EAGLE FINANCIAL SERVICES INC - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - EAGLE FINANCIAL SERVICES INC	efsi-20180930exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - EAGLE FINANCIAL SERVICES INC	efsi-20180930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - EAGLE FINANCIAL SERVICES INC	efsi-20180930exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 0-20146

EAGLE FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)



Virginia		54-1601306
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2 East Main Street P.O. Box 391 Berryville, Virginia		22611
(Address of principal executive offices)		(Zip Code)

(540) 955-2510

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all 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 ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	ý

Non-accelerated filer	¨	Smaller reporting company	ý
		Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the registrant’s Common Stock ($2.50 par value) outstanding as of November 1, 2018 was 3,473,833.

TABLE OF CONTENTS




PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Consolidated Balance Sheets at September 30, 2018 and December 31, 2017	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	3
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	44

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	45

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)



	September 30, 2018			December 31, 2017
	(Unaudited)
Assets
Cash and due from banks	$	9,397		$	10,578
Interest-bearing deposits with other institutions	3,780			22,094
Federal funds sold	—			3,176
Total cash and cash equivalents	13,177			35,848
Securities available for sale, at fair value	140,400			132,566
Restricted investments	1,166			1,107
Loans	598,467			568,817
Allowance for loan losses	(4,713		)	(4,411		)
Net Loans	593,754			564,406
Bank premises and equipment, net	19,504			19,579
Other real estate owned, net of allowance	2,033			106
Other assets	16,040			12,139
Total assets	$	786,074		$	765,751
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits	$	256,738		$	234,990
Savings and interest bearing demand deposits	327,612			322,948
Time deposits	108,987			105,476
Total deposits	$	693,337		$	663,414
Federal funds purchased	1,158			—
Other liabilities	6,749			18,520
Total liabilities	$	701,244		$	681,934

Commitments and contingencies

Shareholders’ Equity
Preferred stock, $10 par value; 500,000 shares authorized and unissued	$	—		$	—
Common stock, $2.50 par value; authorized 10,000,000 shares; issued and outstanding 2018, 3,473,833 including 22,201 shares of unvested restricted stock; issued and outstanding 2017, 3,449,027 including 14,401 shares of unvested restricted stock	8,629			8,587
Surplus	12,680			12,075
Retained earnings	67,340			62,845
Accumulated other comprehensive (loss) income	(3,819		)	310
Total shareholders’ equity	$	84,830		$	83,817
Total liabilities and shareholders’ equity	$	786,074		$	765,751

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Income (Unaudited)

(dollars in thousands, except per share amounts)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Interest and Dividend Income
Interest and fees on loans	$	7,092		$	6,548		$	20,633		$	18,392
Interest and dividends on securities available for sale:
Taxable interest income	702			563			1,976			1,704
Interest income exempt from federal income taxes	263			257			793			781
Dividends	16			17			43			41
Interest on deposits with other institutions	58			73			153			109
Interest on federal funds sold	—			—			2			1
Total interest and dividend income	$	8,131		$	7,458		$	23,600		$	21,028
Interest Expense
Interest on deposits	704			311			$	1,693		$	732
Interest on federal funds purchased	1			—			11			14
Interest on Federal Home Loan Bank advances	—			40			—			57
Total interest expense	$	705		$	351		$	1,704		$	803
Net interest income	$	7,426		$	7,107		$	21,896		$	20,225
Provision for (Recovery of) Loan Losses	140			(2		)	248			(759		)
Net interest income after provision for (recovery of) loan losses	$	7,286		$	7,109		$	21,648		$	20,984
Noninterest Income
Income from fiduciary activities	$	316		$	236		$	1,059		$	837
Service charges on deposit accounts	302			310			912			904
Other service charges and fees	1,172			1,057			3,181			2,967
Gain on sale of securities	6			26			17			77
Loss on disposal of bank premises and equipment	—			(1		)	(3		)	(12		)
Other operating income (loss)	8			(11		)	104			115
Total noninterest income	$	1,804		$	1,617		$	5,270		$	4,888
Noninterest Expenses
Salaries and employee benefits	$	3,666		$	3,513		$	10,598		$	10,227
Occupancy expenses	374			358			1,108			1,102
Equipment expenses	233			222			686			720
Advertising and marketing expenses	209			190			595			543
Stationery and supplies	42			49			145			137
ATM network fees	192			203			644			606
Other real estate owned expense	24			—			161			11
Loss (gain) on other real estate owned	987			—			872			(1		)
FDIC assessment	56			56			169			163
Computer software expense	114			150			365			505
Bank franchise tax	152			137			431			396
Professional fees	260			212			818			770
Data processing fees	270			166			513			422
Other operating expenses	731			653			2,001			1,766
Total noninterest expenses	$	7,310		$	5,909		$	19,106		$	17,367
Income before income taxes	$	1,780		$	2,817		$	7,812		$	8,505
Income Tax Expense (Benefit)	(80		)	810			892			2,429
Net income	$	1,860		$	2,007		$	6,920		$	6,076
Earnings Per Share
Net income per common share, basic	$	0.54		$	0.58		$	2.00		$	1.75
Net income per common share, diluted	$	0.54		$	0.58		$	2.00		$	1.75

