UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------------- Form 10-Q X Quarterly Report Under Section 13 or 15(d) of the Securities --------- Exchange Act of 1934 For the quarterly period ended March 31, 2002 Transition Report Under Section 13 or 15(d) of the Exchange --------- Act - ------------------------------------------------------------------------------- EAGLE FINANCIAL SERVICES, INC (Exact name of registrant as specified in its charter) Virginia 54-1601306 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) Post Office Box 391 Berryville, Virginia 22611 (Address of principal executive offices) (Zip Code) (540) 955-2510 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all documents and 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 [ ] The number of shares of the Registrant's Common Stock ($2.50 par value) outstanding as of August 7, 2002 was 1,468,772. 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 June 30, 2002 and December 31, 2001 ..................... 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2002 and 2001 .............. 4 Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2002 and 2001 ............. 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 ............. 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 PART II. OTHER INFORMATION Item 1. Legal Proceedings ...........................................10 Item 2. Changes in Securities .......................................10 Item 3. Defaults Upon Senior Securities .............................10 Item 4. Submission of Matters to a Vote of Security Holders .........10 Item 5. Other Information ...........................................10 Item 6. Exhibits and reports on Form 8-K ............................11 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Eagle Financial Services, Inc. and Subsidiary Consolidated Balance Sheets As of June 30, 2002 and December 31, 2001 <TABLE> <CAPTION> Jun 30, 2002 Dec 31, 2001 --------------- --------------- <S> <C> <C> Assets Cash and due from banks $ 15,451,200 $ 13,105,622 Federal funds sold 1,561,000 0 Securities available for sale, at fair value 15,867,791 16,713,595 Securities held to maturity (fair value: 2002,$18,513,459; 2001,$20,519,159) 18,030,734 20,259,234 Loans, net allowance for loan losses of $2,195,470 in 2002 and $1,797,263 in 2001 207,765,279 177,871,629 Bank premises and equipment, net 6,394,896 5,422,574 Other assets 4,612,787 4,269,285 --------------- --------------- Total assets $ 269,683,687 $ 237,641,939 =============== =============== Liabilities and Shareholders' Equity Liabilities Deposits: Noninterest bearing demand deposits $ 45,221,897 $ 36,718,703 Interest bearing demand deposits, money market and savings accounts 101,416,532 83,597,263 Time deposits 70,875,179 77,032,485 --------------- --------------- Total deposits $ 217,513,608 $ 197,348,451 Federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings 3,370,153 7,816,807 Federal Home Loan Bank advances 18,000,000 10.000,000 Trust preferred capital notes 7,000,000 0 Other liabilities 834,713 1,003,974 Commitments and contingent liabilities 0 0 --------------- --------------- Total liabilities $ 246,718,474 $ 216,169,232 --------------- --------------- 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 2002, 1,468,772; issued 2001, 1,461,395 shares 3,671,930 3,653,487 Surplus 3,328,606 3,178,848 Retained Earnings 15,627,845 14,407,901 Accumulated other comprehensive income 336,832 232,471 --------------- --------------- Total shareholders' equity $ 22,965,213 $ 21,472,707 --------------- --------------- Total liabilities and shareholders' equity $ 269,683,687 $ 237,641,939 =============== =============== </TABLE> 3
Eagle Financial Services, Inc. and Subsidiary Consolidated Statements of Income For the Periods Ended June 30, 2002 and 2001 <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 2002 2001 2002 2001 --------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Interest and Dividend Income Interest and fees on loans $ 3,474,724 $ 3,038,239 $ 6,741,781 $ 5,969,083 Interest on federal funds sold 242 5,305 242 9,255 Interest on securities held to maturity: Taxable interest income 136,741 228,247 293,373 482,591 Interest income exempt from federal income taxes 93,800 99,453 188,766 200,588 Interest and dividends on securities available for sale: Taxable interest income 198,959 180,810 401,861 326,668 Interest income exempt from federal income taxes 16,048 18,378 33,786 36,755 Dividends 36,802 35,882 