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 1999 the Bank expanded its internet web site to offer internet banking. Customers may utilize the site to perform inquiries on account balances and activity, transfer funds among deposit and loan accounts, and pay bills online. 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 offered secondary market mortgage products. This subsidiary was dissolved and the operations of Eagle Home Funding were merged into the Bank's loan department during the first quarter of 2000.
The Bank's main office is located in Berryville, Clarke County, Virginia, and it operates branch offices in Boyce, Jubal Early Drive in Winchester, Piccadilly 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.
The Bank had twenty-eight officers, fifty-eight other full-time and ten part-time employees as of December 31, 2000. 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.
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 2 - Rate/Volume Variance (In Thousands)
Table 3 - Analysis of Allowance for Loans Losses (In Thousands)
Table 4 - Allocation of Allowance for Loan Losses (In Thousands)
Table 5 - Loan Portfolio (In Thousands)
Table 6 - Maturity Schedule of Selected Loans (In Thousands)
Table 7 - Non-Performing Assets (In Thousands)
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.
Table 8 - Maturity Distribution and Yields of Securities (In Thousands) (continued)
Table 9 - Deposits and Rates Paid (In Thousands)
Table 11 - Risk Based Capital Ratios (In Thousands)
Item 2.
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, 40 West Piccadilly Street, Wincheter, Virginia, and 382 Fairfax Pike, Stephens City, Virginia. The Bank also presently operates a leased branch at 625 East Jubal Early Drive, Winchester, Virginia.
The Bank owns a 1.5 acre parcel of land located adjacent to the Food Lion grocery store in Berryville, Virginia on Route 340. A branch will be constructed on this site 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. During 2000 the Bank purchased a building lot located in front of the Trex Company headquarters on 522 North in Winchester, Virginia. A branch will be constructed on this site in the future.
Item 3.
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.
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.
PART II
Item 5.
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.
The Company's dividend policy was changed during 1997 to pay quarterly dividends beginning February 15, 1997. The company has paid quarterly dividends during each of years after the policy change.
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 1,184 holders of record of the Registrant's Common Stock as of March 21, 2000.
Item 6.
Item 6. Selected Financial Data.
The following Selected Financial Data for the five fiscal years ended December 31, 2000 should be read in conjunction with Item 7, Management's Discussion and 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.
Item 7.
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 Company's Form 10-K may be obtained from the S.E.C.'s EDGAR Database on the internet or by request from the Company's transfer agent.
OVERVIEW
During 2000 total assets of the company increased $17.7 million or 9.95% from $178.4 million at December 31, 1999 to $196.1 at December 31, 2000. Loan growth was funded through an increase in total deposits, primarily time deposits. Net loans increased $17.0 million or 13.76% from $123.7 million to $140.7 million at year end 1999 and 2000, respectively. Securities decreased $2.7 million or 6.58% from $40.6 million to $37.9 million at year 1999 and 2000, respectively. Total deposits of the Company increased from $148.9 million to $168.1 million, which represents an increase of $19.2 million or 12.87% from December 31, 1999 to December 31, 2000. Shareholders' equity increased $1.8 million or 10.34% during 2000 from $17.5 million to $19.3 million. For the year ended December 31, 2000, net income totaled $2.0 million, a $0.3 million or 19.57% increase over 1999 net income of $1.7 million. Net income for 1998 was $1.3 million. Earnings per share was $1.40, $1.18 and $0.93 for 2000, 1999 and 1998, respectively. This is a $0.25 or 26.88% increase in 1999 and a $0.22 or 18.64% increase for 2000. Return on average equity for 2000 was 11.05% as compared to 10.08% for 1999 and 8.42% in 1998. Return on average assets for 2000 was 1.08% as compared to 1.05% for 1999 and 0.94% for 1998. During the past five years, the Company has earned $7.4 million, resulting in an increase in shareholders' equity of $6.1 million or 46.84%. The market value of the stock increased from $18.75 per share to $25.50 over the same five year period which represents an increase of 36.00%.
