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)
(State or other jurisdiction of
incorporation or organization)
2 East Main Street
P.O. Box 391
Berryville, Virginia 22611
(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.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets at March 31, 2004 and December 31, 2003
Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2004 and 2003
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 5.
Item 6.
Item 1. Financial Statements
Consolidated Balance Sheets
March 31,
2004
December 31,
2003
Assets
Cash and due from banks
Federal funds sold
Securities available for sale, at fair value
Securities held to maturity (fair value; $13,707,148 and $14,503,515, respectively)
Loans, net of allowance for loan losses of $2,937,707 and $2,866,991, respectively
Bank premises and equipment, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits
Savings and interest bearing demand deposits
Time deposits
Total deposits
Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings
Federal Home Loan Bank advances
Trust preferred capital notes
Other liabilities
Commitments and contingent liabilities
Total liabilities
Shareholders’ Equity
Preferred Stock, $10 par value; 500,000 shares authorized and unissued
Common Stock, $2.50 par value; authorized 5,000,000 shares; issued 1,500,089 and 1,497,714 shares, respectively
Surplus
Retained Earnings
Accumulated other comprehensive income, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
1
Consolidated Statements of Income
(Unaudited)
Interest and Dividend Income
Interest and fees on loans
Interest on federal funds sold
Interest on securities held to maturity:
Taxable interest income
Interest income exempt from federal income taxes
Interest and dividends on securities available for sale:
Dividends
Interest on deposits in banks
Total interest and dividend income
Interest Expense
Interest on deposits
Interest on federal funds purchased and securities sold under agreements to repurchase
Interest on Federal Home Loan Bank advances
Interest on trust preferred capital notes
Total interest expense
Net interest income
Provision For Loan Losses
Net interest income after provision for loan losses
Noninterest Income
Trust Department income
Service charges on deposits
Other service charges and fees
Securities gains
Other operating income
Noninterest Expenses
Salaries and wages
Pension and other employee benefits
Occupancy expenses
Equipment expenses
Advertising and marketing expenses
Bank franchise taxes
Stationery and supplies
Other operating expenses
Income before income taxes
Income Tax Expense
Net Income
Earnings Per Share
Net income per common share, basic and diluted
2
Consolidated Statements of Changes in Shareholders’ Equity
Common
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Balance, December 31, 2002
Comprehensive income:
Net income
Other comprehensive income:
Unrealized holding gains arising during the period, net of deferred income taxes of $37,731
Total comprehensive income
Issuance of common stock, dividend investment plan
Dividends declared ($0.18 per share)
Fractional shares purchased
Balance, March 31, 2003
Balance, December 31, 2003
Unrealized holding gains arising during the period, net of deferred income taxes of $33,092
Reclassification adjustment, net of income taxes of $48,944
Other comprehensive income, net of income taxes of $15,852
Amortization of unearned compensation, restricted stock awards
Dividend declared ($0.20 per share)
Balance, March 31, 2004
3
Consolidated Statements of Cash Flows
Three Months Ended
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Amortization of intangible and other assets
(Gain) loss on equity investment
Provision for loan losses
Accrual of restricted stock awards
(Gain) on sale of securities
Premium amortization on securities, net
Changes in assets and liabilities:
Decrease in other assets
Increase in other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Proceeds from maturities and principal payments of securities held to maturity
Proceeds from maturities and principal payments of securities available for sale
Proceeds from sales of securities available for sale
Purchases of securities held to maturity
Purchases of securities available for sale
Purchases of bank premises and equipment
Net (increase) in loans
Net cash (used in) investing activities
Cash Flows from Financing Activities
Net increase in demand deposits, money market and savings accounts
Net increase (decrease) in certificates of deposit
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
Net increase in Federal Home Loan Bank advances
Cash dividends paid
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and Cash Equivalents
Beginning
Ending
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest
Income taxes
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain (loss) on securities available for sale
4
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.
Net income, as reported
Deduct: Total stock-based compensation expense
based on fair value of all awards, net of taxes
Pro forma net income
Earnings per share:
Basic - as reported
Basic - pro forma
Diluted - as reported
Diluted - pro forma
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.