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

(dollars in thousands)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net income	$	1,860		$	2,007		$	6,920		$	6,076
Other comprehensive (loss) income:
Unrealized (loss) gain on available for sale securities net of reclassification adjustments, and net of deferred income tax of ($315) and ($124) for the three months ended, respectively and ($1,097) and $434 for the nine months ended, respectively	(1,186		)	(240		)	(4,129		)	843
Total other comprehensive (loss) income	(1,186		)	(240		)	(4,129		)	843
Total comprehensive income	$	674		$	1,767		$	2,791		$	6,919

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands, except per share amounts)



	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2016	$	8,633		$	12,642		$	58,165		$	(24	)	$	79,416
Net income							6,076						6,076
Other comprehensive income										843			843
Vesting of restricted stock awards, stock incentive plan (9,493 shares)	24			(24		)							—
Stock-based compensation expense				277									277
Issuance of common stock, dividend investment plan (11,157 shares)	28			294									322
Issuance of common stock, employee benefit plan (5,145 shares)	13			131									144
Repurchase and retirement of common stock (42,108 shares)	(105		)	(1,127		)							(1,232		)
Dividends declared ($0.66 per share)							(2,295		)				(2,295		)
Balance, September 30, 2017	$	8,593		$	12,193		$	61,946		$	819		$	83,551

Balance, December 31, 2017	$	8,587		$	12,075		$	62,845		$	310		83,817
Net income							6,920						6,920
Other comprehensive (loss)										(4,129		)	(4,129		)
Vesting of restricted stock awards, stock incentive plan (9,109 shares)	23			(23		)							—
Stock-based compensation expense				372									372
Issuance of common stock, dividend investment plan (10,137 shares)	25			306									331
Issuance of common stock, employee benefit plan (4,413 shares)	11			147									158
Repurchase and retirement of common stock (6,653 shares)	(17		)	(197		)							(214		)
Dividends declared ($0.70 per share)							(2,425		)				(2,425		)
Balance, September 30, 2018	$	8,629		$	12,680		$	67,340		$	(3,819	)	$	84,830

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)



	Nine Months Ended
	September 30,
	2018			2017
Cash Flows from Operating Activities
Net income	$	6,920		$	6,076
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation	698			713
Amortization of intangible and other assets	143			154
Provision for (recovery of) loan losses	248			(759		)
Loss (gain) on other real estate owned	872			(1		)
Loss on the sale and disposal of premises and equipment	3			12
Loss on the sale of repossessed assets	—			6
(Gain) on the sale of securities	(17		)	(77		)
Stock-based compensation expense	372			277
Premium amortization on securities, net	400			392
Changes in assets and liabilities:
(Increase) in other assets	(2,944		)	(3,611		)
(Decrease) in other liabilities	(11,770		)	(7,087		)
Net cash (used in) operating activities	$	(5,075	)	$	(3,905	)
Cash Flows from Investing Activities
Proceeds from maturities, calls, and principal payments of securities available for sale	$	12,901		$	8,439
Proceeds from the sale of securities available for sale	5,374			10,554
Purchases of securities available for sale	(31,718		)	(23,347		)
Proceeds from the sale of restricted investments	—			850
Purchases of restricted investments	(59		)	(889		)
Purchases of bank premises and equipment	(626		)	(296		)
Proceeds from the sale of other real estate owned	—			318
Proceeds from the sale of repossessed assets	—			3
Net (increase) in loans	(32,399		)	(34,577		)
Net cash (used in) investing activities	$	(46,527	)	$	(38,945	)
Cash Flows from Financing Activities
Net increase in noninterest bearing demand deposits, savings, and interest bearing demand deposits	$	26,412		$	23,157
Net increase in time deposits	3,511			18,211
Net increase in federal funds purchased	1,158			—
Issuance of common stock, employee benefit plan	158			144
Repurchase and retirement of common stock	(214		)	(1,232		)
Cash dividends paid	(2,094		)	(1,974		)
Net cash provided by financing activities	$	28,931		$	38,306