72,595 71,019 Interest on deposits in banks 149 287 275 920 --------------- --------------- --------------- --------------- Total interest and dividend income $ 3,957,465 $ 3,606,601 $ 7,732,679 $ 7,096,879 --------------- --------------- --------------- --------------- Interest Expense Interest on deposits $ 874,510 $ 1,447,970 $ 1,881,150 $ 2,901,647 Interest on federal funds purchased, securities sold under agreements to repurchase and other short- term borrowings 50,363 56,891 91,845 121,878 Interest on Federal Home Loan Bank advances 163,884 62,436 308,182 124,186 Interest on long-term debt 5,189 0 5,189 0 --------------- --------------- --------------- --------------- Total interest expense $ 1,093,946 $ 1,567,297 $ 2,286,366 $ 3,147,711 --------------- --------------- --------------- --------------- Net interest income $ 2,863,519 $ 2,039,304 $ 5,446,313 $ 3,949,168 Provision For Loan Losses 157,500 145,000 421,900 235,000 --------------- --------------- --------------- --------------- Net interest income after provision for loan losses $ 2,706,019 $ 1,894,304 $ 5,024,413 $ 3,714,168 --------------- --------------- --------------- --------------- Noninterest Income Trust Department income $ 102,600 $ 131,993 218,770 278,622 Service charges on deposits 261,106 238,573 505,601 435,994 Other service charges and fees 450,458 362,393 765,732 592,079 Securities gains 0 0 36,036 55,390 Other operating income 28,658 12,677 58,557 26,226 --------------- --------------- --------------- --------------- $ 842,822 $ 745,636 $ 1,584,696 $ 1,388,311 --------------- --------------- --------------- --------------- Noninterest Expenses Salaries and wages $ 951,040 $ 824,166 $ 1,950,129 $ 1,599,499 Pension and other employee benefits 324,648 218,737 466,169 405,394 Occupancy expenses 117,327 106,621 228,979 221,037 Equipment expenses 196,919 180,767 359,763 336,058 Credit card expense 72,345 56,723 129,254 102,796 Stationary and supplies 71,923 62,222 121,522 108,825 ATM network fees 48,088 38,137 92,127 76,065 Postage 36,226 37,194 78,008 69,799 Other operating expenses 427,075 370,421 782,326 672,710 --------------- --------------- --------------- --------------- $ 2,245,591 $ 1,894,988 $ 4,208,277 $ 3,592,183 --------------- --------------- --------------- --------------- Income before income taxes $ 1,303,250 $ 744,952 $ 2,400,832 $ 1,510,296 Income Tax Expense 399,455 201,371 727,287 411,854 --------------- --------------- --------------- --------------- Net Income $ 903,795 $ 543,581 $ 1,673,545 $ 1,098,442 =============== =============== =============== =============== Net income per common share, basic and diluted $ 0.62 $ 0.37 $ 1.14 $ 0.76 =============== =============== =============== =============== </TABLE> 4
<TABLE> Eagle Financial Services, Inc. and Subsidiary Consolidated Statements of Shareholders' Equity For the Six Months Ended June 30, 2002 and 2001 <CAPTION> Accumulated Other Common Retained Comprehensive Comprehensive Stock Surplus Earnings Income Income Total ------------- ------------- ------------- ------------- ------------- ------------ <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000 $ 3,613,578 $ 2,873,924 $ 12,760,698 $ 17,286 $ 19,265,486 Comprehensive income: Netncome 1,098,442 $ 1,098,442 1,098,442 Other comprehensive income: Unrealized holding gains arising during the period, net of deferred income taxes of $111,402 216,251 Reclassification adjustment, net of deferred income taxes of $18,833 (36,557) ------------- Other comprehensive income, net of deferred income taxes of $92,569 179,694 179,694 179,694 ------------- Total comprehensive income $ 1,278,136 ============= Issuance of common stock, dividend investment plan (6,036 shares) 15,091 122,538 137,629 Dividends declared ($0.26 per share) (376,062) (376,062) Fractional shares purchased (9) (81) (90) ------------- ------------- ------------- ------------- ------------- Balance, June 30, 2001 $ 3,628,660 $ 2,996,381 $ 13,483,078 $ 196,980 $ 20,305,099 ============= ============= ============= ============= ============= Balance, December 31, 2001 $ 3,653,487 $ 3,178,848 $ 14,407,901 $ 232,471 $ 21,472,707 Comprehensive income: Net Income 1,673,545 $ 1,673,545 1,673,545 Other comprehensive income: Unrealized holding losses arising during the period, net of deferred income taxes of $66,014 128,145 Reclassification adjustment, net of deferred income taxes of $12,252 (23,784) Other comprehensive income, net of Deferred income taxes of $53,762 104,361 104,361 104,361 ------------- Total comprehensive income $ 1,777,906 ============= Issuance of common stock, dividend investment plan (7,383 shares) 18,458 149,892 168,350 Dividends declared ($0.31 per share) (453,601) (453,601) Fractional shares purchased (15) (134) (149) ------------- ------------- ------------- ------------- ------------- Balance, June 30, 2002 $ 3,671,930 $ 3,328,606 $ 15,627,845 $ 336,832 $ 22,965,213 ============= ============= ============= ============= ============= </TABLE> 5
