10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

or

¨ 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a smaller reporting company.)	Smaller reporting company	x

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

The number of shares of the registrant’s Common Stock ($2.50 par value) outstanding as of September 30, 2011 was 3,289,553.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets at September 30, 2011 and December 31, 2010	1
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010	2
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2011 and 2010	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010	4
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Removed and Reserved	36
Item 5.	Other Information	36
Item 6.	Exhibits	36

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EAGLE FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(dollars in thousands, except share amounts)

	September 30,			December 31,
	2011			2010
	(Unaudited)
Assets
Cash and due from banks	$	12,987		$	6,884
Interest-bearing deposits with other institutions		5,852			7,086
Federal funds sold		—			—
Total cash and cash equivalents		18,839			13,970
Securities available for sale, at fair value		119,996			109,794
Restricted investments		3,703			3,982
Loans		406,540			408,449
Allowance for loan losses		(7,891	)		(7,111	)
Net Loans		398,649			401,338
Bank premises and equipment, net		15,728			15,712
Other real estate owned, net of allowance		3,437			1,783
Other assets		10,984			12,261
Total assets	$	571,336		$	558,840
Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand deposits	$	104,153		$	98,256
Savings and interest bearing demand deposits		194,035			184,548
Time deposits		151,819			146,492
Total deposits	$	450,007		$	429,296
Federal funds purchased and securities sold under agreements to repurchase		10,000			14,395
Federal Home Loan Bank advances		42,250			52,250
Trust preferred capital notes		7,217			7,217
Other liabilities		3,939			1,853
Total liabilities	$	513,413		$	505,011
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 2011, 3,289,553; issued 2010, 3,249,477		8,224			8,124
Surplus		9,628			9,076
Retained earnings		37,276			35,419
Accumulated other comprehensive income		2,795			1,210
Total shareholders’ equity	$	57,923		$	53,829
Total liabilities and shareholders’ equity	$	571,336		$	558,840

See Notes to Consolidated Financial Statements

1

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Income (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Interest and Dividend Income
Interest and fees on loans	$	5,750		$	5,875		$	17,192		$	17,555
Interest on federal funds sold		—			—			—			2
Interest and dividends on securities available for sale:
Taxable interest income		603			673			2,056			1,968
Interest income exempt from federal income taxes		367			320			1,029			972
Dividends		189			76			315			215
Interest on deposits in banks		11			6			31			16
Total interest and dividend income	$	6,920		$	6,950		$	20,623		$	20,728
Interest Expense
Interest on deposits	$	595		$	741		$	1,890		$	2,290
Interest on federal funds purchased and securities sold under agreements to repurchase		93			97			275			290
Interest on Federal Home Loan Bank advances		420			462			1,310			1,377
Interest on trust preferred capital notes		34			37			102			104
Interest on interest rate swap		46			42			136			132
Total interest expense	$	1,188		$	1,379		$	3,713		$	4,193
Net interest income	$	5,732		$	5,571		$	16,910		$	16,535
Provision For Loan Losses		1,050			2,850			2,850			4,150
Net interest income after provision for loan losses	$	4,682		$	2,721		$	14,060		$	12,385
Noninterest Income
Income from fiduciary activities	$	189		$	248		$	698		$	710
Service charges on deposit accounts		406			438			1,190			1,361
Other service charges and fees		861			794			2,473			2,206
(Loss) gain on the sale of other real estate owned		(78	)		1			(255	)		(246	)
(Loss) gain on securities		(8	)		—			155			98
Other operating income (loss)		24			(6	)		80			93
Total noninterest income	$	1,394		$	1,475		$	4,341		$	4,222
Noninterest Expenses
Salaries and employee benefits	$	2,688		$	2,333		$	7,588		$	6,867
Occupancy expenses		286			261			877			834
Equipment expenses		164			172			507			468
Advertising and marketing expenses		157			139			408			339
Stationery and supplies		53			69			221			181
ATM network fees		131			113			377			305
FDIC assessment		170			179			546			671
Computer software expense		190			150			458			357
Outside service fees		73			77			360			220
Other operating expenses		655			797			2,172			2,211
Total noninterest expenses	$	4,567		$	4,290		$	13,514		$	12,453
Income (loss) before income taxes	$	1,509		$	(94	)	$	4,887		$	4,154
Income Tax Expense		370			(175	)		1,258			1,010
Net income	$	1,139		$	81		$	3,629		$	3,144
Earnings Per Share
Net income per common share, basic	$	0.34		$	0.03		$	1.10		$	0.98
Net income per common share, diluted	$	0.34		$	0.02		$	1.10		$	0.97

