UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ------------- For the fiscal year ended Commission File Number 0-20146 December 31, 1998 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) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, Par Value $2.50 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 if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X] PAGE 1 OF 62 PAGES. Exhibit index on page 35 . ------ ------ ------ The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 25, 1999 was $35,970,928. The aggregate market value of the stock was computed using a market rate of $28.00 per share. The number of shares of Registrant's Common Stock outstanding as of March 25, 1999 was 1,420,287. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated by reference in Parts I, II, and IV of this Form 10-K. (2) Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K. 1
EAGLE FINANCIAL SERVICES, INC. INDEX TO FORM 10-K Page ------ PART I Item 1. Business................................................. 3 Item 2. Properties............................................... 17 Item 3. Legal Proceedings........................................ 17 Item 4. Submission of Matters to a Vote of Security Holders...... 17 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters............................ 18 Item 6. Selected Financial Data.................................. 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 20 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................................. 31 Item 8. Financial Statements and Supplementary Data.............. 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 31 PART III Item 10. Directors and Executive Officers of the Registrant....... 32 Item 11. Executive Compensation................................... 32 Item 12. Security Ownership of Certain Beneficial Owners and Management.... ................................... 32 Item 13. Certain Relationships and Related Transactions........... 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 33 2
PART I Item 1. Business. General The Registrant was incorporated October 2, 1991 by the Bank of Clarke County, Berryville, Virginia (the "Bank"), for the purpose of establishing a one bank holding company upon consummation of a Plan of Share Exchange between the Registrant and the Bank. The Bank is a Virginia banking corporation chartered on April 1, 1881. On December 31, 1991, the Share Exchange was consummated resulting in the Bank becoming a wholly-owned subsidiary of the Registrant. The Registrant has no other subsidiaries. The Registrant is regulated by the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956, which limits the Registrant's activities to managing or controlling banks and engaging in other activities closely related to banking. The Bank is a member of the Federal Deposit Insurance Corporation and is a state member bank of the Federal Reserve System. The Bank is supervised and regulated by the Federal Reserve Board and the Virginia Bureau of Financial Institutions. The Bank offers a wide range of retail and commercial banking services, including demand, savings and time deposits and consumer, mortgage and commercial lending services. The Bank makes seasonal and term commercial loans, both alone and in conjunction with other banks or governmental agencies. The Bank also offers a wide variety of trust services to customers. During 1997 the Bank formed Eagle Investment Services, a division of the Bank which sells non-deposit investment products through a third party provider, UVEST Investment Services. During 1997 the Bank also formed Eagle Home Funding, a wholly owned subsidiary of the Bank, which offers secondary market mortgage products. The Bank's main office is located in Berryville, Clarke County, Virginia, and it operates branch offices in Boyce, Jubal Early Drive in Winchester, Picadilly Street in Winchester, Senseny Road in Frederick County and in Stephens City. Clarke and Frederick Counties and the City of Winchester are the Bank's primary trade area. Within its primary trade area, the Bank competes with numerous large and small financial institutions, credit unions, insurance companies and other non-bank competitors. Eagle Home Funding is located at 615 Jubal Early Drive in Winchester, in the same retail center as the Jubal Early branch. The Bank had twenty-nine officers, fifty-two other full-time and twelve part-time employees as of December 31, 1998. None of the Bank's employees are represented by a union or covered under a collective bargaining agreement. Employee relations have been good. The Bank's loan portfolio is primarily comprised of real estate loans, particularly those secured by 1-4 family residential properties. The Bank also offers many other types of loans including consumer loans, commercial real estate loans, commercial and industrial loans (not secured by real estate), agricultural production loans, and construction loans. See the respective sections in Items 6, 7, and 8 for additional discussion and analysis of the Bank's loan portfolio. The loss of any one depositor or the failure by any one borrower to repay a loan would not have a material adverse effect on the Bank. 3
Statistical Information The following statistical information is furnished pursuant to the requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies) promulgated under the Securities Act of 1933. <TABLE> <CAPTION> <S> <C> INDEX Table 1 Average Balances, Income/Expenses and Average Rates Table 2 Rate/Volume Variance Table 3 Analysis of Allowance for Loans Losses Table 4 Allocation of Allowance for Loan Losses Table 5 Loan Portfolio Table 6 Maturity Schedule of Selected Loans Table 7 Non-Performing Assets Table 8 Maturity Distribution and Yields of Securities Table 9 Deposits and Rates Paid Table 10 Maturities of Certificates of Deposit of $100,000 and More Table 11 Risk Based Capital Ratios Table 12 Interest Rate Sensitivity Schedule </TABLE> 4
<TABLE> Table 1 - Average Balances, Income/Expenses and Average Rates (In Thousands) (Fully Taxable Equivalent) <CAPTION> 1998 1997 --------------------------------- --------------------------------- Average Income/ Average Average Income/ Average Balances Expense Rate Balances Expense Rate --------- --------- --------- --------- --------- --------- <S> <C> ASSETS: Loans Taxable $ 83,536 $ 7,189 8.61% $ 81,525 $ 7,184 8.81% Tax-exempt (1) 1,440 109 7.57% 1,389 107 7.70% Non-accrual 352 0 0.00% 495 0 0.00% --------- --------- --------- --------- Total Loans $ 85,328 $ 7,298 $ 83,409 $ 7,291 8.74% --------- --------- --------- --------- Securities Taxable $ 35,765 $ 2,149 6.01% $ 28,671 $ 1,809 6.13% Tax-Exempt (1) 4,966 333 6.71% 3,106 219 7.05% --------- --------- --------- --------- Total Securities $ 40,731 $ 2,482 6.09% $ 31,777 $ 2,028 6.38% --------- --------- --------- --------- Deposits in banks $ 41 $ 2 4.88% $ 0 $ 0 0.00% --------- --------- --------- --------- Federal funds sold $ 2,090 $ 114 5.45% $ 1,793 $ 101 5.63% --------- --------- --------- --------- Total Earning Assets $128,190 $ 9,896 7.72% $116,979 $ 9,420 8.05% ========= ========= Less: Reserve for loan losses (800) (817) Cash and due from banks 4,985 4,643 Bank premises and equipment, net 4,127 4,122 Other assets 3,413 3,209 --------- --------- Total Assets $139,915 $128,136 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits Demand deposits $ 18,443 $ 0 $ 15,846 $ 0 --------- --------- --------- --------- NOW accounts $ 16,365 $ 325 1.99% $ 15,062 $ 309 2.05% Money