensive income, net of deferred income taxes of $118,672 230,363 230,363 230,363 ------------- Total comprehensive income $ 2,911,803 ============= Issuance of common stock, dividend investment plan (11,004 shares) 27,511 228,559 256,070 Dividends declared ($0.47 per share) (688,605) (688,605) Fractional shares purchased (25) (210) (235) ------------- ------------- ------------- ------------- ------------- Balance, September 30, 2002 $ 3,680,973 $ 3,407,197 $ 16,400,736 $ 462,834 $ 23,951,740 ============= ============= ============= ============= ============= Balance, December 31, 2002 $ 3,696,926 $ 3,545,408 $ 17,012,437 $ 147,020 $ 24,401,791 Comprehensive income: Net Income 3,002,708 $ 3,002,708 3,002,708 Other comprehensive income: Unrealized holding gains arising during the period, net of deferred income taxes of $57,325 111,279 111,279 111,279 ------------- Total comprehensive income $ 3,113,987 ============= Issuance of common stock, employee benefit plan (1,284 shares) 3,210 32,357 35,567 Issuance of common stock, dividend investment plan (10,728 shares) 26,819 273,429 300,248 Dividends declared ($0.55 per share) (815,609) (815,609) Fractional shares purchased (5) (62) (67) ------------- ------------- ------------- ------------- ------------- Balance, September 30, 2003 $ 3,726,950 $ 3,851,132 $ 19,199,536 $ 258,299 $ 27,035,917 ============= ============= ============= ============= =============
5 Eagle Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 2003 and 2002
Nine Months Ended September 30 2003 2002 ------------- ------------- Cash Flows from Operating Activities Net income $ 3,002,708 $ 2,681,440 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 357,023 330,135 Amortization of intangible and other assets 160,616 146,798 (Gain)loss on equity investment (1,653) 3,840 Provision for loan losses 475,000 585,000 (Gain) on sale of securities 0 (36,036) Premium amortization on securities, net 184,557 43,739 Changes in assets and liabilities: (Increase) in other assets (758,192) (383,666) Increase (decrease) in other liabilities 220,644 (81,966) ------------- ------------- Net cash provided by operating activities $ 3,640,703 $ 3,289,284 ------------- ------------- Cash Flows from Investing Activities Proceeds from maturities and principal payments on securities held to maturity $ 3,508,313 $ 3,827,049 Proceeds from maturities and principal payments on securities available for sale 6,623,735 2,570,616 Proceeds from sales of securities available for sale 0 306,108 Purchases of securities held to maturity (4,047,767) (346,500) Purchases of securities available for sale (14,667,332) (2,339,992) Purchases of bank premises and equipment (4,971,053) (2,212,155) Net (increase) in loans (39,978,242) (40,640,546) ------------- ------------- Net cash (used in) investing activities $(53,532,346) $(38,835,420) ------------- ------------- Cash Flows from Financing Activities Net increase in demand deposits, money market and savings accounts $ 42,915,104 $ 31,704,933 Net (decrease) in certificates of deposit (9,302,369) (4,502,436) Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings 10,370,933 (5,608,221) Proceeds from Federal Home Loan Bank advances 0 10,000,000 Proceeds from trust preferred capital notes 0 7,000,000 Proceeds from issuance of common stock to ESOP 35,567 0 Cash dividends paid (515,361) (432,535) Fractional shares purchased (67) (235) ------------- ------------- Net cash provided by financing activities $ 43,503,807 $ 38,161,506 ------------- ------------- Increase (decrease) in cash and cash equivalents $ (6,387,836) $ 2,615,370 Cash and Cash Equivalents Beginning 16,198,473 13,105,622 ------------- ------------- Ending $ 9,810,637 $ 15,720,992 ============= ============= Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 3,099,924 $ 3,526,402 ============= ============= Income taxes $ 1,212,230 $ 1,360,853 ============= ============= Supplemental Schedule of Non-Cash Investing and Financing Activities: Issuance of common stock, dividend investment plan $ 300,248 $ 256,070 ============= ============= Unrealized gain on securities available for sale $ 168,604 $ 349,035 ============= =============