See Notes to Consolidated Financial Statements

2

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

	Common Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Income			Comprehensive Income			Total
Balance, December 31, 2009	$	7,999	$	8,504		$	34,048		$	1,092					$	51,643
Comprehensive income:
Net income							3,144					$	3,144			3,144
Other comprehensive income:
Unrealized gain on available for sale securities, net of deferred income taxes of $863										1,676			1,676			1,676
Change in market value of interest rate swap, net of deferred income taxes of $235										(457	)		(457	)		(457	)
Total comprehensive income												$	4,363
Issuance of restricted stock, stock incentive plan (7,936 shares)		20		(20	)											—
Stock-based compensation expense				77												77
Issuance of common stock, dividend investment plan (28,493 shares)		71		369												440
Dividends declared ($0.51 per share)							(1,648	)								(1,648	)
Balance, September 30, 2010	$	8,090	$	8,930		$	35,544		$	2,311					$	54,875
Balance, December 31, 2010	$	8,124	$	9,076		$	35,419		$	1,210					$	53,829
Comprehensive income:
Net income							3,629					$	3,629			3,629
Other comprehensive income:
Unrealized gain on available for sale securities, net of deferred income taxes of $956										1,855			1,855			1,855
Change in market value of interest rate swap, net of deferred income tax payable of $139										(270	)		(270	)		(270	)
Total comprehensive income												$	5,214
Restricted stock awards, stock incentive plan (5,691 shares)		14		(14	)											—
Stock-based compensation expense				110												110
Issuance of common stock, dividend investment plan (29,201 shares)		73		380												453
Issuance of common stock, employee benefit plan (5,184 shares)		13		76												89
Dividends declared ($0.54 per share)							(1,772	)								(1,772	)
Balance, September 30, 2011	$	8,224	$	9,628		$	37,276		$	2,795					$	57,923

See Notes to Consolidated Financial Statements

3

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2011			2010
Cash Flows from Operating Activities
Net income	$	3,629		$	3,144
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		629			574
Amortization of intangible and other assets		67			103
Provision for loan losses		2,850			4,150
Provision for other real estate owned		75			80
Loss on the sale and disposal of assets		21			10
Loss on the sale of other real estate owned		255			246
(Gain) on the sale of securities		(155	)		(98	)
Accrual of restricted stock awards		110			77
Premium amortization (discount accretion) on securities, net		69			33
Changes in assets and liabilities:
Decrease (increase) in other assets		423			(2,427	)
Increase in other liabilities		1,678			1,374
Net cash provided by operating activities	$	9,651		$	7,266
Cash Flows from Investing Activities
Proceeds from maturities and principal payments of securities available for sale	$	30,281		$	26,749
Proceeds from the buyback for restricted assets		278			281
Purchases of securities available for sale		(42,435	)		(38,238	)
Proceeds from the sale of securities		4,849			2,853
Purchases of bank premises and equipment		(648	)		(1,712	)
Proceeds from the sale of bank premises and equipment		3			—
Proceeds from the sale of other real estate owned		1,673			1,727
Proceeds from the sale of repossessed assets		123			39
Net (increase) in loans		(3,991	)		(12,309	)
Net cash (used in) investing activities	$	(9,867	)	$	(20,610	)
Cash Flows from Financing Activities
Net increase in demand deposits, money market and savings accounts	$	15,384		$	14,147
Net increase in certificates of deposit		5,327			14,409
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(4,395	)		904
Net (decrease) in Federal Home Loan Bank advances		(10,000	)		(10,000	)
Issuance of common stock, employee benefit plan		89			—
Cash dividends paid		(1,320	)		(1,209	)
Net cash provided by financing activities	$	5,085		$	18,251

(continued)

4

EAGLE FINANCIAL SERVICES, INC.

Consolidated Statements of Cash Flows (Unaudited)

(continued)

	Nine Months Ended September 30,
	2011			2010
Increase in cash and cash equivalents	$	4,869		$	4,907
Cash and Cash Equivalents
Beginning		13,970			7,533
Ending	$	18,839		$	12,440
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	3,687		$	4,193
Income taxes	$	850		$	2,250
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain (loss) on securities available for sale	$	2,811		$	2,539
Change in market value of interest rate swap	$	(409	)	$	(692	)
Other real estate acquired in settlement of loans	$	3,657		$	1,179
Issuance of common stock, dividend investment plan	$	453		$	440

See Notes to Consolidated Financial Statements

5

EAGLE FINANCIAL SERVICES, INC.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2011

NOTE 1. General

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2011 and December 31, 2010, the results of operations for the three and nine months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30, 2011 and 2010. The results of operations for the three and nine months ended September 30, 2011 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, 2010 (the “2010 Form 10-K”).

The Company owns 100% of Bank of Clarke County (the “Bank”) and Eagle Financial Statutory Trust II. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. The subordinated debt of Eagle Financial Statutory Trust II is reflected as a liability of the Company.

Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations.

NOTE 2. Stock-Based Compensation Plan

During 2003, 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 300,000 shares of common stock.

The Company periodically grants Restricted Stock to its directors and 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 nine months. Beginning during 2006, executive officers were granted restricted shares which vest over a three year service period and restricted shares which vest based on meeting annual performance measures. The Company recognizes compensation expense over the restricted period. The following table presents Restricted Stock activity for the nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,
	2011					2010
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested, beginning of period		12,772		$	16.89		13,335		$	20.00
Granted		12,300			16.76		12,900			16.14
Vested		(5,691	)		17.26		(7,936	)		22.06
Forfeited		(2,081	)		18.38		(4,160	)		19.87
Nonvested, end of period		17,300		$	16.50		14,139		$	16.83

6

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. 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 and relates to outstanding stock options and unvested restricted stock grants.