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 increased $0.9 million or 13.99% in 2000 and increased $1.0 million or 17.82% in 1999 from $5.5 million in 1998, $6.5 million in 1999 and $7.4 million in 2000. 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 increased from 4.44% in 1998 to 4.57% in 1999, then decreased to 4.46% in 2000. Earning assets yielded 7.87% on a fully taxable equivalent basis in 2000 as compared to 7.59% in 1999 and 7.72% in 1998. The average rate on total loans increased from 8.13% in 1999 to 8.30% in 2000, as compared to 8.55% in 1998. The total income earned on loans for 2000 was $11.1 million as compared to $8.7 million in 1999 and $7.3 million for 1998. Average loans increased $27.1 million or 25.30% from $107.1 million in 1999 to $134.2 million in 2000 as compared to an increase of $21.8 million or 25.56% from $85.3 million in 1998. Interest earned on securities was $2.5 million, $2.6 million, and $2.5 million for 1998, 1999, and 2000, respectively. This represents an increase of $0.1 million or 4.00% in 1999 and a decrease of $0.1 million or 3.85% in 2000. The average balance of securities decreased by $2.6 million or 6.27% in 2000 and increased $0.8 million or 1.80% in 1999 from $40.7 million, $41.5 million and $38.9 million in 1998, 1999 and 2000, respectively. The average rate on securities increased from 6.09% in 1998 to 6.20% in 1999 and 6.38% in 2000. Interest expense increased from $4.2 million in 1998 to $4.5 million in 1999 and $5.9 million in 2000. This represents an increase of $0.3 million or 6.66% in 1999 and $1.4 million or 31.54% in 2000. The average balance of interest-bearing liabilities increased by $20.6 million or 17.04% from $120.9 million in 1999 to $141.5 million in 2000. The average rate on interest-bearing liabilities decreased from 4.01% in 1998 to 3.71% in 1999, then increased to 4.17% in 2000. Interest expense as a percent of average earning assets decreased from 3.28% in 1998 to 3.01% in 1999, then increased to 3.40% in 2000. Net interest spread increased from 3.71% in 1998 to 3.88% in 1999, then decreased to 3.70% in 2000.
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 increased $15,000 from $335,000 in 1999 to $350,000 in 2000 as compared to a decrease in 1999 of $36,886 from $371,886 in 1998. The ratio of net charge-offs to average loans was 0.10% for 2000 as compared to 0.13% in 1999 and 0.23% in 1998. The allowance for loan losses as a percentage of loans decreased from 0.96% at the end of 1998 to 0.90% at the end of 1999, then increased to 0.94% at the end of 2000. Charged-off loans were $293,481, $237,301 and $170,518 for 1998, 1999 and 2000, respectively. This reflects a decrease of $56,180 or 19.14% from 1998 to 1999 and a decrease of $66,783 or 28.14% from 1999 to 2000. Recoveries were $98,208, $99,746 and $37,988 for 1998, 1999 and 2000, respectively. This reflects an increase of $1,538 or 1.57% from 1998 to 1999 and a decrease of $61,758 or 61.92% from 1999 to 2000. Net charge-offs were $195,273, $137,555 and $132,530 for 1998, 1999 and 2000, respectively. Loans 90 days past due and still accruing interest as a percentage of total loans, net unearned discount increased from 0.39% in 1998 to 0.51% in 1999, then decreased to 0.03% in 2000. The amount of loans past due greater than 90 days and still accruing interest increased from $372,101 in 1998 to $642,299 in 1999, then decreased to $46,713 in 2000. The allowance for loan losses at year end covered net charge-offs during the year by 4.74 times in 1998, 8.16 times in 1999 and 10.11 times in 2000. 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.