Average number of common shares outstanding
Effect of dilutive options
Average number of common shares outstandingused to calculate diluted earnings per share
5
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:
Amortized
Cost
Gross
Unrealized
Gains
(Losses)
Fair
Value
Obligations of U.S. government corporations and agencies
Mortgage-backed securities
Obligations of states and political subdivisions
Corporate securities
Restricted stock
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:
GrossUnrealized
Losses
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.
6
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.
7
NOTE 4. Loans
Net loans at March 31, 2004 and December 31, 2003 are summarized as follows:
Mortgage loans on real estate:
Construction and land development
Secured by farmland
Secured by 1-4 family residential properties
Secured by nonfarm, nonresidential properties
Loans to farmers
Commercial and industrial loans
Consumer installment loans
All other loans
Less: Allowance for loan losses
NOTE 5. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Balance, beginning
Provision charged to operating expense
Recoveries added to the allowance
Loan losses charged to the allowance
Balance, ending
8
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:
Components of Net Periodic Benefit Cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service costs
Amortization of net obligation at transition
Recognized net actuarial loss
Net periodic benefit cost
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.
9
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.
10
RESULTS OF OPERATIONS
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.
11
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.
Total noninterest expenses increased $562,174 or 22.9% for the first three months of 2004 as compared to the same period in 2003. The amount of noninterest expenses was $2,459,389 for the first three months of 2003 as compared to $3,021,563 for the first three months of 2004.
Salaries and benefits increased $306,878 or 21.0% from $1,464,359 for the first three months of 2003 to $1,771,237 for the first three months of 2004. This increase can be attributed to annual salary adjustments and the hiring of additional personnel to accommodate the continued growth of the Company.
Occupancy expenses increased $90,371 or 58.7% from $153,846 to $244,217 for the first three months of 2003 and 2004, respectively. This increase can be attributed to the addition of the Millbrook Branch and the relocation of the Old Post Office Branch and Loan Department to the Old Town Center.
Equipment expenses increased $35,770 or 19.4% from $183,964 to $219,734 for the first three months of 2003 and 2004, respectively. This increase can be attributed to investments in hardware and software related to the Bank’s core software conversion which occurred at the end of the first quarter during 2003.
Advertising and marketing expenses increased $32,362 or 41.8% from $77,459 to $109,821 for the first three months of 2003 and 2004, respectively. This category contains numerous expense types such as advertising, public relations, business development and charitable contributions. The budgeted amount of advertising and marketing expenses is directly related to the Company’s growth in assets. Expenses are allocated in a manner which focuses on effectively reaching the existing and potential customers within the market and contributing to the community.
12
FINANCIAL CONDITION
Securities
Total securities were $45.0 million at March 31, 2004 as compared to $47.9 million at December 31, 2003. This represents a decrease of $2.9 million or 6.1%. This decrease can be attributed to the sale of securities with an amortized cost of $2.2 million from which a gain of $143,954 was derived. The Company did not have any securities from a single issuer, other than U.S. government agencies, whose amount exceeded 10% of shareholders’ equity as of March 31, 2004. Note 3 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at March 31, 2004 and December 31, 2003.
The Company had $13.3 million and $14.2 million in securities classified as held to maturity at March 31, 2004 and December 31, 2003, respectively. The Company had $31.7 million and $33.7 million in securities classified as available for sale at March 31, 2004 and December 31, 2003, respectively. Most securities purchased during 2003 and 2004 were designated as available for sale due to their low yields. The ability to dispose of available for sale securities prior to maturity provides management more options to react to future rate changes and provides more liquidity when needed to meet short-term obligations.
Loan Portfolio
The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Total loans outstanding were $283.4 million and $276.5 million at March 31, 2004 and December 31, 2003. This represents and increase of $6.9 million or 2.5% for the first quarter of 2004. The Company’s loan growth can be attributed to competitive loan pricing, experienced loan officers, and continuous sales efforts. The ratio of loans to deposits remained unchanged at 100.4% at December 31, 2003 and March 31, 2004. The loan portfolio consists primarily of loans for owner-occupied single family dwellings, loans to acquire consumer products such as automobiles, and loans to small farms and businesses.