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, 2011 and 2010 and the effect on the weighted average number of shares of dilutive potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Average number of common shares outstanding		3,302,082		3,249,236		3,287,943		3,238,010
Effect of dilutive common stock		9,390		9,995		7,953		8,011
Average number of common shares outstanding used to calculate diluted earnings per share		3,311,472		3,259,231		3,295,896		3,246,021

NOTE 4. Securities

Amortized costs and fair values of securities available for sale at September 30, 2011 and December 31, 2010 were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Fair Value
	September 30, 2011
	(in thousands)
Obligations of U.S. government corporations and agencies	$	24,658	$	977	$	—		$	25,635
Mortgage-backed securities		32,519		1,404		—			33,923
Obligations of states and political subdivisions		43,113		2,105		(45	)		45,173
Corporate securities		12,498		785		(217	)		13,066
Equity securities		2,054		145		—			2,199
	$	114,842	$	5,416	$	(262	)	$	119,996

		00000000		00000000		00000000			00000000
	December 31, 2010
	(in thousands)
Obligations of U.S. government corporations and agencies	$	32,716	$	531	$	(97	)	$	33,150
Mortgage-backed securities		15,706		524		(73	)		16,157
Obligations of states and political subdivisions		42,511		928		(531	)		42,908
Corporate securities		14,464		994		(57	)		15,401
Equity securities		2,054		124		—			2,178
	$	107,451	$	3,101	$	(758	)	$	109,794

Sales and calls of securities available for sale totaled $4,849,000 during the first nine months of 2011 for a net gain of $155,000. During the first nine months of 2010, the Company sold $2,853,000 in available for sale securities for a net gain of $98,000.

7

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, 2011 and December 31, 2010 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, 2011
	(in thousands)
Obligations of U.S. government corporations and agencies	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		—		—		—		—		—		—
Obligations of states and political subdivisions		543		5		296		40		839		45
Corporate securities		3,356		142		50		75		3,406		217
Equity securities		—		—		—		—		—		—
	$	3,899	$	147	$	346	$	115	$	4,245	$	262

		000000		000000		000000		000000		000000		000000
	December 31, 2010
	(in thousands)
Obligations of U.S. government corporations and agencies	$	6,916	$	97	$	—	$	—	$	6,916	$	97
Mortgage-backed securities		4,355		73		—		—		4,355		73
Obligations of states and political subdivisions		11,464		481		320		50		11,784		531
Corporate securities		1,047		57		—		—		1,047		57
Equity securities		—		—		—		—		—		—
	$	23,782	$	708	$	320	$	50	$	24,102	$	758

Gross unrealized losses on available for sale securities included nine (9) and thirty-five (35) debt securities at September 30, 2011 and December 31, 2010, 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. 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. 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, 2011 and December 31, 2010 was changes in market interest rates. Since the losses can be primarily attributed to changes in market interest rates and not expected cash flows or an issuer’s financial condition, the unrealized losses are deemed to be temporary. The Company’s holdings of corporate securities and equity securities represent investments in larger financial institutions. The current economic crisis involving housing, liquidity and credit were the primary causes of the unrealized losses on these securities at December 31, 2010 and September 30, 2011. 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. In addition, recent economic uncertainty and market events have led to unprecedented volatility in currency, commodity, credit and equity markets culminating in failures of some banking and financial services firms and government intervention to solidify others. These recent events underscore the level of investment risk associated with the current economic environment, and accordingly the level of risk in the Company’s securities.

Securities having a carrying value of $17,581,000 at September 30, 2011 were pledged to secure securities sold under agreements to repurchase and other purposes required by law.

8

The composition of restricted investments at September 30, 2011 and December 31, 2010 was as follows:

	September 30, 2011		December 31, 2010
	(in thousands)
Federal Reserve Bank Stock	$	344	$	344
Federal Home Loan Bank Stock		3,219		3,498
Community Bankers’ Bank Stock		140		140
	$	3,703	$	3,982

NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the nine months ended September 30, 2011 and 2010 and the year ended December 31, 2010 were as follows:

	Nine Months Ended September 30, 2011			Year Ended December 31, 2010			Nine Months Ended September 30, 2010
	(in thousands)
Balance, beginning	$	7,111		$	5,970		$	5,970
Provision charged to operating expense		2,850			6,325			4,150
Recoveries added to the allowance		568			291			143
Loan losses charged to the allowance		(2,638	)		(5,475	)		(2,430	)
Balance, ending	$	7,891		$	7,111		$	7,833

9

Nonaccrual and past due loans by class at September 30, 2011 and December 31, 2010 were as follows:

	As of September 30, 2011 (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	$	50	$	197	$	—	$	247	$	24,644	$	24,891	$	—	$	128
Commercial Real Estate:
Owner Occupied		467		—		297		764		82,025		82,789		—		455
Non-owner occupied		245		—		244		489		32,382		32,871		—		245
Construction and Farmland:
Residential		—		315		—		315		8,949		9,264		—		—
Commercial		464		—		—		464		22,992		23,456		—		—
Consumer:
Installment		136		41		2		179		13,291		13,470		2		—
Residential:
Equity Lines		225		—		—		225		33,281		33,506		—		180
Single family		4,742		2,245		910		7,897		169,746		177,643		163		1,627
Multifamily		—		—		—		—		4,524		4,524		—		—
All Other Loans		7		—		—		7		4,119		4,126		—		—
Total	$	6,336	$	2,798	$	1,453	$	10,587	$	395,953	$	406,540	$	165	$	2,635

	As of December 31, 2010 (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	$	91	$	129	$	7	$	227	$	24,222	$	24,449	$	7	$	267
Commercial Real Estate:
Owner Occupied		1,100		938		177		2,215		81,176		83,391		—		1,071
Non-owner occupied		248		—		294		542		32,448		32,990		—		—
Construction and Farmland:
Residential		63		70		1,122		1,255		9,042		10,297		—		3,808
Commercial		1,222		—		911		2,133		23,462		25,595		—		—
Consumer:
Installment		181		72		3		256		14,262		14,518		3		—
Residential:
Equity Lines		781		60		—		841		41,848		42,689		—		190
Single family		1,814		490		502		2,806		162,176		164,982		—		3,041
Multifamily		—		—		—		—		4,908		4,908		—		—
All Other Loans		—		696		—		696		3,934		4,630		—		—
Total	$	5,500	$	2,455	$	3,016	$	10,971	$	397,478	$	408,449	$	10	$	8,377

10

Allowance for loan losses by segment at September 30, 2011 and December 31, 2010 were as follows:

	As of and for the Nine Months Ended September 30, 2011
	(in thousands)
	Construction		Residential		Commercial						All
	and Farmland		Real Estate		Real Estate		Commercial		Consumer		Other Loans		Unallocated		Total
Allowance for credit losses:
Beginning Balance	$	1,386	$	3,457	$	1,231	$	819	$	182	$	36	$	—	$	7,111
Charge-Offs		710		1,053		24		572		236		43		—		2,638
Recoveries		4		295		—		125		128		16		—		568
Provision		1,202		522		42		1,009		65		10		—		2,850
Ending balance	$	1,882	$	3,221	$	1,249	$	1,381	$	139	$	19	$	—	$	7,891
Ending balance: Individually evaluated for impairment	$	1,078	$	1,739	$	333	$	573	$	—	$	—	$	—	$	3,723
Ending balance: collectively evaluated for impairment	$	804	$	1,482	$	916	$	808	$	139	$	19	$	—	$	4,168
Financing receivables:
Ending balance	$	32,720	$	215,673	$	115,660	$	24,891	$	13,470	$	4,126	$	—	$	406,540
Ending balance individually evaluated for impairment	$	3,186	$	8,125	$	4,593	$	634	$	—	$	—	$	—	$	16,538
Ending balance collectively evaluated for impairment	$	29,534	$	207,548	$	111,067	$	24,257	$	13,470	$	4,126	$	—	$	390,002

	As of December 31, 2010
	(in thousands)
	Construction		Residential		Commercial						All
	and Farmland		Real Estate		Real Estate		Commercial		Consumer		Other Loans		Unallocated		Total
Allowance for credit losses:
Ending balance	$	1,386	$	3,457	$	1,231	$	819	$	182	$	36	$	—	$	7,111
Ending balance: Individually evaluated for impairment	$	622	$	1,623	$	273	$	139	$	—	$	—	$	—	$	2,657
Ending balance: collectively evaluated for impairment	$	764	$	1,834	$	958	$	680	$	182	$	36	$	—	$	4,454
Financing receivables:
Ending balance	$	35,892	$	212,579	$	116,381	$	24,449	$	14,518	$	4,630	$	—	$	408,449
Ending balance individually evaluated for impairment	$	3,549	$	11,172	$	5,141	$	319	$	—	$	—	$	—	$	20,181
Ending balance collectively evaluated for impairment	$	32,343	$	201,407	$	111,240	$	24,130	$	14,518	$	4,630	$	—	$	388,268

11

Impaired loans by class at September 30, 2011 and December 31, 2010 were as follows:

	As of September 30, 2011
	(in thousands)
	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied		1,935		1,928		—		1,940		93
Non-owner occupied		1,555		1,550		—		1,562		41
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		—		—		—		—		—
Residential
Equity lines		—		—		—		—		—
Single family		2,525		2,520		—		2,570		78
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	6,015	$	5,998	$	—	$	6,072	$	212
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	647	$	634	$	573	$	640	$	20
Commercial Real Estate:
Owner Occupied		332		297		111		334		—
Non-owner occupied		820		818		222		826		42
Construction and Farmland:
Residential		1,628		1,622		444		1,632		48
Commercial		1,581		1,564		634		1,581		62
Residential
Equity lines		404		402		330		404		10
Single family		4,489		4,717		1,409		5,028		135
Multifamily		—		—		—		—		—
Other Loans		—		—		—		—		—
	$	9,901	$	10,054	$	3,723	$	10,445	$	317
Total:
Commercial	$	647	$	634	$	573	$	640	$	20
Commercial Real Estate		4,642		4,593		333		4,662		176
Construction and Farmland		3,209		3,186		1,078		3,213		110
Residential		7,418		7,639		1,739		8,002		223
Other		—		—		—		—		—
Total	$	15,916	$	16,052	$	3,723	$	16,517	$	529

The average recorded investment of impaired loans for the three month period ended September 30, 2011 was $16,475,000. The interest income recognized on impaired loans for the three months ended September 30, 2011 was $58,500.