NONINTEREST INCOME AND EXPENSES
Total noninterest income increased $0.2 million or 7.44% from $2.0 million in 1999 to $2.2 million in 2000 and increased $0.3 million or 18.56% in 1999 from $1.7 million in 1998. Service charges on deposit accounts were $545,782, $657,956 and $742,026 in 1998, 1999 and 2000, respectively. This represents an increase of $112,174 or 20.55% from 1998 to 1999 and an increase of $84,070 or 12.78% from 1999 to 2000. The increase in 2000 can be attributed to an increased volume of transactions which are service charged and a change in the service charge schedule on commercial deposit accounts. Other service charges and fees were $754,379, $861,849 and $964,223 in 1998, 1999 and 2000, respectively. This represents an increase of $107,470 or 14.25% from 1998 to 1999 and $102,374 or 11.88% from 1999 to 2000. This increase can be attributed to commissions received from the sale of non-deposit investment products through Eagle Investment Services and fees generated from the Bank's ATM/debit card and credit card products. Total noninterest expenses were $5,099,167, $5,982,827 and $6,576,135 in 1998, 1999 and 2000, respectively. This represents an increase of $883,660 or 17.33% from 1998 to 1999 and an increase of $593,308 or 9.92% from 1999 to 2000. Salaries and wages increased $187,634 or 7.05% from $2,662,397 in 1999 to $2,850,031 in 2000 as compared to an increase of $344,080 or 14.84% in 1999 from $2,318,317 in 1998. The increase in 2000 can be attributed to annual salary adjustments and the hiring of additional personnel. Occupancy expenses increased $81,525 or 18.88% from $431,875 in 1999 to $513,400 in 2000. This increase can be attributed to opening the Bank's seventh branch location within Medical Office Building II at the Winchester Medical Center. Equipment expenses increased $71,856 or 12.83% from $560,241 to $632,097. This increase can be attributed to the implementation of check imaging during 2000. The efficiency ratio of the Company, a measure of its performance based upon the relationship between noninterest expenses and operating income, was 68.90% in 1998, 67.76% in 1999 and 66.37% in 2000. This decrease in the efficiency ratio can be attributed to the percentage increase in tax-equivalent net interest income and noninterest income being greater than the percentage increase in noninterest expenses. It is management's objective to maintain an efficiency ratio at or below 68.00% for the Company.
INCOME TAXES
Income tax expense was $677,696, $551,538, $470,190 for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in income tax expense can be attributed to increased taxable earnings at the federal statutory income tax rate of 34%. These amounts correspond to an effective tax rate of 25.17%, 24.66% and 26.43% for 2000, 1999 and 1998, respectively. Note 7 to the Consolidated Financial Statements provides a reconciliation between income tax expense computed using the federal statutory income tax rate and the Company's actual income tax expense. In addition, Note 7 to the Consolidated Financial Statements provides information regarding the principal items giving rise to deferred taxes for 2000 and 1999.
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 0.69% and 10.15% in 2000 and 1999, respectively, from 73.68% in 1998 to 83.83% in 1999 and 84.52% in 2000. Loans, net of unearned income increased $17.2 million or 13.81% from $124.8 million to $142.0 million at year end 1999 and 2000, 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 $110.5 million or 77.81% of total loans in 2000 and $98.2 million or 78.67% of total loans in 1999 which represents an increase of $12.3 million or 12.54% 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.
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 were $265,365 as of December 31, 1999. There were no nonperforming assets as of December 31, 2000. Total loans past due 90 days or more and still accruing interest were $46,713 and $642,299 at December 31, 2000 and 1999, respectively. This is a decrease of $595,586 or 92.73%. The loans past due 90 days or more and still accruing interest are secured and in the process of collection, therefore, they are not classified as nonaccrual. Any loan over 90 days past due without being in the process of collection or where the collection of its principal or interest is doubtful would be placed on nonaccrual status. Upon being placed on nonaccrual status, accrued interest would be reversed from income and future accruals would be discontinued with interest income being recognized on a cash basis. 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 $1.2 million as of December 31, 1999 and 2000. These loans are primarily well-secured and in the process of collection and the allowance for loan losses includes $221,105 in specific allocations for these loans as well as percentage allocations for classified assets without specific allocations.
SECURITIES
The total amount of securities as of December 31, 2000 was $37.9 million compared to $40.6 million as of December 31, 1999. Securities decreased $2.7 million or 6.58% in 2000 from 1999. The decrease from 1999 to 2000 is due to loan growth using funds which would have otherwise been used to purchase securities. The Company changed its investment policy during 2000 to allow for the purchase of corporate securities, of which it purchased $1.2 million during the year. The Company had $26.3 million and $29.5 million in securities classified as held to maturity in 2000 and 1999, respectively. The Company's available for sale securities totaled $11.6 million in 2000 and $11.1 million in 1999. The Company had an unrealized gain on available for sale securities in the amount of $26,191 at December 31, 2000 as compared to an unrealized loss in the amount $197,223 at December 31, 1999. This resulted in a total unrealized gain of $223,414 during 2000. This unrealized gain can be attributed to changes in interest rates during 2000 and the purchase of securities whose values increased during the year. Unrealized gains or losses on available for sale securities are reported within shareholders' equity, net of the related deferred tax effect, as accumulated other comprehensive income.