market accounts 17,488 553 3.16% 16,709 520 3.11% Savings accounts 13,773 330 2.40% 13,956 341 2.44% Time deposits 56,604 2,971 5,25% 50,655 2,729 5.39% --------- --------- --------- --------- Total Interest- Bearing Deposits $104,230 $ 4,179 4.01% $ 96,382 $ 3,899 4.05% Fed funds purchased 305 14 4.59% 115 5 4.35% Federal Home Loan Bank advances 233 12 5.15% 0 0 0.00% --------- --------- --------- --------- Total Interest- Bearing Liabilities $104,768 $ 4,205 4.01% $ 96,497 $ 3,904 4.05% --------- --------- --------- --------- Other Liabilities $ 1,160 $ 1,143 --------- --------- Shareholders' Equity $ 15,544 $ 14,650 --------- --------- Total Liabilities & Shareholders' Equity $139,915 $128,136 ========= ========= Net interest spread 3.71% 4.00% Interest expense as a percent of average earning assets 3.28% 3.34% Net interest margin 4.44% 4.72% (1) Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. </TABLE> Average Balances, Income/Expenses and Average Rates (continued) (In Thousands) (Fully Taxable Equivalent) 1996 --------------------------------- Average Income/ Average Balances Expense Rate --------- --------- --------- ASSETS: Loans Taxable $ 84,772 $ 7,660 9.04% Tax-exempt (1) 1,410 138 9.79% Non-accrual 0 0 0.00% --------- --------- Total Loans $ 86,182 $ 7,798 9.05% --------- --------- Securities Taxable $ 23,528 $ 1,443 6.13% Tax-Exempt (1) 3,289 239 7.27% --------- --------- Total Securities $ 26,817 $ 1,682 6.27% --------- --------- Deposits in banks $ 0 $ 0 0.00% --------- --------- Federal funds sold $ 918 $ 51 5.56% --------- --------- Total Earning Assets $113,917 $ 9,531 8.37% ========= Less: Reserve for loan losses (853) Cash and due from banks 4,197 Bank premises and equipment, net 4,097 Other assets 2,858 --------- Total Assets $124,216 ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits Demand deposits $ 12,900 $ 0 --------- --------- NOW accounts $ 15,262 $ 321 2.10% Money market accounts 17,393 535 3.08% Savings accounts 13,594 342 2.52% Time deposits 49,349 2,656 5,38% --------- --------- Total Interest- Bearing Deposits $ 95,598 $ 3,854 4.03% Fed funds purchased 974 57 5.85% Federal Home Loan Bank advances 0 0 0.00% --------- --------- Total Interest- Bearing Liabilities $ 96,572 $ 3,911 4.05% --------- --------- Other Liabilities $ 1,053 --------- Shareholders' Equity $ 13,691 --------- Total Liabilities & Shareholders' Equity $124,216 ========= Net interest spread 4.32% Interest expense as a percent of average earning assets 3.43% Net interest margin 4.93% (1) Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. 5
Table 2 - Rate/Volume Variance (In Thousands) <TABLE> <CAPTION> 1998 Compared to 1997 1997 Compared to 1996 -------------------------------------------------------------------- Due to Due to Due to Due to Change Volume Rate Change Volume Rate -------- -------- -------- -------- -------- -------- INTEREST INCOME: <S> <C> <C> <C> <C> <C> <C> Loans; taxable $ (9) $ 729 $ (738) $ (476) $ (286) $ (190) Loans; tax-exempt 24 4 20 (31) (2) (29) Securities; taxable 340 421 (81) 366 323 43 Securities; tax-exempt 114 124 (10) (20) (13) (7) Deposits in banks 2 2 0 0 0 0 Federal funds sold 13 16 (3) 50 49 1 -------- -------- -------- -------- -------- -------- Total Interest Income $ 484 $ 1,296 $ (812) $ (111) $ 71 $ (182) -------- -------- -------- -------- -------- -------- INTEREST EXPENSE: NOW accounts $ 16 $ 24 $ (8) $ (12) $ (4) $ (8) Money market accounts 33 25 8 (15) (20) 5 Savings accounts (11) (5) (6) (1) 5 (6) Time deposits 242 311 (69) 73 68 5 Federal funds purchased 9 9 0 (52) (40) (12) Federal Home Loan Bank advances 12 12 0 (3) (3) 0 -------- -------- -------- -------- -------- -------- Total Interest Expense $ 301 $ 376 $ (75) $ (7) $ 9 $ (16) -------- -------- -------- -------- -------- -------- Net Interest Income $ 183 $ 920 $ (737) $ (104) $ 62 $ (166) -------- -------- -------- -------- -------- -------- </TABLE> 6
Table 3 - Analysis of Allowance for Loans Losses (In Thousands) <TABLE> <CAPTION> Year Ended December 31 ------------------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Allowance for Loan <S> <C> <C> <C> <C> <C> Losses, January 1 $ 749 $ 914 $ 828 $ 808 $ 744 Loans Charged-Off: Commercial, financial and agricultural $ 1 $ 4 $ 0 $ 144 $ 52 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 7 42 0 0 48 Consumer 286 640 267 130 122 ------ ------ ------ ------ ------ Total Loans Charged-Off $ 294 $ 686 $ 267 $ 274 $ 174 ------ ------ ------ ------ ------ Recoveries: Commercial, financial and agricultural $ 0 $ 1 $ 6 $ 10 $ 11 Real estate-construction and development 0 0 0 0 0 Real estate-mortgage 4 4 0 0 0 Consumer 94 39 57 44 24 ------ ------ ------ ------ ------ Total Recoveries $ 98 $ 44 $ 63 $ 54 $ 35 ------ ------ ------ ------ ------ Net Charge-Offs $ 196 $ 642 $ 204 $ 220 $ 139 ------ ------ ------ ------ ------ Provision for Loan Losses $ 372 $ 477 $ 290 $ 240 $ 203 ------ ------ ------ ------ ------ Allowance for Loan Losses, December 31 $ 925 $ 749 $ 914 $ 828 $ 808 ====== ====== ====== ====== ====== Ratio of Net Charge-Offs to Average Loans: 0.23% 0.77% 0.24% 0.26% 0.18% ====== ====== ====== ====== ====== </TABLE> 7
Table 4 - Allocation of Allowance for Loan Losses (In Thousands) <TABLE> <CAPTION> 1998 1997 1996 ---------------------- ---------------------- ---------------------- Allowance Percentage Allowance Percentage Allowance Percentage for Loan of Total for Loan of Total for Loan of Total Losses Loans Losses Loans Losses Loans ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> Commercial, financial, and agricultural $ 352 8.8% $ 323 8.8% $ 365 10.6% Real Estate: mortgage 110 77.2% 125 74.0% 75 68.4% Consumer 463 14.0% 301 17.2% 474 21.0% ---------- ---------- ---------- $ 925 $ 749 $ 914 ========== ========== ========== </TABLE> 8
Table 5 - Loan Portfolio (In Thousands) <TABLE> <CAPTION> December 31 ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- <S> <C> Loans secured by real estate: Construction and land development $ 2,168 $ 588 $ 1,434 $ 0 $ 0 Secured by farmland 3,565 3,700 4,013 4,112 3,888 Secured by 1-4 family residential 51,444 44,863 45,156 41,411 35,803 Nonfarm, nonresidential loans 16,902 11,141 9,518 10,372 13,698 Loans to farmers (except secured by real estate) 745 770 1,446 1,605 1,777 Commercial and industrial loans (except those secured by real estate) 6,463 5,116 6,145 6,349 6,247 Loans to individuals (except those secured by real estate) 13,603 14,458 19,633 22,508 19,547 All other loans 1,193 1,251 1,732 1,239 1,239 -------- -------- -------- -------- -------- Total loans 96,083 81,887 89,077 87,596 82,199 Less: Unearned discount (150) (462) (1,207) (1,725) (1,565) -------- -------- -------- -------- -------- Total Loans, Net $95,933 $81,425 $87,870 $85,871 $80,634 ======== ======== ======== ======== ======== </TABLE> 9
Table 6 - Maturity Schedule of Selected Loans (In Thousands) <TABLE> <CAPTION> <S> <C> After 1 Year Within Within After 1 Year 5 Years 5 Years Total ------- ------- ------- ------- Loans secured by real estate $14,308 $48,183 $13,588 $74,079 Agricultural production loans 452 282 0 734 Commercial and industrial loans 3,530 2,912 18 6,460 Consumer loans 2,775 9,474 1,218 13,467 All other loans 1,193 0 0 1,193 ------- ------- ------- ------- $22,258 $58,851 $14,824 $95,933 ======= ======= ======= ======= For maturities over one year: Interest rates - floating $ 1,521 $ 3,249 $ 4,770 Interest rates - fixed 57,330 11,575 68,905 ------- ------- ------- $58,851 $14,824 $73,675 ======= ======= ======= </TABLE> 10
