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