12

	As of December 31, 2010
	(in thousands)
	Unpaid						Average		Interest
	Principal		Recorded		Related		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Owner Occupied		2,143		2,151		—		2,164		131
Non-owner occupied		2,144		2,153		—		2,153		34
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		2,447		2,447		—		2,451		70
Residential
Equity lines		685		689		—		690		33
Single family		4,432		4,450		—		4,736		90
Multifamily		—		—		—		—		—
	$	11,851	$	11,890	$	—	$	12,194	$	358
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial	$	319	$	319	$	139	$	695	$	29
Commercial Real Estate:
Owner Occupied		306		306		122		406		—
Non-owner occupied		548		549		151		202		23
Construction and Farmland:
Residential		—		—		—		—		—
Commercial		1,102		1,102		622		1,259		68
Residential
Equity lines		—		—		—		—		—
Single family		6,055		6,093		1,623		3,653		319
Multifamily		—		—		—		—		—
	$	8,330	$	8,369	$	2,657	$	6,215	$	439
Total:
Commercial	$	319	$	319	$	139	$	695	$	29
Commercial Real Estate		5,141		5,159		273		4,925		188
Construction and Farmland		3,549		3,549		622		3,710		138
Residential		11,172		11,232		1,623		9,079		442
	$	20,181	$	20,259	$	2,657	$	18,409	$	797

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

There were twenty-three (23) troubled debt restructured loans totaling $10,069,000 at September 30, 2011. At December 31, 2010 there were thirty-one (31) troubled debt restructured loans totaling $8,469,000. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at September 30, 2011.

13

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows:

Pass	Pass loans exhibit acceptable operating trends, balance sheet trends, and liquidity. Sufficient cash flow exists to service the loan. All obligations have been paid by the borrower in an as agreed manner.
Watch	Watch loans exhibit income volatility, negative operating trends, and a highly leveraged balance sheet. A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower’s ability to repay the loan.
Special mention	Special mention loans exhibit a potential weakness, if left uncorrected, may negatively affect the borrower’s ability to repay its debt obligation. The risk of default is not imminent and the borrower still demonstrates sufficient cash flow to support the loan.
Substandard	Substandard loans exhibit well defined weaknesses and have a potential of default. The borrowers exhibit adverse financial trends but still have the ability to service debt obligations.
Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans but the weaknesses make collection or full liquidation highly questionable.
Loss	Loss loans are considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at September 30, 2011 and December 31, 2010 was as follows:

	As of September 30, 2011
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	19,967	$	587	$	1,946	$	2,231	$	160	$	—	$	24,891
Commercial Real Estate:
Owner Occupied		63,122		7,298		6,797		5,275		297		—		82,789
Non-owner occupied		21,260		4,354		2,636		4,377		244		—		32,871
Construction and Farmland:
Residential		7,428		94		306		899		—		—		8,727
Commercial		16,125		1,825		3,960		2,083		—		—		23,993
Consumer:
Installment		—		5		25		16		7		—		53
Residential:
Equity Lines		39,392		378		209		826		149		—		40,954
Single family		144,463		3,115		8,854		10,176		3,550		—		170,158
Multifamily		2,006		1,581		937		—		—		—		4,524
All other loans		3,470		—		693		—		—		—		4,163
Total	$	317,233	$	19,237	$	26,363	$	25,883	$	4,407	$	—	$	393,123

	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	13,417	$	—

14

	As of December 31, 2010
	(in thousands)
INTERNAL RISK RATING GRADES	Pass		Watch		Special Mention		Substandard		Doubtful		Loss		Total
Commercial - Non Real Estate:
Commercial & Industrial	$	19,990	$	845	$	1,535	$	1,812	$	267	$	—	$	24,449
Commercial Real Estate:														—
Owner Occupied		65,983		5,686		8,823		2,899		—		—		83,391
Non-owner occupied		25,569		3,322		3,113		986		—		—		32,990
Construction and Farmland:														—
Residential		7,875		1,556		—		—		—		—		9,431
Commercial		17,492		790		2,378		2,672		3,129		—		26,461
Consumer:
Installment		—		23		—		10		—		—		33
Residential:														—
Equity Lines		41,430		182		67		860		150		—		42,689
Single family		147,445		3,674		2,229		9,132		2,502		—		164,982
Multifamily		3,272		1,636		—		—		—		—		4,908
All other loans		4,581		49		—		—		—		—		4,630
Total	$	333,637	$	17,763	$	18,145	$	18,371	$	6,048	$	—	$	393,964

	Performing		Nonperforming
Consumer Credit Exposure by Payment Activity	$	14,237	$	248

NOTE 6. Troubled Debt Restructurings

All loans deemed a troubled debt restructuring, or “TDR”, are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):

• The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk.