Table 7 - Non-Performing Assets (In Thousands) <TABLE> <CAPTION> December 31, ------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Nonaccrual loans $ 227 $ 437 $ 0 $ 430 $ 0 Restructured loans 0 0 0 0 0 Other real estate owned 0 190 47 47 47 ------ ------ ------ ------ ------ Total Non-Performing Assets $ 227 $ 627 $ 47 $ 477 $ 47 ====== ====== ====== ====== ====== Loans past due 90 days accruing interest $ 372 $ 614 $ 967 $1,694 $ 683 ====== ====== ====== ====== ====== Allowance for loan losses to period end loans 0.96% 0.92% 1.04% 0.96% 1.00% Non-performing assets to period end loans and other real estate owned 0.24% 0.77% 0.05% 0.52% 0.06% </TABLE> The amount of gross interest income that would have been recorded during the periods if the non-accrual loans had been current in accordance with their original terms is incorporated by reference to Note 4 of the Consolidated Financial Statements which are contained herein as Exhibit 99.1. A discussion of the Company's policy for placing loans on non-accrual status is incorporated by reference to Note 1 of the Consolidated Financial Statements which are contained herein as Exhibit 99.1. 11
<TABLE> Table 8 - Maturity Distribution and Yields of Securities (In Thousands) <CAPTION> Due in one year Due after 1 Due after 5 or less through 5 years through 10 years ---------------- ---------------- ---------------- Amount Yield Amount Yield Amount Yield ------- ----- ------- ----- ------- ----- <S> <C> Securities held to maturity: U.S. Treasury securities $ 0 0.00% $ 0 0.00% $ 122 7.63% Obligations of U.S. government corporations and agencies 1,987 5.02% 4,504 6.28% 0 0.00% Mortgage-backed securities 0 0.00% 2,629 7.12% 4,972 6.73% Obligations of states and political subdivisions, taxable 0 0.00% 2,727 6.40% 375 6.18% ------- ------- ------- Total taxable 1,987 9,860 5,469 Obligations of states and political subdivisions, tax-exempt (1) 355 7.60% 2,732 6.74% 5,006 6.33% ------- ------- ------- Total $ 2,342 $12,592 $10,475 ------- ------- ------- Securities available for sale: Obligations of U.S. government corporations and agencies $ 1,401 5.76% $ 3,825 5.94% $ 0 0.00% Mortgage-backed securities 1,171 6.21% 4,200 5.94% 2,067 6.21% Other taxable securities 0 0.00% 0 0.00% 0 0.00% ------- ------- ------- Total taxable $ 2,572 $ 8,025 $ 2,067 ------- ------- ------- Obligations of states and Political subdivision Tax-exempt 0 0.00% 0 0.00% 498 6.56% ------- ------- ------- Total $ 2,572 $ 8,025 $ 2,565 ------- ------- ------- Total securities: $ 4,914 $20,617 $13,040 ======= ======= ======= (1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 34%. </TABLE> Maturity Distribution and Yields of Securities (continued) (In Thousands) <TABLE> <CAPTION> Due after 10 years and Equity Securities Total ---------------- ---------------- Amount Yield Amount Yield ------- ----- ------- ----- <S> <C> Securities held to maturity: U.S. Treasury securities $ 0 0.00% $ 122 7.63% Obligations of U.S. government corporations and agencies 0 0.00% 6,491 5.89% Mortgage-backed securities 3,009 0.00% 10,610 6.75% Obligations of states and political subdivisions, taxable 0 0.00% 3,102 6.37% ------- ------- Total taxable 3,009 20,325 Obligations of states and political subdivisions, tax-exempt (1) 250 6.63% 8,343 6.53% ------- ------- Total $ 3,259 $28,668 ------- ------- Securities available for sale: Obligations of U.S. government corporations and agencies $ 0 0.00% $ 5,226 5.89% Mortgage-backed securities 0 0.00% 7,438 6.06% Other taxable securities 1,252 6.70% 1,252 6.70% ------- ------- Total taxable $ 1,252 $13,916 ------- ------- Obligations of state and Political subdivisions Tax-exempt 0 0.00% 498 6.56% ------- ------- Total $ 1,252 $14,414 ------- ------- Total securities: $ 4,511 $43,082 ======= ======= (1) Yields on tax-exempt securities have been computed on a tax-equivalent basis using a federal tax rate of 34%. </TABLE> 12
Table 9 - Deposits and Rates Paid (In Thousands) <TABLE> <CAPTION> December 31 --------------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- Amount Rate Amount Rate Amount Rate -------- ------ -------- ------ -------- ------ <S> <C> <C> <C> Noninterest-bearing $ 21,289 $ 17,774 $ 15,175 -------- -------- -------- Interest-bearing: NOW accounts 18,053 1.99% 15,796 2.05% 16,773 2.10% Money market accounts 18,922 3.16% 16,232 3.11% 17,172 3.08% Regular savings accounts 13,959 2.40% 13,572 2.44% 13,421 2.52% Certificates of deposit: Less than $100,000 37,540 5.16% 38,743 5.39% 37,204 5.38% $100,000 and more 20,477 5.46% 14,962 5.49% 11,343 5.40% -------- -------- -------- Total interest-bearing $108,921 4.01% $ 99,305 4.05% $ 95,913 4.03% -------- -------- -------- Total deposits $130,210 $117,079 $111,088 ======== ======== ======== </TABLE> 13
<TABLE> Table 10 - Maturities of Certificates of Deposit and Other Time Deposits of $100,000 and More (In Thousands) <CAPTION> <S> <C> Within Three to Six to One to Over Three Six Twelve Five Five Months Months Months Years Years Total -------- -------- -------- -------- -------- -------- At December 31, 1998 $ 12,129 $ 4,609 $ 3,168 $ 541 $ 0 $ 20,447 ======== ======== ======== ======== ======== ======== </TABLE> 14
Table 11 - Risk Based Capital Ratios (In Thousands) <TABLE> <CAPTION> December 31 ---------------------------------- 1998 1997 -------- -------- <S> <C> Tier 1 Capital: Shareholders' Equity $ 15,563 $ 14,445 Tier 2 Capital: Allowable Allowance for Loan Losses 925 749 -------- -------- Total Capital: $16,488 $ 15,194 ======== ======== Risk Adjusted Assets: $102,313 $ 82,443 ======== ======== Risk Based Capital Ratios: Tier 1 to Risk Adjusted Assets 15.21% 17.52% Total Capital to Risk Adjusted Assets 16.12% 18.43% </TABLE> 15
<TABLE> Table 12 - Interest Rate Sensitivity Schedule (In Thousands) <CAPTION> December 31, 1998 ------------------------------------------------------ Mature or Reprice Within ------------------------------------------------------ Over Three Months Over Three Through One Year Over Months Twelve To Five Five Or Less Months Years Years Total --------- --------- --------- --------- --------- INTEREST-EARNING ASSETS: <S> <C> <C> <C> <C> <C> Loans (net of unearned income) $ 15,062 $ 11,966 $ 57,330 $ 11,575 $ 95,933 Securities and other interest-earning assets 2,110 2,803 20,724 17.445 43,082 Federal funds sold 2,323 0 0 0 2,323 --------- --------- --------- --------- --------- Total interest-earning assets $ 19,495 $ 14,769 $ 78,054 $ 29,020 $141,338 --------- --------- --------- --------- --------- INTEREST-BEARING LIABILITIES: Certificates of deposit: $100,000 and more $ 12,129 $ 7,777 $ 541 $ 0 $ 20,447 less than $100,000 11,284 18,729 7,524 3 37,540 Other deposits 50,934 0 0 0 50,934 --------- --------- --------- --------- --------- Total interest-bearing liabilities $ 74,347 $ 26,506 $ 8,065 $ 3 $108,921 --------- --------- --------- --------- --------- Interest sensitivity gap: Asset sensitive (Liability sensitive) ($54,852) ($11,737) $ 69,989 $ 29,017 $ 32,417 ========= ========= ========= ========= ========= Cumulative interest rate gap: $(54,852) $(66,589) $ 3,400 $ 32,417 ========= ========= ========= ========= Ratio of cumulative gap to total interest earning assets: -38.81% -47.11% 2.41% 22.94% ========= ========= ========= ========= </TABLE> 16