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

(continued)



	Nine Months Ended
	September 30,
	2018			2017
(Decrease) in cash and cash equivalents	$	(22,671	)	$	(4,544	)
Cash and Cash Equivalents
Beginning	35,848			35,281
Ending	$	13,177		$	30,737
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,649		$	798
Income taxes	$	1,791		$	1,784
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized (loss) gain on securities available for sale	$	(5,226	)	$	1,277
Other real estate and repossessed assets acquired in settlement of loans	$	2,803		$	57
Issuance of common stock, dividend investment plan	$	331		$	322

See Notes to Consolidated Financial Statements

EAGLE FINANCIAL SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2018

NOTE 1. General

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America.

In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at September 30, 2018 and December 31, 2017, the results of operations for the three and nine months ended September 30, 2018 and 2017, and cash flows for the nine months ended September 30, 2018 and 2017. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).

Eagle Financial Services, Inc. (the "Company") owns 100% of Bank of Clarke County (the “Bank”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated.

Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations. None of the reclassifications were of a material nature and they had no effect on prior year net income or shareholders' equity.

On January 1, 2018, the Company adopted ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606." This ASU revised guidance for the recognition, measurement, and disclosure of revenue from contracts with customers. The original guidance was amended through subsequent accounting standard updates that resulted in technical corrections, improvements, and a one-year deferral of the effective date to January 1, 2018. The guidance, as amended, is applicable to all entities and replaces significant portions of existing industry and transaction-specific revenue recognition rules with a more principles-based recognition model. Most revenue associated with financial instruments, including interest income, loan origination fees, and credit card fees, is outside the scope of the guidance. Gains and losses on investment securities, derivatives, financial guarantees, and sales of financial instruments are similarly excluded from the scope. The guidance is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, and merchant income. The Company adopted this guidance via the modified retrospective approach, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application.

Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, and merchant income. The Company also completed an evaluation of certain costs related to these revenue streams to determine whether such costs should be presented gross versus net. Based on these assessments, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

NOTE 2. Stock-Based Compensation Plan

During 2014, the Company’s shareholders approved a stock incentive plan which allows key employees and directors to increase their personal financial interest in the Company. This plan permits the issuance of incentive stock options and non-qualified stock options and the award of stock appreciation rights, common stock, restricted stock, and phantom stock. The plan authorizes the issuance of up to 500,000 shares of common stock.

The Company periodically grants Restricted Stock to its directors, executive officers and certain non-executive officers. Restricted Stock provides grantees with rights to shares of common stock upon completion of a service period or achievement of Company performance measures. During the restriction period, all shares are considered outstanding and dividends are paid to the grantee. In general, outside directors are periodically granted restricted shares which vest over a period of less than 9 months. Beginning during 2006, executive officers were granted restricted shares which vest over a 3 year service period and restricted shares which vest based on meeting annual performance measures over a 1 year period. Beginning in 2018, certain non-executive officers also were granted restricted shares which vest over a 3 year service period. The Company recognizes compensation expense over the restricted period based on the fair value of the Company's stock on the grant date. The Company's policy is to recognize forfeitures as they occur. As of September 30, 2018, there was $219 thousand of unrecognized compensation cost related to nonvested restricted stock.

The following table presents Restricted Stock activity for the nine months ended September 30, 2018 and 2017:



	Nine Months Ended
	September 30,
	2018				2017
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested, beginning of period	14,401		$	24.68	14,901		$	23.05
Granted	16,950		32.84		14,650		27.46
Vested	(9,109	)	24.63		(9,493	)	23.08
Forfeited	(41	)	25.50		(657	)	23.00
Nonvested, end of period	22,201		30.93		19,401		26.37

NOTE 3. Earnings Per Common Share

Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Nonvested restricted shares are included in the weighted average number of common shares used to compute basic earnings per share because of dividend participation and voting rights. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. The number of potential common shares is determined using the treasury method.