• The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.

• The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

• The borrower receives a deferral of required payments (principal and/or interest).

• The borrower receives a reduction of the accrued interest.

15

The following tables set forth information on the Company’s troubled debt restructurings by class of financing receivable occurring during the stated periods:

	Three Months Ended September 30, 2011
	(in thousands)
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded		Impairment
	Contracts		Investment		Investment		Accrued
Residential
Single family		1	$	72	$	74	$	19
Total		1	$	72	$	74	$	19
	Nine Months Ended September 30, 2011
	(in thousands)
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded		Impairment
	Contracts		Investment		Investment		Accrued
Commercial Real Estate:
Non-owner occupied		1	$	890	$	890	$	—
Construction and Farmland:
Residential		1		1,530		1,530		389
Residential
Single family		6		2,713		2,767		504
Total		8	$	5,133	$	5,187	$	893

During the three months ended September 30, 2011, the Company restructured one loan by granting concessions to a borrower experiencing financial difficulties. A residential loan was modified by granting an interest rate reduction. During the nine months ended September 30, 2011, the Company restructured eight loans by granting concessions to borrowers experiencing financial difficulties. Two commercial real estate loans were combined into the one restructured commercial real estate loan reflected in the table above. Monthly payments on this loan were converted from principal and interest to interest only. The residential construction loan was modified by granting a reduction in the required monthly payment. Six single family residential loans were modified during the nine months ended September 30, 2011. Three of the loans were modified by granting interest rate reductions, another two had payment requirements modified from principal and interest to interest only while the remaining loan was modified by granting a reduction in the required monthly payment.

16

Loans by class of financing receivable modified as TDRs within the previous 12 months and for which there was a payment default during the stated periods were:

	Three Months Ended September 30, 2011
	(in thousands)
	Number of		Recorded
	Contracts		Investment
Residential
Single family		3	$	983
Total		3	$	983
	Nine Months Ended September 30, 2011
	(in thousands)
	Number of		Recorded
	Contracts		Investment
Commercial Real Estate:
Owner occupied		2	$	613
Residential
Single family		5		1,904
Total		7	$	2,517

A loan is considered to be in payment default once it is thirty days contractually past due under the modified terms.

NOTE 7. Deposits

The composition of deposits at September 30, 2011 and December 31, 2010 was as follows:

	September 30, 2011		December 31, 2010
	(in thousands)
Noninterest bearing demand deposits	$	104,153	$	98,256
Savings and interest bearing demand deposits:
NOW accounts	$	69,660	$	72,413
Money market accounts		77,446		69,766
Regular savings accounts		46,929		42,369
	$	194,035	$	184,548
Time deposits:
Balances of less than $100,000	$	87,843	$	85,269
Balances of $100,000 and more		63,976		61,223
	$	151,819	$	146,492
	$	450,007	$	429,296

17

NOTE 8. Pension and Postretirement Benefit Plans

The Company has a funded noncontributory defined benefit pension plan that covers substantially all of its employees. The plan provides defined benefits based on years of service and final average salary. Effective December 31, 2006, the pension plan was amended so that no further benefits will accrue under the plan and no additional employees may become participants. In September 2010, the board of directors voted to terminate the pension plan effective September 30, 2010. Pending regulatory, approval, a payout is expected to occur in the fourth quarter of 2011. Defined benefit pension plan expenses are projected to be approximately $581,000 in 2011 and nothing going forward.

The Company provides certain health care and life insurance benefits for nine retired employees who have met certain eligibility requirements. All other employees retiring after reaching age 65 and having at least 15 years of service with the Company will be allowed to stay on the Company’s group life and health insurance policies, but will be required to pay premiums. The Company’s share of the estimated costs that will be paid after retirement is generally being accrued by charges to expense over the employees’ active service periods to the dates they are fully eligible for benefits, except that the Company’s unfunded cost that existed at January 1, 1993 is being accrued primarily in a straight-line manner that will result in its full accrual by December 31, 2013.

Generally Accepted Accounting Principles (“GAAP”) requires the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its pension and postretirement benefit plans in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of taxes.