Item 2. Properties. The present headquarters building of the Registrant and the Bank, which is owned, was substantially enlarged and remodeled in 1983-84 and again in 1993. The building now consists of a two-story building of brick construction, with approximately 20,000 square feet of floor space located at 2 East Main Street, Berryville, Virginia. This office has seven teller stations in the lobby, a remote drive-through facility with a walk-up window, and a 24 hour automated teller machine. The Bank also owns and operates branch offices at 108 West Main Street, Boyce, Virginia, 1508 Senseny Road, Winchester, Virginia, and 382 Fairfax Pike, Stephens City, Virginia. The Bank also presently operates leased branches at 625 East Jubal Early Drive, Winchester, Virginia and 40 West Piccadilly Street, Winchester, Virginia. The Bank also purchased a 1.5 acre parcel of land located adjacent to the Food Lion north of Berryville on Route 340. The site will house a branch in the future. The Bank also owns a building at 18 North Church Street in Berryville for future expansion. This site is currently leased and used for offices. Item 3. Legal Proceedings. There are no material pending legal proceedings against the Registrant or the Bank and no material proceedings to which any director, officer or affiliate of the Registrant, any beneficial owner of more than 5% of the Common Stock of the Registrant, or any associate of such director, officer or affiliate of the Registrant, is a party adverse to the Registrant or the Bank or has a material interest adverse to the Registrant or the Bank. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year covered by this report. 17
PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The Common Stock of the Registrant is not listed for trading on a registered exchange or any automated quotation system. Accordingly, there is no established public trading market for shares of the Registrant's Common Stock. Trades in shares of the Registrant's Common Stock occur sporadically on a local basis. Based on information available to the Registrant concerning such trading, the following table shows the trading ranges of the Common Stock of the Registrant and dividends for the periods indicated. <TABLE> <CAPTION> 1998 1997 1996 Dividends Per Share --------------------------------------------------------------------------- High Low High Low High Low 1998 1997 1996 --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> 1st Quarter $25.00 $24.00 $22.00 $20.50 $19.00 $18.75 $0.08 $0.08 $0.00 2nd Quarter 26.00 25.00 23.00 22.00 19.50 19.00 0.08 0.08 0.11 3rd Quarter 27.00 26.00 24.00 23.00 20.00 19.50 0.08 0.08 0.00 4th Quarter 27.00 27.00 24.00 24.00 20.50 20.00 0.09 0.08 0.19 </TABLE> The Registrant declared a 100% stock dividend effected in the form of a two for one split as of December 31, 1996. The par value remained unchanged at $2.50. The share prices above have been restated to reflect the stock split. The Registrant paid semiannual dividends in 1996 and 1995. Dividends per share have been restated to reflect the 100% stock dividend. The dividend policy was changed to begin paying quarterly dividends starting February 15, 1997. The company paid quarterly dividends during both 1997 and 1998. The Registrant's future dividends will depend upon its earnings and financial condition and upon other factors not presently determinable. It is anticipated that the Registrant will obtain the funds needed for the payment of its dividends and expenses from the Bank in the form of dividends. There were 1,042 holders of record of the Registrant's Common Stock as of March 25, 1999. 18
Item 6. Selected Financial Data. The following Selected Financial Data for the five fiscal years ended December 31, 1998 should be read in conjunction with Item 7, Management's Discussion & Analysis of Financial Condition and Results of Operations and the Financial Statements of the Registrant incorporated by reference in response to Item 8, Financial Statements and Supplementary Data. <TABLE> <CAPTION> Year Ended December 31 ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 Income Statement Data: ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Interest Income $9,746,590 $9,310,237 $9,402,870 $8,726,902 $7,896,082 Interest Expense 4,204,254 3,904,197 3,910,612 3,584,788 2,722,451 ------------ ------------ ------------ ------------ ------------ Net Interest Income $5,542,336 $5,406,040 $5,492,258 $5,142,114 $5,173,631 Less: Provision for Loan Losses 371,886 476,667 290,000 240,000 203,000 ------------ ------------ ------------ ------------ ------------ Net Interest Income after Provision for Loan Losses $5,170,450 $4,929,373 $5,202,258 $4,902,114 $4,970,631 Non-Interest Income 1,707,712 1,245,781 1,024,770 811,968 590,458 ------------ ------------ ------------ ------------ ------------ Net Revenue $6,878,162 $6,175,154 $6,227,028 $5,714,082 $5,561,089 Non-Interest Expense 5,099,167 4,690,999 4,378,387 3,976,155 3,626,679 ------------ ------------ ------------ ------------ ------------ Income before Income Taxes $1,778,995 $1,484,155 $1,848,641 $1,737,927 $1,934,410 Applicable Income Taxes 470,190 372,143 537,304 477,237 573,407 ------------ ------------ ------------ ------------ ------------ Net Income $1,308,805 $1,112,012 $1,311,337 $1,260,690 $1,361,003 ============ ============ ============ ============ ============ Performance Ratios: Return on Average Assets 0.94% 0.87% 1.06% 1.12% 1.25% Return on Average Equity 8.42% 7.59% 9.58% 9.94% 11.90% Dividend Payout Ratio 35.60% 40.38% 31.86% 30.18% 26.17% Per Share Data (1): Net Income, basic and diluted $0.93 $0.79 $0.94 $0.91 $0.99 Cash Dividends Declared 0.33 0.32 0.30 0.28 0.26 Book Value 11.42 10.69 10.14 9.44 8.67 Market Price * 27.00 24.00 20.50 18.75 17.50 Average Shares Outstanding 1,413,172 1,404,645 1,392,298 1,383,152 1,369,330 Balance Sheet Data: Assets $153,124,559 $133,239,401 $126,241,741 $121,492,853 $114,607,016 Loans (Net of Unearned Income) 95,933,498 81,425,186 87,870,194 85,871,203 80,634,132 Securities 43,081,952 37,418,780 26,089,574 26,618,148 23,833,408 Deposits 130,209,888 117,079,355 111,087,867 105,612,562 99,007,815 Shareholders' Equity 16,193,501 15,058,115 14,196,856 13,120,419 11,969,374 (1) Adjusted for a stock split effected in the form of a 100% stock dividend of Eagle Financial Services, Inc. stock on December 31, 1996. * The Company issues one class of stock, Common, which is not listed for trading on a registered exchange or quoted on the National Association of Securities Dealers Automated Quotation System (NASDAQ). Trades in the Company's stock occur sporadically on a local basis. Accordingly, there is no established public trade market for shares of the Company's stock, and quotations do not necessarily reflect the price that would be paid in an active and liquid market. </TABLE> 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The purpose of this discussion is to focus on the important factors affecting the Company's financial condition and results of operations. This discussion should be read in conjunction with the Selected Financial Data and the Company's Consolidated Financial Statements (including the notes thereto). The tables which were contained in prior years' Annual Reports with Management's Discussion and Analysis can be found in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission. OVERVIEW During 1998 total assets of the company increased $19.9 million or 14.92% from $133.2 million at December 31, 1997 to $153.1 at December 31, 1998. Growth in both loans and securities was funded through an increase in total deposits and an advance from the Federal Home Loan Bank. Net loans increased $14.3 million or 17.76% from $80.7 million to $95.0 million at year end 1997 and 1998, respectively. Securities increased $5.7 million or 15.13% from $37.4 million to $43.1 million at year 1997 and 1998, respectively. Total deposits of the Company increased from $117.1 million to $130.2 million, which represents an increase of $13.1 million or 11.22% from December 31, 1997 to December 31, 1998. Shareholders' equity increased $1.1 million or 7.54% during 1998 from $15.1 million to $16.2 million. For the year ended December 31, 1998, net income totaled $1.3 million, a $0.2 million or 17.70% increase over 1997 net income of $1.1 million. Earnings per share were $0.93, $0.79 and $0.94 for 1998, 1997 and 1996, respectively. This is a $0.15 or 15.96% decrease in 1997 and a $0.14 or 17.72% increase for 1998. Return of average equity for 1998 was 8.42% as compared to 7.59% for 1997 and 9.58% in 1996. Return on average assets for 1998 was 0.94% as compared to 0.87% for 1997 and 1.06% for 1996. During the past five years, the Company has earned $6.4 million, resulting in an increase in shareholders' equity of 49.18%. The market value of the Company has risen steadily over the same period. The market value of the stock has increased from $16.25 per share to $27.00 over the same five year period which represents an increase of 66.15% 20
NET INTEREST INCOME AND NET INTEREST MARGIN Net interest income, the difference between total interest income and total interest expense, is the Company's primary source of earnings. Net interest income decreased $0.1 million or 1.57% in 1997 and increased $0.1 million or 2.52% in 1998 from $5.5 million in 1996, $5.4 million in 1997 and $5.5 million in 1998. The amount of net interest income is derived from the volume of earning assets, the rates earned on those assets, and the cost of funds. The difference between rates on earning assets and the cost of funds is measured by the net interest margin, which decreased from 4.93% in 1996 to 4.72% in 1997 and 4.44% in 1998. Earning assets yielded 7.72% on a fully taxable equivalent basis in 1998 as compared to 8.05% in 1997 and 8.37% in 1996. The average rate on total loans decreased from 8.74% in 1997 to 8.55% in 1998 as compared to 9.05% in 1996. The total income earned on loans remained the same at $7.3 million in 1997 and 1998 despite an increase in average loans of $1.9 million or 2.30% as compared to a $0.5 million or 6.39% decrease in 1997 from $7.8 million in 1996. Interest earned on securities increased from $1.6 million in 1996 to $2.0 million in 1997 and $2.5 million in 1998, an increase of $0.4 million or 22.01% and $0.5 million or 22.4% in 1997 and 1998, respectively. The average balance of securities increased by $9.0 million or 28.18% in 1998 and $5.0 million or 18.50% in 1997. The average rate on securities increased from 6.27% in 1996 to 6.38% in 1997, then decreased to 6.09% in 1998. Interest expense remained the same at $3.9 million for 1996 and 1997 and increased $0.3 million or 7.71% to $4.2 million in 1998. Average balances on interest-bearing liabilities increased by $8.3 million or 8.57% from $96.5 million in 1997 to $104.8 million in 1998. The average rate on interest-bearing liabilities has changed only slightly from 4.05% in 1996 and 1997 to 4.01% in 1998. Interest expense as a percent of average earning assets has decreased from 3.43% in 1996 to 3.34% in 1997 and 3.28% in 1998 and net interest spread has decreased from 4.32% in 1996 to 4.00% in 1997 and 3.71% in 1998. 21
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 provision for loan losses decreased $104,781 from $476,667 in 1997 to $371,886 in 1998 as compared to an increase in 1997 of $186,667 from $290,000 in 1996. The ratio of net charge-offs to average loans was 0.23% for 1998 compared to 0.77% in 1997 and 0.24% in 1996. The allowance for loan losses as a percentage of loans decreased from 1.04% at the end of 1996 to 0.92% at the end of 1997, then increased to 0.96% at the end of 1998. Charged-off loans decreased $393,207 or 57.26% and recoveries increased $53,584 or 120.08% in 1998 compared to 1997, which resulted in net charge-offs of $195,273 for 1998 and $642,064 for 1997. The coverage for the allowance for loan losses over non-performing assets and loans 90 days past due and still accruing interest was 154.36% in 1998 as compared to 60.35% in 1997 and 90.14% in 1996. Loans 90 days past due and still accruing interest as a percentage of total loans, net unearned discount, decreased from 0.75% in 1997 to 0.39% in 1998. The amount of loans past due greater than 90 days decreased from $614,000 in 1997 to $372,000 in 1998. Of the $372,000, 89.75% are secured by real estate. The allowance for loan losses as of year end covered net charge-offs 4.74 times in 1998 as compared to only 1.17 times in 1997. 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 methods utilized consider specific identifications, specific and estimate pools, trends in delinquencies, local and regional economic trends, concentrations, commitments, off balance sheet exposure and other factors. 22
OTHER INCOME AND EXPENSES Total other income increased $0.5 million or 37.08% from $1.2 million in 1997 to $1.7 million in 1998 and increased $0.2 million or 21.57% in 1997 from $1.0 million in 1996. Other operating income realized an increase of $291,092 or 148.71% from $195,739 in 1997 to $486,831 in 1998. This increase can be attributed to commissions received from the sale of non-deposit investment products through Eagle Investment Services and commissions received from the origination of mortgages for the secondary market through Eagle Home Funding. Total other expenses increased $0.4 million or 8.70% from $4.7 million in 1997 to $5.1 million in 1998 and increased $0.3 million or 7.14% in 1997 from $4.4 million in 1996. Salaries and wages realized an increase of $366,748 or 18.79% from $1,951,569 in 1997 to $2,318,317 in 1998. This increase can be attributed to the hiring of personnel necessary to operate the Bank's Old Post Office Branch and performance salary adjustments received by employees. The efficiency ratio of the Company, a measure of its performance based upon the relationship between non-interest expense and operating income, was 69.46% in 1997 and 68.90% in 1998. It is management's objective to maintain an efficiency ratio at or below 68.00% for the Company. 23
LOAN PORTFOLIO The Company uses its funds primarily to support lending activities from which it derives the greatest amount of income. The objective is to invest 70% to 85% of total deposits in loans. The ratio of loans to deposits increased 4.13% from 69.55% in 1997 to 73.68% in 1998. Loans, net of unearned income increased $14.5 million or 17.82% from $81.4 million to $95.9 million at year end 1997 and 1998, respectively. 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 $74.1 million or 77.10% of total loans in 1998 and $60.3 million or 73.63% of total loans in 1997 which represents an increase of $13.8 million or 22.87% during the year. 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 which consists of Clarke and Frederick Counties and the City of Winchester, all of which are located in the Northern Shenandoah Valley in the state of Virginia. 24