6 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 (1) 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. (2) 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 September 30, 2003 and December 31, 2002, the results of operations for the three and nine months ended September 30, 2003 and 2002, and cash flows for the nine months ended September 30, 2003 and 2002. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company's Annual Report for the year ended December 31, 2002. (3) The results of operations for the nine month period ended September 30, 2003, are not necessarily indicative of the results to be expected for the full year. (4) Securities The amortized costs and fair values of securities held to maturity as of September 30, 2003 and December 31, 2002 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Loss) Value -------------- -------------- -------------- -------------- September 30, 2003 -------------------------------------------------------------------- Held to Maturity: Obligations of U.S. government corporations and agencies $ 3,004,735 $ 12,856 $ (12,121) $ 3,005,470 Mortgage-backed securities 2,463,738 68,040 (6,333) 2,525,445 Obligations of states and political subdivisions 10,315,630 355,861 (11,920) 10,659,571 -------------- -------------- -------------- -------------- $ 15,784,103 $ 436,757 $ (30,374) $ 16,190,486 ============== ============== ============== ============== December 31, 2002 -------------------------------------------------------------------- Held to Maturity: Obligations of U.S. government corporations and agencies $ 999,541 $ 36,864 $ 0 $ 1,036,405 Mortgage-backed securities 3,042,902 126,059 (26) 3,168,935 Obligations of states and political Subdivisions 11,224,314 432,497 (408) 11,656,403 -------------- -------------- -------------- -------------- $ 15,266,757 $ 595,420 $ (434) $ 15,861,743 ============== ============== ============== ==============
The amortized costs and fair values of securities available for sale as of September 30, 2003 and December 31, 2002 are as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value -------------- -------------- -------------- -------------- September 30, 2003 -------------------------------------------------------------------- Available for Sale: Obligations of U.S. government corporations and agencies $ 8,512,662 $ 94,556 $ (5,233) $ 8,601,985 Mortgage-backed securities 10,809,000 19,434 (63,457) 10,764,977 Obligations of states and political subdivisions 1,311,623 129,077 0 1,440,700 Corporate debt securities 10,154,400 829,015 0 10,983,415 Restricted Stock 1,326,700 0 0 1,326,700 -------------- -------------- -------------- -------------- $ 32,114,385 $ 1,072,082 $ (68,690) $ 33,117,777 ============== ============== ============== ============== December 31, 2002 -------------------------------------------------------------------- Available for Sale: Obligations of U.S. government corporations and agencies $ 7,152,565 $ 107,685 $ 0 $ 7,260,250 Mortgage-backed securities 4,711,530 38,419 0 4,749,949 Obligations of states and political subdivisions 1,309,526 119,918 0 1,429,444 Corporate debt securities 9,668,817 666,033 (97,268) 10,237,582 Restricted Stock 1,390,800 0 0 1,390,800 -------------- -------------- -------------- -------------- $ 24,233,238 $ 932,055 $ (97,268) $ 25,068,025 ============== ============== ============== ==============
(5) Loans Net loans at September 30, 2003 and December 31, 2002 are summarized as follows (In Thousands):
Sep 30, 2003 Dec 31, 2002 --------------- --------------- Mortgage loans on real estate: Construction and land development $ 22,247 $ 12,081 Secured by farmland 2,583 2,892 Secured by 1-4 family residential 134,026 111,273 Secured by nonfarm,nonresidential 52,385 48,459 Loans to farmers 1,375 1,071 Commercial and industrial loans 20,171 18,671 Consumer installment loans 32,408 31,377 All other loans 707 154 --------------- --------------- Gross loans $ 265,902 $ 225,978 Less: Allowance for loan losses (2,797) (2,376) --------------- --------------- Loans, net $ 263,105 $ 223,602 =============== ===============
(6) Allowance for Loan Losses Changes in the allowance for loan losses are as follows:
Sep 30, 2003 Sep 30, 2002 Dec 31, 2002 -------------- -------------- -------------- Balance, beginning $ 2,376,463 $ 1,797,263 $ 1,797,263 Provision charged to operating expense 475,000 585,000 700,000 Recoveries added to the allowance 77,051 49,555 67,332 Loan losses charged to the allowance (131,564) (127,446) (188,132) -------------- -------------- -------------- Balance, ending $ 2,796,950 $ 2,304,372 $ 2,376,463 ============== ============== ==============