DEPOSITS
Total deposits increased $19.2 million or 12.87% from $148.9 million in 1999 to $168.1 million in 2000. Noninterest bearing demand deposits increased $5.3 million or 23.19% from $22.9 in 1999 to $28.2 in 2000. Savings and interest bearing demand deposits increased $1.6 million or 2.82% from $55.1 million in 1999 to $56.7 million in 2000. Time deposits increased $12.3 million or 17.37% from $70.9 million in 1999 to $83.2 million in 1999. The increase in time deposits can be attributed to certificate of deposit promotions offered during throughout 2000. The Company will attempt to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source funding. Core deposits consist of demand deposits, interest-bearing demand deposits, money market accounts, savings accounts, and time deposits of less than $100,000. Core deposits totaled $141.2 million or 84.02% of total deposits in 2000 as compared to $126.8 million or 85.20% of total deposits in 1999. Certificates of deposit of $100,000 or more totaled $26.8 million or 15.98% of total deposits in 2000 as compared to $22.0 million or 14.80% of total deposits in 1999. The Company does not purchase brokered deposits or solicit deposits from outside of its primary market area.
CAPITAL RESOURCES
The Company continues to be a well capitalized financial institution. Total shareholders' equity on December 31, 2000 was $19.3 million, reflecting a percentage of total assets of 9.82%, as compared to $17.5 million and 9.79% at year-end 1999. Shareholders' equity per share increased $1.14 or 9.35% from $12.19 per share in 1999 to $13.33 per share in 2000. The return on average shareholders' equity increased from 10.08% in 1999 to 11.05% in 2000. During 2000 the Company paid $0.46 per share in dividends as compared to $0.38 per share in 1999. The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock. Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk. 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, 2000, the Company's Tier I capital ratio was 13.96% compared to 14.24% in 1999, the Tier II capital ratio was 14.96% compared to 15.18% in 1999 and the leverage ratio was 9.66% compared to 9.93% in 1999. See Note 12 to the Consolidated Financial Statements as of December 31, 2000 for additional discussion and analysis of regulatory capital requirements.
LIQUIDITY AND MARKET RISK
Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At December 31, 2000, liquid assets totaled $47.5 million as compared to $42.6 million at year-end 1999. These amounts represent 26.85% for 2000 and 26.46% for 1999, of total liabilities. The Company minimizes liquidity demand by utilizing core deposits to fund asset growth. Securities provide a constant source of liquidity through paydowns and maturities. Also, the Company maintains short-term borrowing arrangements, namely federal funds lines of credit, with larger financial institutions as an additional source of liquidity. Finally, the Bank's membership with the Federal Home Loan Bank of Atlanta provides a source of borrowings with numerous rate and term structures. The Company's senior management monitors the liquidity position regularly and attempts to maintain a position which utilizes available funds most efficiently. 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. Asset / liability management attempts to maximize the net interest income of the Company by adjusting the volume and price of rate sensitive assets and liabilities. 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, 2000, the Company did not have any hedging transactions in place such as interest rate swaps, floors or caps. The Bank's interest rate management strategy is designed to maximize net interest income and preserve the capital of the Company. The following table provides the results from various simulations that the Bank's financial instruments are periodically subjected to. These models are based on actual data from the bank's financial statements and assumptions about the performance of certain financial instruments. Prepayment assumptions are applied to all mortgage related assets, which includes real estate loans and mortgage-backed securities. Prepayment assumptions are based on a median rate at which principal payments are received on these assets over their contractual term. The rate of principal payback is assumed to increase when rates fall and decrease when rates rise. Term assumptions are applied to nonmaturity deposits, which includes demand deposits, NOW accounts, savings accounts, and money market accounts. Demand deposits, NOW accounts, and savings accounts are generally assumed to have a term greater than one year since the total amount outstanding does not fluctuate with changes in interest rates. Money market accounts are assumed to be more interest rate sensitive, therefore, a majority of the amount outstanding is assumed to have a term of less than one year. The Bank uses interest rate sensitivity analysis which uses the term to maturity or repricing for rate sensitive assets and liabilities to measure