Eagle Financial Services, Inc. and Subsidiary Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2002 and 2001 <TABLE> <CAPTION> Six Months Ended June 30 2002 2001 ------------- ------------- <S> <C> <C> Cash Flows from Operating Activities Net income $ 1,673,545 $ 1,098,442 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 281,954 279,034 Amortization of intangible assets 22,525 22,525 Loss on equity investment 3,706 3,433 Provision for loan losses 421,900 235,000 (Gain) on sale of securities (36,036) (55,390) Premium amortization on securities, net 25,387 32,793 Changes in assets and liabilities: (Increase) in other assets (441,027) (362,246) (Decrease) in other liabilities (223,023) (126,881) ------------- ------------- Net cash provided by operating activities $ 1,728,931 $ 1,126,710 ------------- ------------- Cash Flows from Investing Activities Proceeds from maturities and principal payments on securities held to maturity $ 2,560,802 $ 2,676,223 Proceeds from maturities and principal payments on securities available for sale 1,878,478 2,089,510 Proceeds from sales of securities available for sale 306,108 2,531,732 Purchases of securities held to maturity (346,500) 0 Purchases of securities available for sale (1,155,812) (8,081,416) Purchases of bank premises and equipment (1,182,982) (344,240) Net (increase) in loans (30,315,550) (15,089,369) ------------- ------------- Net cash (used in) investing activities $(28,255,456) $(16,217,560) ------------- ------------- Cash Flows from Financing Activities Net increase in demand deposits, money market and savings accounts $ 26,322,463 $ 12,217,504 Net increase (decrease) in certificates of deposits (6,157,306) 2,547,902 Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase and other short-term borrowings (4,446,654) 961,509 Proceeds from Federal Home Loan Bank advances 8,000,000 0 Proceeds from trust preferred capital notes 7,000,000 0 Cash dividends paid (285,251) (238,433) Fractional shares purchased (149) (90) ------------- ------------- Net cash provided by financing activities $ 30,433,103 $ 15,488,392 ------------- ------------- Increase in cash and cash equivalents $ 3,906,578 $ 397,542 Cash and Cash Equivalents Beginning 13,105,622 8,504,765 ------------- ------------- Ending $ 17,012,200 $ 8,902,307 ============= ============= Supplemental Disclosures of Cash Flow Information Cash payments for: Interest $ 2,353,831 $ 3,170,697 ============= ============= Income taxes $ 968,321 $ 556,868 ============= ============= Supplemental Schedule of Non-Cash Investing and Financing Activities: Issuance of common stock, dividend investment plan $ 168,350 $ 137,629 ============= ============= Unrealized gain on securities available for sale $ 158,123 $ 272,263 ============= ============= </TABLE> 6
EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 (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 June 30, 2002 and December 31, 2001, the results of operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001. 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, 2001. (3) The results of operations for the six month period ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year. (4) Securities held to maturity and available for sale as of June 30, 2002 and December 31, 2001, are: <TABLE> <CAPTION> Jun 30, 2002 Dec 31, 2001 Held to Maturity Amortized Cost Amortized Cost - ---------------- -------------- -------------- <S> <C> <C> U.S. Treasury securities $ 0 $ 121,985 Obligations of U.S. government corporations and agencies 1,499,038 1,998,678 Mortgage-backed securities 4,210,927 5,383,586 Obligations of states and political subdivisions 12,320,769 12,754,985 -------------- -------------- $ 18,030,734 $ 20,259,234 ============== ============== Jun 30, 2002 Dec 31, 2001 Fair Value Fair Value -------------- -------------- U.S. Treasury securities $ 0 $ 123,068 Obligations of U.S. government corporations and agencies 1,536,560 2,053,910 Mortgage-backed securities 4,322,954 5,452,775 Obligations of states and