The following tables provide the components of net periodic benefit cost of the pension plan and postretirement benefit plan for the three and nine months ended September 30, 2011 and 2010:

	Pension Benefits						Postretirement Benefits
	Three Months Ended September 30,						Three Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Components of Net Periodic Benefit Cost:
Service cost	$	—		$	—		$	—		$	—
Interest cost		49			47			1			2
Expected return on plan assets		(40	)		(37	)		—			—
Amortization of prior service costs		—			—			—			—
Amortization of transition obligation		—			—			—			—
Recognized net actuarial loss (gain)		16			59			(2	)		(2	)
Net periodic benefit cost	$	25		$	69		$	(1	)	$	—
	Pension Benefits						Postretirement Benefits
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
	(in thousands)
Components of Net Periodic Benefit Cost:
Service cost	$	—		$	—		$	—		$	—
Interest cost		147			141			3			6
Expected return on plan assets		(120	)		(111	)		—			—
Amortization of prior service costs		—			—			—			—
Amortization of transition obligation		—			—			—			—
Recognized net actuarial loss (gain)		48			177			(6	)		(6	)
Net periodic benefit cost	$	75		$	207		$	(3	)	$	—

18

The pension financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

•	Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•	Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table presents balances of pension assets measured at fair value on September 30, 2011 and December 31, 2010:

			Fair Value Measurements at September 30, 2011 Using
	Balance as of September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Cash Equivalents	$	3,278	$	3,278	$	—	$	—
Total assets at fair value	$	3,278	$	3,278	$	—	$	—
			Fair Value Measurements at December 31, 2010 Using
	Balance as of December 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Cash	$	1	$	1	$	—	$	—
Cash Equivalents		1,406		1,406
AA corporate bonds		131		—		131		—
Mutual funds (a)		1,714		1,714		—		—
Total assets at fair value	$	3,252	$	3,121	$	131	$	—

(a) 100% of mutual funds are invested in fixed income corporate bond securities.

NOTE 9. Trust Preferred Capital Notes

In September 2007, Eagle Financial Statutory Trust II (the “Trust II”), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On September 20, 2007, Trust II issued $7,000,000 of trust preferred securities and $217,000 in common equity. The principal asset of Trust II is $7,217,000 of the Company’s junior subordinated debt securities with the same maturity and interest rate structures as the capital securities. The securities have a LIBOR-indexed floating rate of interest and the interest rate at September 30, 2011 was 1.95%. The securities have a mandatory redemption date of September 1, 2037, and are subject to varying call provisions beginning September 1, 2012.

19

The trust preferred securities are included in Tier 1 capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier 1 capital, including total trust preferred securities. The portion of the trust preferred securities not considered as Tier 1 capital, if any, may be included in Tier 2 capital. At September 30, 2011, the total amount ($7,000,000) of trust preferred securities issued by Trust II is included in the Company’s Tier 1 capital.

The obligations of the Company with respect to the issuance of the capital securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the capital securities.

Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital securities.

NOTE 10. Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

“Fair Value Measurements” defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•	Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•	Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Interest Rate Swap: The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data, and therefore, are classified within Level 2 of the valuation hierarchy.

20

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010:

			Fair Value Measurements at September 30, 2011 Using
	Balance as of September 30,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2011		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	25,635	$	—	$	25,635	$	—
Mortgage-backed securities		33,923		—		33,923		—
Obligations of states and political subdivisions		45,173		—		45,173		—
Corporate securities		13,066		—		13,066		—
Equity securities:
Bank preferred stock		2,199		2,199		—		—
Total assets at fair value	$	119,996	$	2,199	$	117,797	$	—
Liabilities:
Interest rate swap		577		—		577		—
Total liabilities at fair value	$	577	$	—	$	577	$	—
			Fair Value Measurements at December 31, 2010 Using
	Balance as of December 31,		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	2010		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government corporations and agencies	$	33,150	$	—	$	33,150	$	—
Mortgage-backed securities		16,157		—		16,157		—
Obligations of states and political subdivisions		42,908		—		42,908		—
Corporate securities		15,401				15,401
Equity securities:
Bank preferred stock		2,178		2,178		—		—
Total assets at fair value	$	109,794	$	2,178	$	107,616	$	—
Liabilities:
Interest rate swap		169		—		169		—
Total liabilities at fair value	$	169	$	—	$	169	$	—

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Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. Level 2 impaired loan value is determined by utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Level 3 impaired loan values are determined using inventory and accounts receivables collateral and are based on financial statement balances or aging reports. If the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old or has been discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business, then the fair value is considered Level 3. Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lesser of the fair value of the property, less estimated selling costs or the loan balance outstanding at the date of foreclosure. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Any subsequent valuation adjustments are applied to earnings in the consolidated statements of income. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of GAAP.

The following table summarizes the Company’s financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at September 30, 2011 and December 31, 2010:

	Balance as of September 30, 2011		Carrying value at September 30, 2011
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
			(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	12,329	$	—	$	—	$	12,329
Nonfinancial Assets:
Other real estate owned		3,437		—		—		3,437
			Carrying value at December 31, 2010
	Balance as of December 31, 2010		Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$	17,524	$	—	$	—	$	17,524
Nonfinancial Assets:
Other real estate owned		1,783		—		—		1,783

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GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments:

Cash and short-term investments/accrued interest: The fair value was equal to the carrying amount.

Securities: The fair value, excluding restricted securities, was based on quoted market prices. The fair value of restricted securities approximated the carrying amount based on the redemption provisions of the issuers.

Loans: The fair value of variable rate loans, which reprice frequently and with no significant change in credit risk, was equal to the carrying amount. The fair value of all other loans was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products.

Deposits and borrowings: The fair value of demand deposits, savings accounts, and certain money market deposits was equal to the carrying amount. The fair value of all other deposits and borrowings was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products.