RISK ELEMENTS AND NON-PERFORMING ASSETS Non-performing assets consist of nonaccrual loans, restructured loans, and other real estate owned (foreclosed properties). Total nonperforming assets and loans that are 90 days or more past due and still accruing interest was $0.6 million and $1.2 million on December 31, 1998 and 1997, respectively. This is a decrease of $0.6 million or 51.73%. The loans past due 90+ days and still accruing interest are primarily well-secured and in the process of collection and therefore, 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. Any accrued interest would then be reversed and future accruals would be discontinued with interest income being recognized on a cash basis. The ratio of non-performing assets and other real estate owned to loans is expected to remain at its low level relative to the Company's peers. The amount of classified loans remained the same at $2.4 million for 1998 and 1997. These loans are primarily well-secured and in the process of collection and the allowance for loan losses includes $316,260 in specific allocations for these loans as well as percentage allocations for classified assets without specific allocations. 25
SECURITIES The total amount of securities as of December 31, 1998 was $43.1 million, compared to $37.4 million as of December 31, 1997. Securities increased $5.7 million or 15.13% in 1998 over 1997. The increase from 1997 to 1998 is primarily due to investments in Obligations of states and political subdivisions (municipal bonds). These securities increased $6.6 million or 121.88% from 1997 to 1998. During 1998 the Company adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective October 1, 1998. Paragraph 54 of this Standard allows a reallocation of securities among the categories established by FAS No. 115. As a result of adoption the Company transferred Obligations of U.S. government corporations and agencies and Mortgage-backed securities with a total book value of $12.1 million and a total fair value of $12.2 million from held to maturity to available for sale. As of result of adoption, 66.54% percent of the Company's securities were classified as held to maturity and 33.46% were classified as available for sale at December 31, 1998. The increase in available for sale securities provide additional liquidity to the Company due to their ability to be sold. This transfer would also allow the company to sell and replace certain securities if rates change rapidly and the opportunity to sell mortgage-backed securities when the pool becomes very small and the expected life of the security extends well beyond its original average life. The unrealized gain on available for sale securities increased from $14,864 to $118,075 at December 31, 1997 and 1998 respectively. This significant increase in fair value can be attributed to the adoption of FAS No. 133 due to many of the securities which were transferred having an unrealized gain. Unrealized gains or losses on available for sale securities are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect as Accumulated other comprehensive income. 26
DEPOSITS Total deposits increased $13.1 million or 11.21% from $117.1 million in 1997 to $130.2 million in 1998. Non-interest bearing demand deposits increased $3.5 million or 19.77% from $17.8 in 1997 to $21.3 in 1998. Savings and interest bearing demand deposits increased $5.3 million or 11.70% from $45.6 million in 1997 to $50.9 million in 1998. Time deposits increased $4.3 million or 7.97% from $53.7 million in 1997 to $58.0 in 1998. The Company will continue funding assets with deposit liability accounts and focus upon core deposit growth as its primary source of liquidity and stability. Core deposits consist of demand deposits, interest checking accounts, money market accounts, savings accounts, and time deposits of less than $100,000. Core deposits totaled $109.8 million or 84.30% of total deposits in 1998 as compared to $102.1 million or 87.22% of total deposits in 1997. Certificates of deposit of $100,000 or more totaled $20.4 million or 15.70% of total deposits in 1998 as compared to $15.0 million or 12.78% of total deposits in 1997. The Company neither purchases brokered deposits nor solicits deposits from sources outside of its primary market area. 27
CAPITAL RESOURCES The Company continues to be a well capitalized financial institution. Total shareholders' equity on December 31, 1998 was $16.2 million, reflecting a percentage of total assets of 10.58% compared to $15.1 million and 11.30% at year-end 1997. Shareholders' equity per share increased $0.73 or 6.83% from $10.69 per share in 1997 to $11.42 per share in 1998. The return on average shareholders' equity increased from 7.59% in 1997 to 8.42% in 1998. During 1998 the Company paid $0.33 per share in dividends as compared to $0.32 per share in 1997. The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock. Federal regulatory risk-based capital guidelines were fully phased-in on December 31, 1992. These guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk. Tier I capital consists of total shareholders' equity. Tier II capital is comprised of Tier I capital plus the allowable portion of the allowance for loan losses. Financial institutions must maintain a Tier I capital ratio of at least 4% and a Tier II capital ratio of at least 8%. Additionally, a 4% minimum leverage ratio of shareholders' equity to average assets must be maintained. On December 31, 1998, the Company's Tier I capital ratio was 15.21% compared to 17.52% in 1997, the Tier II capital ratio was 16.12% compared to 18.43% in 1997 and the leverage ratio was 11.17% compared to 11.06% in 1996. See Note 12 to the Consolidated Financial Statements as of December 31, 1998 for additional discussion and analysis of regulatory capital requirements. 28
YEAR 2000 During 1997 the Company's subsidiary (the Bank) began to assess the effect of the Year 2000 on its systems, vendors, and customers. In January 1998, the Bank's Board of Directors approved a Year 2000 Compliance Plan which identifies particular steps necessary to achieve Year 2000 readiness and a timeline for accomplishing these steps. The plan also named the Bank's Year 2000 committee which includes members of senior management, operations, and data processing. The Bank is now well into testing its systems and renovating areas with known deficiencies. The overall test objective of the Bank is to utilize proxy testing of systems rather than attempting to simulate future date periods using production equipment. During October 1998 an employee of the Bank was sent to the site of our core processing vendor to participate in regional user group testing for the software. Actual data from a bank was used to test the critical dates identified by the Federal Financial Institutions Examination Council (F.F.I.E.C.). A representative from the Bank returned to the vendor's site during February 1999 to complete testing of the auxiliary products of the software which the Bank uses. Proxy testing was also utilized to test the software used for the Bank's Trust Department. Other softwares, which operate in a microcomputer environment, will be installed on a stand-alone test computer and tested using future critical dates. During March 1999 the company had its ATM machines evaluated for Year 2000 readiness. The Bank's maintenance vendor will be able to upgrade parts and software to ensure these machines will be Year 2000 ready. The overall cost of preparing for the Year 2000 is not expected to have a material effect on the Company's consolidated financial statements. The Bank has incurred nominal fees for participating in proxy testing which cover the cost of using the vendor's equipment, supplies, and personnel. The Bank will incur hardware and software costs to upgrade ATM's to be Year 2000 ready. The