political subdivisions 12,653,945 12,889,406 -------------- -------------- $ 18,513,459 $ 20,519,159 ============== ============== </TABLE> <TABLE> <CAPTION> Jun 30, 2002 Dec 31, 2001 Available for Sale Amortized Cost Amortized Cost - ------------------ -------------- -------------- <S> <C> <C> Obligations of U.S. government corporations and agencies $ 1,491,326 $ 1,989,914 Mortgage-backed securities 1,361,870 2,009,049 Obligations of states and political Subdivisions 1,308,128 1,498,807 Corporate securities 9,681,726 9,693,902 Other 1,514,389 1,169,694 -------------- -------------- $ 15,357,439 $ 16,361,366 ============== ============== Jun 30, 2002 Dec 31, 2001 Fair Value Fair Value -------------- -------------- Obligations of U.S. government corporations and agencies $ 1,532,815 $ 2,014,850 Mortgage-backed securities 1,399,788 2,054,114 Obligations of states and political Subdivisions 1,393,757 1,545,255 Corporate securities 10,027,042 9,901,227 Other 1,514,389 1,198,149 -------------- -------------- $ 15,867,791 $ 16,713,595 ============== ============== </TABLE> (5) Net loans at June 30,2002 and December 31, 2001 are summarized as follows (In Thousands): <TABLE> <CAPTION> Jun 30, 2002 Dec 31, 2001 --------------- --------------- <S> <C> <C> Loans secured by real estate: Construction and land development $ 15,224 $ 10,383 Secured by farmland 3,174 4,778 Secured by 1-4 family residential 105,063 93,042 Nonfarm, nonresidential loans 39,631 30,295 Loans to farmers (except those secured by real estate) 1,139 1,002 Commercial and industrial loans (except those secured by real estate) 16,349 13,912 Consumer installment loans (except those secured by real estate) 29,283 25,909 Loans to U.S. state and political subdivisions 0 0 All other loans 97 350 --------------- --------------- Gross loans $ 209,960 $ 179,671 Less: Unearned income 0 (2) Allowance for loan losses (2,195) (1,797) --------------- --------------- Loans, net $ 207,765 $ 177,872 =============== =============== </TABLE> (6) Allowance for Loan Losses <TABLE> <CAPTION> Jun 30, 2002 Jun 30, 2001 Dec 31, 2001 -------------- -------------- -------------- <S> <C> <C> <C> Balance, beginning $ 1,797,263 $ 1,340,086 $ 1,340,086 Provision charged to operating expense 421,900 235,000 712,500 Recoveries added to the allowance 39,324 19,738 95,217 Loan losses charged to the allowance (63,017) (93,432) (350,540) -------------- -------------- -------------- Balance, ending $ 2,195,470 $ 1,501,392 $ 1,797,263 ============== ============== ============== </TABLE> (7) Recent Accounting Pronouncements There are no new accounting pronouncements to disclose within this Form 10-Q. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations CRITICAL ACCOUNTING POLICIES The financial statements of Eagle Financial Services, Inc. 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. We use historical loss factors as one element in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. The allowance for loan losses is an estimate of the losses that may be sustained in our 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 are 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. PERFORMANCE SUMMARY Net income of the company for the first six months of 2002 and 2001 was $1,673,545 and $1,098,442, respectively. This is an increase of $575,103 or 52.36%. Net interest income after provision for loan losses for the first six months of 2002 and 2001 was $5,024,413 and $3,714,168, respectively. This is an increase of $1,310,245 or 35.28%. This increase can be attributed to continued loan growth during 2002 being funded with growth in noninterest bearing demand deposits, interest bearings demand deposits, and savings accounts. Total noninterest income increased $196,385 or 14.15% from $1,388,311 for the first six months of 2001 to $1,584,696 for the first six months of 2002. 