Loans secured by real estate were $226.9 million or 80.0% and $221.8 million or 80.2% of total loans as of March 31, 2004 and December 31, 2003, respectively. This represents an increase of $5.1 million or 2.3% during the first quarter of 2004. These loans are well-secured and based on conservative appraisals in a stable market. The Company generally does not make real estate loans outside its primary market area. Consumer installment loans were unchanged at $32.2 million, which represents 11.4% and 11.6% of total loans at March 31, 2004 and December 31, 2003, respectively. This type of loan is primarily comprised of vehicle loans which have been difficult to increase due to manufacturer financing options and customers using alternative financing such as home equity lines of credit whose interest is tax-deductible. Commercial and industrial loans were $22.5 million or 7.9% and $20.8 million or 7.5% of total loans at March 31, 2004 and December 31, 2003, respectively. This represents an increase of $1.7 million or 8.4% for the first quarter of 2004.
Allowance for Loan Losses
The purpose of and the methods for measuring the allowance for loan losses are discussed in the Critical Accounting Policies section above. Charged-off loans were $128,479 and $54,885 for the three months ended March 31, 2004 and 2003, respectively. Recoveries were $24,195 and $23,087 for the three months ended March 31, 2004 and 2003, respectively. This resulted in net charge-offs of $104,284 and $31,798 for the three months ended March 31, 2004 and 2003, respectively. The allowance for loan losses as a percentage of loans was 1.04% at March 31, 2004 and December 31, 2003.
Risk Elements and Nonperforming Assets
Nonperforming assets consist of nonaccrual loans, restructured loans, and other real estate owned (foreclosed properties). Total nonperforming assets were $50,000 and $34,780 as of March 31, 2004 and December 31, 2003, respectively. The percentage of nonperforming assets to loans and other real estate owned was 0.02% and 0.01% as of March 31, 2004 and December 31, 2003, respectively. Total loans past due 90 days or more and still accruing interest were $144,142 or 0.05% and $69,885 or 0.03% of total loans at March 31, 2004 and December 31, 2003, respectively.
The loans past due 90 days or more and still accruing interest are secured and in the process of collection and, therefore, they are not classified as nonaccrual. Any loan over 90 days past due without being in the process of collection or where the collection of its principal or interest is doubtful would be placed on nonaccrual status. Upon being placed on nonaccrual status, accrued interest would be reversed from income and future accruals would be discontinued with interest income being recognized on a cash basis. Management evaluates borrowers on an ongoing basis to identify those loans on which a loss may be realized. The methods for identifying these loans and establishing estimated losses for these loans are discussed in the Critical Accounting Policies section above. Once management determines that a loan requires a specific allowance, it becomes a potential problem loan. The amount of potential problem loans was $465,000 and $593,706 at March 31, 2004 and December 31, 2003, respectively. This represents a decrease of $128,706 or 21.7% during the first quarter of 2004. As of March 31, 2004 these loans are primarily well-secured and in the process of collection and the allowance for loan losses includes $38,908 in specific allocations for these loans.
13
Deposits
Total deposits were $282.3 million and $275.5 million as of March 31, 2004 and December 31, 2003, respectively. This represents an increase of $6.8 million or 2.5% during the first quarter of 2004.
Noninterest bearing demand deposits increased $0.4 million or 0.6% from $65.1 million at December 31, 2003 to $65.5 million at March 31, 2004. Savings and interest bearing demand deposits, which includes NOW accounts, money market accounts and regular savings accounts, increased $2.6 million or 1.8% from $145.7 million at December 31, 2003 to $148.3 million at March 31, 2004. The increases in demand deposits and savings and interest bearing demand deposits can be attributed to deposit accounts gained through the subsidiary’s branch network. Time deposits increased $3.8 million or 5.9% from $64.7 million at December 31, 2003 to $68.5 million at March 31, 2004. The increase in time deposits can be attributed to obtaining certificates of deposits of $100,000 or more which are comprised primarily of public funds.