The following table shows the weighted average number of shares used in computing earnings per share for the three and nine months ended September 30, 2018 and 2017. During 2018 and 2017, there were no potentially dilutive securities outstanding.



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
Weighted average number of common shares outstanding used to calculate basic and diluted earnings per share	3,474,246	3,469,372	3,467,201	3,473,872

NOTE 4. Securities

Amortized costs and fair values of securities available for sale at September 30, 2018 and December 31, 2017 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	September 30, 2018
	(in thousands)
Obligations of U.S. government corporations and agencies	$	22,184	$	9	$	(868	)	$	21,325
Mortgage-backed securities	76,110		—		(3,161		)	72,949
Obligations of states and political subdivisions	46,994		227		(1,095		)	46,126
	$	145,288	$	236	$	(5,124	)	$	140,400
	December 31, 2017
	(in thousands)
Obligations of U.S. government corporations and agencies	$	21,565	$	213	$	(258	)	$	21,520
Mortgage-backed securities	61,464		126		(346		)	61,244
Obligations of states and political subdivisions	49,199		789		(186		)	49,802
	$	132,228	$	1,128	$	(790	)	$	132,566

During the nine months ended September 30, 2018, the Company received proceeds of $5.4 million on sales of available for sale securities for gross gains of $62 thousand and gross losses of $45 thousand. During the nine months ended September 30, 2017, the Company sold $10.6 million of available for sale securities for gross gains of $94 thousand. There were $17 thousand in gross losses on the sale of available for sale securities during the nine months ended September 30, 2017.

The fair value and gross unrealized losses for securities available for sale, totaled by the length of time that individual securities have been in a continuous gross unrealized loss position, at September 30, 2018 and December 31, 2017 were as follows:



	Less than 12 months				12 months or more				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	September 30, 2018
	(in thousands)
Obligations of U.S. government corporations and agencies	$	4,682	$	185	$	10,616	$	683	$	15,298	$	868
Mortgage-backed securities	48,710		1,839		22,195		1,322		70,905		3,161
Obligations of states and political subdivisions	21,233		667		6,127		428		27,360		1,095
	$	74,625	$	2,691	$	38,938	$	2,433	$	113,563	$	5,124
	December 31, 2017
	(in thousands)
Obligations of U.S. government corporations and agencies	$	4,455	$	58	$	7,810	$	200	$	12,265	$	258
Mortgage-backed securities	11,885		59		17,931		287		29,816		346
Obligations of states and political subdivisions	4,071		27		4,692		159		8,763		186
	$	20,411	$	144	$	30,433	$	646	$	50,844	$	790

Gross unrealized losses on available for sale securities included one hundred twenty-seven (127) and fifty-four (54) debt securities at September 30, 2018 and December 31, 2017, respectively. The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the amount of an unrealized loss, the financial condition of the issuer, and the intent and ability of the Company to retain its investment in the issuer long enough to allow for an anticipated recovery in fair value. The fair value of a security reflects its liquidity as compared to similar instruments, current market rates on similar instruments, and the creditworthiness of the issuer. Absent any change in the liquidity of a security or the creditworthiness of the issuer, prices will decline as market rates rise and vice-versa. The primary cause of the unrealized losses at September 30, 2018 and December 31, 2017 was changes in market interest rates and not credit concerns of the issuers. Since the losses can be primarily attributed to changes in market interest rates and not expected cash flows or an issuer’s financial condition and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, the unrealized losses were deemed to be temporary. The Company’s mortgage-backed securities are issued by U.S. government agencies, which guarantee payments to investors regardless of the status of the underlying mortgages. The Company monitors the financial condition of these issuers continuously and will record other-than-temporary impairment if the recovery of value is unlikely.

The Company’s securities are exposed to various risks, such as interest rate, market, currency and credit risks. Due to the level of risk associated with certain securities and the level of uncertainty related to changes in the value of securities, it is at least reasonably possible that changes in risks in the near term would materially affect securities reported in the financial statements.

Securities having a carrying value of $2.8 million at September 30, 2018 were pledged for various purposes required by law.