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 $616,094 or 17.15% from $3,592,183 during the first six months of 2001 to $4,208,277 during the first six months of 2002. This change can be attributed to an increase in compensation and benefits expense from the hiring of additional personnel for the Bank's eighth branch location and in the loan department. Earnings per common share outstanding (basic and diluted) was $1.14 and $0.76 for the six months ended June 30, 2002 and 2001, respectively. Annualized return on average assets for the six month periods ended June 30, 2002 and 2001 was 1.32% and 1.10%, respectively. Annualized return on average equity for the six month periods ended June 30, 2002 and 2001 was 15.17% and 11.12%, 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 reflective of the risks in the loan portfolio. The Company reviews the adequacy of the allowance for loan losses monthly and utilizes the results of these evaluations to establish the provision for loan losses. The allowance is maintained at a level believed by management to absorb potential losses in the loan portfolio. The methodology considers specific identifications, specific and estimate pools, trends in delinquencies, local and regional economic trends, concentrations, commitments, off balance sheet exposure and other factors. The provision for loan losses for the six month periods ended June 30, 2001 and 2002 was $235,000 and $421,900, respectively. The allowance for loan losses increased $398,207 or 22.16% during the first six months of 2002 from $1,797,263 at December 31, 2001 to $2,195,470 at June 30, 2002. The allowance as a percentage of total loans increased from 1.00% as of December 31, 2001 to 1.05% as of June 30, 2002. The Company had net charge-offs of $73,694 and $23,693 for the first six months of 2001 and 2002, respectively. The ratio of net charge-offs to average loans was 0.05% and 0.01% for the first six months of 2001 and 2002, respectively. Loans past due greater than 90 days and still accruing interest increased from $7,827 at December 31, 2001 to $55,591 at June 30, 2002. Total nonaccrual loans were $2,029,379 as of December 31, 2001 and $32,584 as if June 30, 2002. There were no impaired loans as of December 31, 2001 and June 30, 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 June 30, 2002 was $135,407. Most of these loans are well secured and management expects to incur only immaterial losses on their disposition. BALANCE SHEET Total assets increased $32.1 million or 13.48% from $237.6 million at December 31, 2001 to $269.7 million at June 30, 2002. Securities decreased $3.1 million or 8.32% during the first six months of 2002 from $37.0 million at December 31, 2001 to $33.9 million at June 30, 2002. Loans, net of unearned discounts increased $30.3 million or 16.86% during the same period from $179.7 million at December 31, 2001 to $210.0 million at June 30, 2002. Total liabilities increased $30.5 million or 14.13% during the first six months of 2002 from $216.2 million at December 31, 2001 to $246.7 million at June 30, 2002. Total deposits increased $20.2 million or 10.22% during the same period from $197.3 at December 31, 2001 to $217.5 million at June 30, 2002. Total shareholders' equity increased $1.5 million or 6.95% during the first six months of 2002 from $21.5 million at December 31, 2001 to $23.0 million at June 30, 2002. 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 June 30, 2002 was 5.34%. 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 The Company continues to be a well capitalized financial institution. Shareholders' equity per share increased $0.95 or 6.47% from $14.69 per share at December 31, 2001 to $15.64 per share at June 30, 2002. During 2001 the Company paid $0.55 per share in dividends. The Company's 2002 total dividends for the first two quarters was $0.31 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 $64.3 million at December 31, 2001 and $79.2 million at June 30, 2002. These amounts represent 29.74% and 32.10% of total liabilities as of December 31, 2001 and June 30, 2002, respectively. There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported at December 31, 2001 in the Company's Form 10-K. 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 The information required by Part I, Item 3., is incorporated herein by reference to the section titled LIQUIDITY AND MARKET RISK within Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operation." 9
PART II. OTHER INFORMATION Item 1. Legal proceedings. None. Item 2. Changes in securities. 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. 10
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). 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 99. Additional Exhibits 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the second quarter of 2002. 11
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: August 9, 2002 /s/ JOHN R. MILLESON -------------------------- John R. Milleson President and Chief Executive Officer Date: August 9, 2002 /s/ JAMES W. MCCARTY, JR. -------------------------- James W. McCarty, Jr. Vice President, Chief Financial Officer, and Secretary/Treasurer 12