Bank is utilizing existing personnel to perform testing and document Year 2000 efforts, therefore, no outside consulting fees will be incurred in achieving Year 2000 readiness. Although the Company has no reason to conclude that a failure will occur, the most likely worst-case Year 2000 scenario would entail a disruption or failure of the Company's power supplier's or voice and data transmission supplier's capability to provide power or data transmission services to a computer system or facility. If such a failure were to occur, the Company would implement its contingency plan. While it is impossible to quantify the impact of such a scenario, the most reasonably likely worst-case scenario would entail diminishment of service levels, some customer inconvenience and additional costs associated with implementing the contingency plan. Although the Bank is confident that its efforts will result in a seamless transition into the Year 2000, a contingency plan has been prepared which addresses carrying on normal operations despite any Year 2000 problems which may be encountered. Through a careful plan for processing at the end of the year, all of the Bank's data and system files will be protected by performing Year 2000 back-up procedures, in addition to normal back-up procedures, onto magnetic tapes which will be stored in a designated area. All year-end reports will be printed for access to account and customer information in the event that the systems are unable to operate due to a program or utility company problem which hinders normal processing procedures. 29
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. At December 31, 1998, liquid assets totaled $44.3 million, which represents 32.38% of total deposits, federal funds purchased and securities sold under agreements to repurchase, long-term borrowings, and other liabilities. The Company minimizes liquidity demand by relying on core deposits, which represent 84.30% of total deposits. Securities provide a constant source of funds through paydowns and maturities. As additional sources of liquidity, the Company maintains short-term borrowing arrangements, namely federal funds lines, with larger financial institutions. Finally, the Bank's membership in the Federal Home Loan Bank provides a source of borrowings with a variety of maturities. The Company's senior management monitors the liquidity position regularly and attempts to maintain an interest sensitive position that maximizes the net interest margin. As the holding company of Bank of Clarke County, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will impact the amount of interest income and expense the Bank receives or pays on almost all of its assets and liabilities and the market value of its interest-earning assets and interest-bearing liabilities, excluding those which have a very short term until maturity. Interest rate risk exposure of the Company is, therefore, experienced at the Bank level. It is the responsibility of senior management to enact appropriate interest rate risk management procedures. The loan portfolio's primary volatility is due to the concentration of loans made in the Counties of Clarke and Frederick and the City of Winchester. This subjects the portfolio to fluctuations in the local economy. The Bank does not subject itself to foreign currency exchange or commodity price risk due to prohibition through policy and the current nature of operations. As of December 31, 1998, the Company does not have any hedging transactions in place such as interest rate swaps or caps. The Bank's interest rate management strategy is designed to stabilize net interest income and preserve the capital of the Company. The Bank utilizes several procedures to analyze the maturities of assets and liabilities along with their associated rate or yield. Senior management also monitors the economy closely in order to be knowledgeable of events which may immediately or eventually effect the pricing of assets and liabilities. The Bank also uses interest rate sensitivity analysis which measures the term to maturity or repricing for the interest sensitive assets and liabilities of the Bank. The Company had negative cumulative twelve month gaps of $37.4 million or 26.23% of total interest earning assets at December 31, 1998 and $31.8 million or 26.47% of total interest earning assets at December 31, 1997. The increase of $5.6 million in the negative cumulative twelve month gap can be attributed to the shifting of certificates of deposit into terms of twelve months or less along with an increase in fixed and variable loans which mature within one year. The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1997 and 1998. The expected maturities for loans, securities, and certificates of deposit are the based on the contractual maturity of the instruments. The expected maturities of money market, savings, and N.O.W. accounts are based on the Bank's internal interest rate sensitivity analysis which considers the amount of these accounts which would remain if rates increased or decreased. The average interest rate for loans is the weighted average contractual rate of the loans maturing during the period indicated. The average interest rate for taxable securities is the weighted average yield of the securities maturing during the period indicated. The average interest rate for tax-exempt securities is the weighted average tax-equivalent yield assuming a federal tax rate of 34% for the securities maturing during the period indicated. The average interest rate for money market, savings, and N.O.W. accounts is the weighted average annual percentage yield as of December 31, 1997 and 1998 for the amount maturing during the period indicated. The average rate for certificates of deposit is the weighted average contractual rate of the certificates maturing during the period indicated. <TABLE> <CAPTION> At December 31, 1998 Principal Amount Maturing In - ------------------------------------------------------------------------------------------------------ There- Fair (In Thousands) 1999 2000 2001 2002 2003 after Total Value - ------------------------------------------------------------------------------------------------------ Earning assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> Fixed rate loans $16,495 $10,074 $17,154 $11,581 $18,521 $11,575 $85,400 $88,309 Average interest rate 7.99% 8.82% 8.09% 8.27% 7.48% 7.94% 8.03% Variable rate loans $5,763 $442 $434 $322 $323 $3,249 $10,533 $10,533 Average interest rate 8.57% 8.71% 8.45% 8.47% 8.61% 8.01% 8.40% Taxable securities $4,559 $4,021 $5,686 $4,704 $3,474 $11,797 $34,241 $34,357 Average interest rate 5.55% 5.98% 6.06% 6.45% 6.69% 6.56% 6.27% Tax-exempt securities $355 $735 $674 $892 $431 $5,754 $8,841 $8,883 Average interest rate 7.60% 6.49% 6.72% 6.90% 6.90% 6.36% 6.53% Other interest-earning assets $2,323 0 0 0 0 0 $2,323 $2,323 Average interest rate 4.62% 0 0 0 0 0 4.62% Interest-bearing liabilities: Money market, savings, and N.O.W. accounts $17,412 $5,878 $5,878 $2,791 $2,791 $16,184 $50,934 $50,934 Average interest rate 2.69% 2.73% 2.73% 2.25% 2.25% 1.75% 2.36% Certificates of deposit $48,805 $7,466 $1,081 $275 $357 $3 $57,987 $58,500 Average interest rate 4.98% 5.80% 5.02% 5.28% 4.92% 5.27% 5.09% Long-term borrowings 0 0 0 0 0 $5,000 $5,000 $5,030 Average interest rate 0 0 0 0 0 5.01% 5.01% Other interest-bearing Liablities $696 0 0 0 0 0 $696 $696 Average interest rate 3.98% 0 0 0 0 0 3.98% - ------------------------------------------------------------------------------------------------------ <CAPTION> At