The composition of restricted investments at September 30, 2018 and December 31, 2017 was as follows:



	September 30, 2018		December 31, 2017
	(in thousands)
Federal Reserve Bank Stock	$	344	$	344
Federal Home Loan Bank Stock	682		623
Community Bankers’ Bank Stock	140		140
	$	1,166	$	1,107

NOTE 5. Loans and Allowance for Loan Losses

The composition of loans at September 30, 2018 and December 31, 2017 was as follows:



	September 30,			December 31,
	2018			2017
	(in thousands)
Mortgage loans on real estate:
Construction and land development	$	56,168		$	43,786
Secured by farmland	6,394			8,568
Secured by 1-4 family residential properties	221,848			223,210
Multifamily	7,482			4,095
Commercial	252,539			239,915
Commercial and industrial loans	36,549			37,427
Consumer installment loans	9,367			10,187
All other loans	8,552			2,050
Total loans	$	598,899		$	569,238
Net deferred loan fees	(432		)	(421		)
Allowance for loan losses	(4,713		)	(4,411		)
Net Loans	$	593,754		$	564,406

Changes in the allowance for loan losses for the nine months ended September 30, 2018 and 2017 and the year ended December 31, 2017 were as follows:



	Nine Months Ended			Year Ended			Nine Months Ended
	September 30,			December 31,			September 30,
	2018			2017			2017
				(in thousands)
Balance, beginning	$	4,411		$	4,505		$	4,505
Provision for (recovery of) loan losses	248			(625		)	(759		)
Recoveries added to the allowance	240			901			908
Loan losses charged to the allowance	(186		)	(370		)	(210		)
Balance, ending	$	4,713		$	4,411		$	4,444

Nonaccrual and past due loans by class at September 30, 2018 and December 31, 2017 were as follows:



	September 30, 2018
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Days Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	17	$	—	$	—	$	17	$	36,532	$	36,549	$	—	$	135
Commercial Real Estate:
Owner Occupied	—		91		—		91		131,569		131,660		—		—
Non-owner occupied	—		—		—		—		120,879		120,879		—		373
Construction and Farmland:
Residential	—		—		—		—		8,482		8,482		—		—
Commercial	283		—		—		283		53,797		54,080		—		—
Consumer:
Installment	4		3		—		7		9,360		9,367		—		1
Residential:
Equity Lines	—		—		—		—		32,981		32,981		—		99
Single family	1,904		129		220		2,253		186,614		188,867		—		537
Multifamily	—		—		—		—		7,482		7,482		—		—
All Other Loans	—		—		—		—		8,552		8,552		—		—
Total	$	2,208	$	223	$	220	$	2,651	$	596,248	$	598,899	$	—	$	1,145



	December 31, 2017
	(in thousands)
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 or More Days Past Due		Total Past Due		Current		Total Loans		90 or More Past Due Still Accruing		Nonaccrual Loans
Commercial - Non Real Estate:
Commercial & Industrial	$	75	$	10	$	142	$	227	$	37,200	$	37,427	$	—	$	594
Commercial Real Estate:
Owner Occupied	—		—		—		—		127,018		127,018		—		—
Non-owner occupied	—		368		—		368		112,529		112,897		—		767
Construction and Farmland:
Residential	—		—		—		—		3,214		3,214		—		—
Commercial	187		—		—		187		48,953		49,140		—		—
Consumer:
Installment	17		—		2		19		10,168		10,187		—		13
Residential:
Equity Lines	18		—		—		18		32,820		32,838		—		44
Single family	829		572		4,060		5,461		184,911		190,372		—		4,921
Multifamily	—		—		—		—		4,095		4,095		—		—
All Other Loans	—		—		—		—		2,050		2,050		—		—
Total	$	1,126	$	950	$	4,204	$	6,280	$	562,958	$	569,238	$	—	$	6,339

Allowance for loan losses by segment at September 30, 2018 and December 31, 2017 were as follows:



	As of and for the Nine Months Ended
	September 30, 2018
	(in thousands)
	Construction and Farmland		Residential			Commercial Real Estate		Commercial - Non Real Estate			Consumer			All Other Loans			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	332	$	1,754		$	1,627	$	570		$	69		$	29		$	30		$	4,411
Charge-Offs	—		(3		)	—		(122		)	(28		)	(33		)	—			(186		)
Recoveries	28		24			75		85			16			12			—			240
(Recovery of) provision for loan losses	256		51			77		(213		)	5			102			(30		)	248
Ending balance	$	616	$	1,826		$	1,779	$	320		$	62		$	110		$	—		$	4,713
Ending balance: Individually evaluated for impairment	$	—	$	158		$	55	$	—		$	—		$	—		$	—		$	213
Ending balance: collectively evaluated for impairment	$	616	$	1,668		$	1,724	$	320		$	62		$	110		$	—		$	4,500
Loans:
Ending balance	$	62,562	$	229,330		$	252,539	$	36,549		$	9,367		$	8,552		$	—		$	598,899
Ending balance individually evaluated for impairment	$	290	$	4,425		$	1,266	$	379		$	1		$	—		$	—		$	6,361
Ending balance collectively evaluated for impairment	$	62,272	$	224,905		$	251,273	$	36,170		$	9,366		$	8,552		$	—		$	592,538



	As of and for the Twelve Months Ended
	December 31, 2017
	(in thousands)
	Construction and Farmland			Residential			Commercial Real Estate			Commercial - Non Real Estate			Consumer			All Other Loans			Unallocated			Total
Allowance for credit losses:
Beginning Balance	$	450		$	1,992		$	1,522		$	235		$	69		$	22		$	215		$	4,505
Charge-Offs	(19		)	(55		)	(1		)	(187		)	(59		)	(49		)	—			(370		)
Recoveries	535			212			65			44			40			5			—			901
(Recovery of) provision for loan losses	(634		)	(395		)	41			478			19			51			(185		)	(625		)
Ending balance	$	332		$	1,754		$	1,627		$	570		$	69		$	29		$	30		$	4,411
Ending balance: Individually evaluated for impairment	$	—		$	195		$	59		$	195		$	9		$	—		$	—		$	458
Ending balance: collectively evaluated for impairment	$	332		$	1,559		$	1,568		$	375		$	60		$	29		$	30		$	3,953
Loans:
Ending balance	$	52,354		$	227,305		$	239,915		$	37,427		$	10,187		$	2,050		$	—		$	569,238
Ending balance individually evaluated for impairment	$	315		$	8,315		$	1,904		$	858		$	34		$	—		$	—		$	11,426
Ending balance collectively evaluated for impairment	$	52,039		$	218,990		$	238,011		$	36,569		$	10,153		$	2,050		$	—		$	557,812

Beginning with the quarter ended September 30, 2018, the Company changed its allowance methodology for the look-back period used in calculating the loss history portion of the general reserves assigned to unimpaired credits. During this quarter, management determined it necessary to extend the loss history period utilized in the calculation from five years to seven years in light of current trends for growth and asset quality, as well as the ongoing economic cycle and the Bank's overall lending environment. The Company believes that the expanded loss history is more indicative of the losses and risks inherent in the portfolio.

The following table represents the effect on the loan loss provision for the nine months ended September 30, 2018 as a result of the change in allowance methodology from that used in prior periods.



(in thousands)	Calculated Provision Based on Current Methodology			Calculated Provision Based on Prior Methodology			Difference
Portfolio Segment:
Construction and Farmland	$	256		$	47		$	209
Residential Real Estate	51			(121		)	172
Commercial Real Estate	77			(64		)	141
Commercial	(213		)	(279		)	66
Consumer	5			(1		)	6
All Other Loans	102			92			10
Total, excluding unallocated	$	278		$	(326	)	$	604

Impaired loans by class as of and for the periods ended September 30, 2018 and December 31, 2017 were as follows:



	As of and for the Nine Months Ended
	September 30, 2018
	(in thousands)
	Unpaid Principal Balance		Recorded Investment (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	594	$	380	$	—	$	432	$	20
Commercial Real Estate:
Owner Occupied	—		—		—		—		—
Non-owner occupied	526		474		—		479		—
Construction and Farmland:
Residential	—		—		—		—		—
Commercial	340		290		—		301		21
Consumer:
Installment	1		1		—		1		—
Residential:
Equity lines	251		59		—		60		—
Single family	3,081		2,856		—		2,912		87
Multifamily	287		288		—		290		10
Other Loans	—		—		—		—		—
	$	5,080	$	4,348	$	—	$	4,475	$	138
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial

EAGLE FINANCIAL SERVICES INC - FORM 10-Q - November 8, 2018

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