how well they match. Differences in the terms of rates sensitive assets and liabilities create gaps, which are analyzed for each term segment and cumulatively. Management focuses on the static 1-year cumulative gap to measure its short-term sensitivity position. The Company had negative static 1-year cumulative gaps of 19.42% and 21.01% of total rate sensitive assets at December 31, 2000 and 1999, respectively. The negative gap indicates a liability sensitive position, which is expected by management since deposits have relatively short terms with most having a variable rate and loans have longer terms with most having a fixed rate. The policy limit for the static 1-year cumulative gap is plus or minus 20.00% of total rate sensitive assets. The Bank also measures the change in net income assuming rates would increase or decrease by 2.00%. If rates decreased by 2.00%, net income would have increased by 8.21% in 1999 and 1.61% in 2000 as compared to net income in a stable rate environment. Conversely, if rates increased by 2.00%, net income would have decreased by 9.68% in 1999 and 3.39% in 2000 as compared to net income in a stable rate environment. These results, like interest rate sensitivity analysis, indicate that the Bank is liability sensitive. Overall changes in the economy with regards to interest rates and changes in the balance sheet's structure have reduced the volatility of net income in the simulation from 1999 to 2000. Finally, the Bank measures the change in present value of its balance sheet assuming rates would increase or decrease by 2.00%. This simulation applies these rate changes to the net present value of the balance sheet which is derived by subtracting the net present value of liabilities from the net present value of assets. If rates decreased by 2.00%, the net present value of the balance sheet would have increased by 18.48% in 1999 and 7.33% in 2000. Conversely, if rates increased by 2.00%, the net present value of the balance sheet would have decreased by 22.12% in 1999 and 12.53% in 2000. This simulation confirms the Bank's liability sensitive position since the net present value of the balance sheet rises during a falling rate environment and falls during a rising rate environment, and, displays the reduction in volatility of the balance sheet's net present value from 1999 to 2000.
FORWARD LOOKING STATEMENTS
Certain statements contained in this annual 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.
Item 7A.
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.
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.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
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 30, 2001, for the Company's 2001 Annual Meeting of Shareholders to be held April 18, 2001.
Item 11.
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 30, 2001, for the Company's 2001 Annual Meeting of Shareholders to be held April 18, 2001.
Item 12.
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 30, 2001, for the Company's 2001 Annual Meeting of Shareholders to be held April 18, 2001.
Item 13.
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 30, 2001, for the Company's 2001 Annual Meeting of Shareholders to be held April 18, 2001.
PART IV
Item 14.
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, 2000 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 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 12. Not applicable.
Exhibit 13. Portions of the 2000 Annual Report to Shareholders for the year ended December 31, 2000 (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 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, 2000 (incorporated herein as Exhibit 99.1).
1. Independent Auditor's Report. 2. Consolidated Balance Sheets - At December 31, 2000 and 1999. 3. Consolidated Statements of Income - Years ended December 31, 2000, 1999, and 1998. 4. Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 2000, 1999, and 1998. 5. Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999, and 1998. 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 2000.
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 30th day of March, 2001.
Eagle Financial Services, Inc.
By: /s/ JOHN R. MILLESON --------------------------------- John R. Milleson, 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.
EAGLE FINANCIAL SERVICES, INC. EXHIBIT INDEX TO FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
EXHIBIT NUMBER DESCRIPTION -------------- ----------------------------------------
11 Computation of Per Share Earnings .
21 Subsidiaries of the Registrant.
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, 2000.
1. Independent Auditor's Report. 2. Consolidated Balance Sheets - At December 31, 2000 and 1999. 3. Consolidated Statements of Income - Years ended December 31, 2000, 1999, and 1998. 4. Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 2000, 1999, and 1998. 5. Consolidated Statements of Cash Flows Years ended December 31, 2000, 1999, and 1998. 6. Notes to Consolidated Financial Statements.