December 31, 1997 Principal Amount Maturing In - ------------------------------------------------------------------------------------------------------ There- Fair (In Thousands) 1998 1999 2000 2001 2002 after Total Value - ------------------------------------------------------------------------------------------------------ Earning assets: Fixed rate loans $13,578 $12,446 $13,783 $16,235 $13,815 $4,599 $74,456 $74,072 Average interest rate 8.63% 8.84% 8.86% 8.06% 8.16% 8.76% 8.50% Variable rate loans $3,217 $279 $582 $488 $486 $1,917 $6,969 $5,195 Average interest rate 9.58% 9.86% 10.08% 9.91% 9.49% 9.50% 9.63% Taxable securities $2,022 $2,916 $5,953 $3,313 $9,566 $9,954 $33,724 $33,756 Average interest rate 6.02% 6.03% 6.16% 6.25% 6.47% 7.07% 6.50% Tax-exempt securities $550 $355 $615 $475 $405 $1,280 $3,680 $3,710 Average interest rate 7.03% 7.60% 6.54% 6.91% 7.55% 6.91% 7.00% Other interest-earning assets $2,300 0 0 0 0 0 $2,300 $2,300 Average interest rate 6.25% 0 0 0 0 0 6.25% Interest-bearing liabilities: Money market, savings, and N.O.W. accounts $14,666 $5,256 $5,256 $2,680 $2,680 $15,062 $45,600 $45,600 Average interest rate 2.67% 2.67% 2.67% 2.47% 2.47% 2.07% 2.45% Certificates of deposit $38,775 $10,113 $3,899 $720 $195 $3 $53,705 $54,753 Average interest rate 5.37% 5.62% 6.56% 5.33% 5.52% 5.29% 5.43% - ------------------------------------------------------------------------------------------------------ </TABLE> 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk The information required by Part II, Item 7A., is incorporated herein by reference to the section titled LIQUIDITY AND MARKET RISK within Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation." Item 8. Financial Statements and Supplementary Data Pursuant to General Instruction G(2) information required by this Item is incorporated by reference to Part IV, Item 14. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. None. 31
PART III Item 10. Directors and Executive Officers of the Registrant. The information required by Part III, Item 10., is incorporated herein by reference to the Company's proxy statement, dated March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999. Item 11. Executive Compensation. The information required by Part III, Item 11., is incorporated herein by reference to the Company's proxy statement, dated March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by Part III, Item 12., is incorporated herein by reference to the Company's proxy statement, dated March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999. Item 13. Certain Relationships and Related Transactions. The information required by Part III, Item 13., is incorporated herein by reference to the Company's proxy statement, dated March 25, 1999, for the Company's 1999 Annual Meeting of Shareholders to be held April 21, 1999 32
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed or incorporated by reference as part of this report on Form 10-K. (1) Financial Statements Financial statements of the registrant for the fiscal year ended December 31, 1998 are incorporated herein by reference to Exhibit 99.1. (2) Financial Statement Schedules All financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. (3) Exhibits The following exhibits, when applicable, are filed with this Form 10-K 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 9. 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 Development Company (landlord) dated July 1, 1997 for an office at 615 East Jubal Early Drive, Winchester, Virginia (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.4 Lease Agreement between Bank of Clarke County (tenant) and Steven R. Koman(landlord) dated December 2, 1997 for the branch office at 40 West Piccadilly Street, Winchester, Virginia (incorporated herein as Exhibit 10.4 of the Company's Annual Report on Form 10-K for the year ended December 31, 1997). Exhibit 11. Computation of Per Share Earnings (incorporated herein as Exhibit 11). Exhibit 12. Not applicable. Exhibit 13. Portions of the 1998 Annual Report to Shareholders for the year ended December 31, 1998 (filed herein). Exhibit 16. Not applicable. Exhibit 18. Not applicable. Exhibit 21. Subsidiaries of the Registrant (incorporated herein as Exhibit 21). Exhibit 22. Not applicable. Exhibit 23. Not applicable. Exhibit 24. Not applicable. Exhibit 27. Financial Data Schedule (incorporated herein as Exhibit 27). Exhibit 99. Additional Exhibits 99.1 The following consolidated financial statements of the Company including the related notes and the report of the independent auditors for the year ended December 31, 1998 (incorporated herein as Exhibit 99.1). 1. Independent Auditor's Report. 2. Consolidated Balance Sheets - At December 31, 1998 and 1997. 3. Consolidated Statements of Income Years ended December 31, 1998, 1997, and 1996. 4. Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1998, 1997, and 1996. 5. Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996. 6. Notes to Consolidated Financial Statements. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the fourth quarter of 1998. 33
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 25th day of March, 1998. Eagle Financial Services, Inc. By: /s/ LEWIS M. EWING --------------------------------- Lewis M. Ewing, President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> /s/ LEWIS M. EWING President, Chief March 25, 1998 - ------------------------- Executive Officer Lewis M. Ewing and Director (principal executive officer) /s/ JOHN R. MILLESON Vice President, Secretary/ March 25, 1998 - ------------------------- Treasuer (principal financial John R. Milleson officer) /s/ JAMES W. MCCARTY, JR. Vice President, Chief March 25, 1998 - ------------------------- Financial Officer James W. McCarty, Jr. (principal accounting officer) /s/ JOHN D. HARDESTY Chairman of the Board March 25, 1998 - ------------------------- and Director John D. Hardesty /s/ J. FRED JONES Director March 25, 1998 - ------------------------- J. Fred Jones Director March 25, 1998 - ------------------------- Marilyn C. Beck Director March 25, 1998 - ------------------------- Thomas T. Byrd Director March 25, 1998 - ------------------------- Thomas T. Gilpin /s/ MARY BRUCE GLAIZE Director March 25, 1999 - ------------------------- Mary Bruce Glaize /s/ JOHN F. MILLESON, JR. Director March 25, 1998 - ------------------------- John F. Milleson, Jr. /s/ ROBERT W. SMALLEY, JR. Director March 25, 1998 - ------------------------- Robert W. Smalley, Jr. /s/ RANDALL G. VINSON Director March 25, 1998 - ------------------------- Randall G. Vinson Director March 25, 1999 - ------------------------- James R. Wilkins, Jr. </TABLE> 34
EAGLE FINANCIAL SERVICES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 EXHIBIT NUMBER DESCRIPTION -------------- ---------------------------------------- 11 Computation of Per Share Earnings . 21 Subsidiaries of the Registrant. 27 Financial Data Schedule. 99.1 The following consolidated financial statements of the Company including the related notes and the report of the independent auditors for the year ended December 31, 1998. 1. Independent Auditor's Report. 2. Consolidated Balance Sheets At December 31, 1998 and 1997. 3. Consolidated Statements of Income Years ended December 31, 1998, 1997, and 1996. 4. Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1998, 1997, and 1996. 5. Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996. 6. Notes to Consolidated Financial Statements. 35