(7) Recent Accounting Pronouncements In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Interpretation requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the recognition requirements of this Interpretation will have a material impact on the Corporation's consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporation's consolidated financial statements. The Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entity's activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently evaluating the applicability of FIN 46 but the adoption of this Interpretation is not expected to have a material impact on the Corporation's consolidated financial statements. In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Corporation's consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Corporation's consolidated financial statements. 7 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 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. RESULTS OF OPERATIONS Net income of the Company for the first nine months of 2002 and 2003 was $2,681,440 and $3,002,708, respectively. This is an increase of $321,268 or 11.98%. Net interest income after provision for loan losses for the first nine months of 2002 and 2003 was $7,801,997 and $9,173,566, respectively. This is an increase of $1,371,569 or 17.58%. This increase can be attributed to continued loan growth during 2003 being funded with growth in noninterest bearing demand deposits, interest bearing demand deposits, and savings accounts. The Company's earnings assets yielded 6.72% and 5.86% for the nine months ended September 30, 2002 and 2003, respectively. This decrease of 86 basis points was caused by decreases in the primary index used to price variable rate loans and by acquiring securities where the yield was substantially lower than securities acquired during previous periods. The cost of interest bearing liabilities was 2.35% and 1.75% for the nine months ended September 30, 2002 and 2003, respectively. This decrease of 60 basis points can be attributed to repricing deposits to reflect current market rates. These changes caused the net interest margin to decrease 32 basis points from 4.79% to 4.47% for the nine months ended September 30, 2002 and 2003, respectively. Total noninterest income increased $346,315 or 13.60% from $2,546,665 for the first nine months of 2002 to $2,892,980 for the first nine months of 2003. This change can be attributed to increases in commissions earned on the sale of nondeposit investment products and fees earned from the origination of secondary market mortgages. Total noninterest expenses increased $1,243,290 or 19.08% from $6,516,096 during the first nine months of 2002 to $7,759,386 during the first nine months of 2003. This change can be attributed to an increase in compensation and benefits expense from the hiring of additional personnel for the Bank's new branch locations and an increase in pension benefit expense. Earnings per common share outstanding (basic and diluted) was $1.83 and $2.02 for the nine months ended September 30, 2002 and 2003, respectively. Annualized return on average assets for the nine month periods ended September 30, 2002 and 2003 was 1.37% and 1.28%, respectively. Annualized return on average equity for the nine month periods ended September 30, 2002 and 2003 was 15.88% and 15.62%, respectively. 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 for the nine month periods ended September 30, 2002 and 2003 was $585,000 and $475,000, respectively. The allowance for loan losses increased $420,487 or 17.69% during the first nine months of 2003 from $2,376,463 at December 31, 2002 to $2,796,950 at September 30, 2003. The allowance as a percentage of total loans was 1.05% as of December 31, 2002 and September 30, 2003. Charged-off loans were $127,446 and $131,564 for the nine months ended September 30, 2002 and 2003, respectively. Recoveries were $49,555 and $77,051 for the nine months ended September 30, 2002 and 2003, respectively. This resulted in net charge-offs of $77,891 and $54,513 for the first