The Company attempts to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source of funding. Core deposits consist of demand deposits, interest-bearing demand deposits, money market accounts, savings accounts, and time deposits of less than $100,000. Core deposits totaled $257.0 million or 91.0% and $254.0 million or 92.2% of total deposits at March 31, 2004 and December 31, 2003, respectively. Certificates of deposit of $100,000 or more totaled $25.3 or 9.0% and $21.5 million or 7.8% of total deposits at March 31, 2004 and December 31, 2003, respectively.
CAPITAL RESOURCES
The Company continues to be a well capitalized financial institution. Total shareholders’ equity on March 31, 2004 was $29.1 million, reflecting a percentage of total assets of 8.17%, as compared to $28.4 million and 8.06% at December 31 2003. Shareholders’ equity per share increased $0.43 or 2.3% to $19.37 per share at March 31, 2004 from $18.94 per share at December 31, 2003. During the first quarter of 2004 the Company has paid $0.20 per share in dividends as compared to $0.18 per share for the same period of 2003. The total dividend paid for 2003 was $0.75 per share. The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock.
Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk in order to calculate risk-weighted assets. Tier I capital consists of total shareholders’ equity plus qualifying trust preferred securities outstanding less net unrealized gains and losses on available for sale securities, goodwill and other intangible assets. Total capital is comprised of Tier I capital plus the allowable portion of the allowance for loan losses and any excess trust preferred securities that do not qualify as Tier I capital. The $7.0 million in trust preferred securities, issued by the Company during 2002, qualifies as Tier I capital because this amount does not exceed 25% of total capital, including the trust preferred securities. Financial institutions must maintain a Tier I risk-based capital ratio of at least 4% and a total risk-based capital ratio of at least 8%. Additionally, they must maintain a minimum Tier I leverage ratio of 4%. The Company’s Tier I risk-based capital ratio was 12.56% at March 31, 2004 as compared to 12.86% at December 31, 2003. The Company’s total risk-based capital ratio was 13.62% at March 31, 2004 as compared to 13.93% at December 31, 2003. The Company’s Tier I capital to average total assets ratio was 9.92% at March 31, 2004 as compared to 10.00% at December 31, 2003. Each of these ratios has decreased slightly as asset growth has exceeded shareholders’ equity growth, which is comprised of retained earnings and additional shares issued through the Dividend Investment Plan. The Company monitors these ratios on a quarterly basis and has several strategies to ensure that it remains well capitalized.
LIQUIDITY
Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At March 31, 2004, liquid assets totaled $108.0 million as compared to $103.7 million at December 31, 2003. These amounts represent 33.1% for 2004 and 32.0% for 2003, of total liabilities. The Company minimizes liquidity demand by utilizing core deposits to fund asset growth. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. Finally, the Bank’s membership with the Federal Home Loan Bank of Atlanta provides a source of borrowings with numerous rate and term structures. The Company’s senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. Management believes that the Company maintains overall liquidity sufficient to satisfy the depositors’ requirements and meet its customers’ credit needs.
14
FORWARD LOOKING STATEMENTS
We make forward looking statements in this annual report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:
Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results.
15
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, 2003 in the 2003 Form 10-K.
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the date of this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2004 to ensure that information required to be disclosed by the Company in reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended March 31, 2004 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
16
Item 1. Legal Proceedings
During the normal course of business, various legal claims arise from time to time which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed with this Form 10-Q.
Description
(b) Reports on Form 8-K
On January 30, 2004, the Company furnished a report on Form 8-K to announce, under Item 12, results of operations for the year ended December 31, 2003 and to disclose a cash dividend payable on February 16, 2004 to shareholders on record as of February 2, 2004.
18
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, this 13th day of May, 2004.
Eagle Financial Services, Inc.
/S/ JOHN R. MILLESON
John R. Milleson
President and Chief Executive Officer
/S/ JAMES W. MCCARTY, JR.
James W. McCarty, Jr.
Vice President, Chief Financial Officer, and Secretary-Treasurer
19