nine months of 2002 and 2003, respectively. The ratio of net charge-offs to average loans was 0.04% and 0.02% for the first nine months of 2002 and 2003, respectively. Loans past due greater than 90 days and still accruing interest increased from $26,674 at December 31, 2002 to $59,130 at September 30, 2003. Total nonaccrual loans were $56,542 as of September 30, 2003. There were no impaired loans as of September 30, 2003. There were no nonaccrual or impaired loans as of December 31, 2002. Loans are viewed as potential problem loans when management questions the ability of the borrower to comply with current repayment terms. These loans are subject to constant review by management and their status is reviewed on a regular basis. The amount of problem loans as of December 31, 2002 and September 30, 2003 was $1,021,153 and $502,707, respectively. Most of these loans are well secured and management expects to incur only immaterial losses, if any, on their disposition. BALANCE SHEET Total assets increased $46.9 million or 16.03% from $292.6 million at December 31, 2002 to $339.5 million at September 30, 2003. Securities increased $8.6 million or 21.24% during the first nine months of 2003 from $40.3 million at December 31, 2002 to $48.9 million at September 30, 2003. Loans, net of unearned discounts increased $39.9 million or 17.67% during the same period from $226.0 million at December 31, 2002 to $265.9 million at September 30, 2003. Total liabilities increased $44.2 million or 16.51% during the first nine months of 2003 from $268.2 million at December 31, 2002 to $312.4 million at September 30, 2003. Total deposits increased $33.6 million or 14.21% during the same period from $236.6 at December 31, 2002 to $270.2 million at September 30, 2003. Total shareholders' equity increased $2.6 million or 10.79% during the first nine months of 2003 from $24.4 million at December 31, 2002 to $27.0 million at September 30, 2003. 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. On June 26, 2002, $7 million of trust preferred securities were issued through a pooled underwriting totaling approximately $554 million. The securities have a LIBOR-indexed floating rate of interest. The interest rate at September 30, 2003 was 4.59%. 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 million of the Company's junior subordinated debt securities with maturities and interest rates like the capital 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 million) of trust preferred securities issued by the Trust can be included in the Company's Tier I capital. SHAREHOLDERS' EQUITY Shareholders' equity per common share outstanding (book value) increased $1.64 or 9.94% from $16.50 at December 31, 2002 to $18.14 at September 30, 2003. During 2002 the Company paid $0.65 per share in dividends. The Company's total dividends for the first three quarters of 2003 were $0.55 per share. The Company has a Dividend Investment Plan that reinvests the dividends of participating shareholders in Company stock. LIQUIDITY AND MARKET RISK Asset and liability management assures liquidity and maintains the balance between rate sensitive assets and liabilities. Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or through the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. Total liquid assets were $93.2 million at December 31, 2002 and $102.7 million at September 30, 2003. These amounts represent 34.76% and 32.87% of total liabilities as of December 31, 2002 and September 30, 2003, respectively. FORWARD LOOKING STATEMENTS Certain statements contained in this 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. 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported at December 31, 2002 in the Company's Form 10-K. 9 Item 4. 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 as of the filing date of this quarterly report. 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. 10 PART II. OTHER INFORMATION Item 1. Legal proceedings. None. Item 2. Changes in securities and use of proceeds. None. Item 3. Defaults upon senior securities. None. Item 4. Submission of matters to a vote of security holders. None. Item 5. Other Information. None. 11 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The following exhibits, when applicable, are filed with this Form 10-Q 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 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 15. Not applicable. Exhibit 18. Not applicable. Exhibit 19. Not applicable. Exhibit 22. Not applicable. Exhibit 23. Not applicable. Exhibit 24. Not applicable. Exhibit 27. Not applicable Exhibit 31. Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.1 Certification by John R. Milleson 31.2 Certification by James W. McCarty, Jr. Exhibit 32. Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.1 Certification by John R. Milleson 32.2 Certification by James W. McCarty, Jr. (b) Reports on Form 8-K. On July 17, 2003 the Company filed a report on Form 8-K to disclose its results of operations for the six months ended June 30, 2003 and to disclose information regarding its third quarter dividend payable August 15, 2003 for shareholders of record on August 1, 2003. 12 SIGNATURES Pursuant to the requirements 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. EAGLE FINANCIAL SERVICES, INC. Date: November 12, 2003 /s/ JOHN R. MILLESON -------------------------- John R. Milleson President and Chief Executive Officer Date: November 12, 2003 /s/ JAMES W. MCCARTY, JR. -------------------------- James W. McCarty, Jr. Vice President, Chief Financial Officer, and Secretary/Treasurer 13 EX-11 3 ex-11.txt COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY Computations of Weighted Average Shares Outstanding and Earnings Per Share (Shares Outstanding End of Month)
Three Months Ended Nine Months Ended September 30 September 30 2003 2002 2003 2002 ------------ ------------ ------------ ------------ JAN --- --- 1,478,770 1,461,394 FEB --- --- 1,482,389 1,464,952 MAR --- --- 1,482,389 1,464,949 APR --- --- 1,482,389 1,464,947 MAY --- --- 1,486,036 1,468,772 JUN --- --- 1,487,320 1,468,772 JUL 1,487,319 1,468,772 1,487,319 1,468,772 AUG 1,490,780 1,472,392 1,490,780 1,472,392 SEP 1,490,780 1,472,389 1,490,780 1,472,389 OCT --- --- --- --- NOV --- --- --- --- DEC --- --- --- --- ------------ ------------ ------------ ------------ 4,468,879 4,413,553 13,368,172 13,207,339 3 3 9 9 - ------------ ------------ ------------ ------------ ------------ Weighted Average Shares Outstanding 1,489,626 1,471,184 1,485,352 1,467,482 - ------------ ------------ ------------ ------------ ------------ Net Income $ 1,105,970 $ 1,007,895 $ 3,002,708 $ 2,681,440 - ------------ ------------ ------------ ------------ ------------ Earnings Per Share, Basic and Diluted $ 0.74 $ 0.69 $ 2.02 $ 1.83 - ------------ ------------ ------------ ------------ ------------
14 EX-31.1 4 ex-311.txt 302 CERTIFICATION OF PRESIDENT AND CEO EXHIBIT 31.1 I, John R. Milleson, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ JOHN R. MILLESON - -------------------------- John R. Milleson. President and Chief Executive Officer 15 EX-31.2 5 ex-321.txt 302 CERTIFICATION OF CFO EXHIBIT 32.1 In connection with the Quarterly Report on Form 10-Q of Eagle Financial Services, Inc. (the "Company") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I John R. Milleson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Code Section 1350, as adopted pursuant to Code Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2003 /s/ JOHN R. MILLESON - -------------------------- John R. Milleson President and Chief Executive Officer 17 EX-32.1 6 ex-312.txt 906 CERTIFICATION OF PRESIDENT AND CEO EXHIBIT 31.2 I, James W. McCarty, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q 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-15(e) and 15d-15(e)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 12, 2003 /s/ JAMES W. MCCARTY, JR. - -------------------------- James W. McCarty, Jr. Vice President, Chief Financial Officer, and Secretary/Treasurer 16 EX-32.2 7 ex-322.txt 906 CERTIFICATION OF CFO EXHIBIT 32.2 In connection with the Quarterly Report on Form 10-Q of Eagle Financial Services, Inc. (the "Company") for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I James W. McCarty, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Code Section 1350, as adopted pursuant to Code Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 12, 2003 /s/ JAMES W. MCCARTY, JR. - -------------------------- James W. McCarty, Jr. Vice President, Chief Financial Officer, and Secretary/Treasurer 18 -----END PRIVACY-ENHANCED MESSAGE-----