Off-balance-sheet financial instruments: The fair value of commitments to extend credit was estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the counterparties. The fair value of fixed rate loan commitments also considered the difference between current interest rates and the committed interest rates. The fair value of standby letters of credit was estimated using the fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties.

The carrying amount and fair value of the Company’s financial instruments at September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(in thousands)				(in thousands)
Financial assets:
Cash and short-term investments	$	18,839	$	18,839	$	13,970	$	13,970
Securities		123,699		123,699		109,794		109,794
Loans, net		398,649		416,788		401,338		416,669
Accrued interest receivable		2,136		2,136		2,179		2,179
Financial liabilities:
Deposits	$	450,007	$	451,852	$	429,296	$	430,627
Federal funds purchased and securities sold under agreements to repurchase		10,000		10,421		14,395		14,950
Federal Home Loan Bank advances		42,250		45,060		52,250		54,853
Trust preferred capital notes		7,217		7,217		7,217		7,217
Accrued interest payable		403		403		417		417
Interest rate swap contract		577		577		169		169

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment. Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

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NOTE 11. Derivative Instruments and Hedging Activities

Interest Rate Swaps

The Company uses interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converts floating rate debt into fixed rate debt, or alternatively, converts fixed rate debt into floating rate debt. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest expense. These interest rate swap agreements are derivative instruments that qualify for hedge accounting as discussed in Note 1. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.

On December 4, 2008, the Company entered into an interest rate swap agreement related to the outstanding trust preferred capital notes. The swap agreement became effective on December 1, 2008. The notional amount of the interest rate swap was $7,000,000 and has an expiration date of December 1, 2016. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 2.85% and receives interest quarterly at a variable rate of three month LIBOR. The variable rate resets on each interest payment date.

The following table summarizes the fair value of derivative instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
	Balance Sheet	Fair		Balance Sheet	Fair
	Location	Value		Location	Value
	(dollars in thousands)
Derivatives designated as hedging instruments under GAAP
Interest rate swap contracts	Other Liabilities	$	577	Other Liabilities	$	169

The following tables present the effect of the derivative instrument on the Consolidated Balance Sheet at September 30, 2011 and 2010 and the Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,
Derivatives in GAAP Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income (Ineffective Portion)
	2011			2010			(Ineffective Portion)	2011		2010
	(dollars in thousands)							(dollars in thousands)
Interest rate swap contracts, net of tax	$	(195	)	$	(161	)	Not applicable	$	—	$	—
	Nine Months Ended September 30,
Derivatives in GAAP Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income (Ineffective Portion)
	2011			2010			(Ineffective Portion)	2011		2010
	(dollars in thousands)							(dollars in thousands)
Interest rate swap contracts, net of tax	$	(270	)	$	(457	)	Not applicable	$	—	$	—

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NOTE 12. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s (consolidated) financial statements.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures were required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its (consolidated) financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s (consolidated) financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s (consolidated) financial statements.

The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company complied with this Rule beginning with the filing of the June 30, 2011 Form 10-Q.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s (consolidated) financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in its (consolidated) financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its (consolidated) financial statements.

25

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its (consolidated) financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its (consolidated) financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on the Company’s (consolidated) financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 will have on its (consolidated) financial statements.

NOTE 13. Subsequent Events

The Company has evaluated events and transactions subsequent to September 30, 2011 through the date these financial statements were issued. Based on definitions and requirements of Generally Accepted Accounting Principles for “Subsequent Events”, the Company has not identified any events that would require adjustments to, or disclosure in the financial statements.

26

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this discussion is to focus on the important factors affecting the Company’s financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes to the Consolidated Financial Statements presented in Part I, Item 1, Financial Statements, of this Form 10-Q and Item 8, Financial Statements and Supplementary Data, of the 2010 Form 10-K.

GENERAL

Eagle Financial Services, Inc. is a bank holding company which owns 100% of the stock of Bank of Clarke County (the “Bank”), collectively (the “Company”). Accordingly, the results of operations for the Company are dependent upon the operations of the Bank. The Bank conducts commercial banking business which consists of attracting deposits from the general public and investing those funds in commercial, consumer and real estate loans and corporate, municipal and U.S. government agency securities. The Bank’s deposits are insured by the Federal Deposit Insurance Corporation to the extent permitted by law. At September 30, 2011, the Company had total assets of $571,336,000, net loans of $398,649,000, total deposits of $450,007,000, and shareholders’ equity of $57,923,000. The Company’s net income was $3,629,000 for the nine months ended September 30, 2011.

MANAGEMENT’S STRATEGY

The Company strives to be an outstanding financial institution in its market by building solid sustainable relationships with: (1) its customers, by providing highly personalized customer service, a network of conveniently placed branches and ATMs, a competitive variety of products/services and courteous, professional employees, (2) its employees, by providing generous benefits, a positive work environment, advancement opportunities and incentives to exceed expectations, (3) its communities, by participating in local concerns, providing monetary support, supporting employee volunteerism and providing employment opportunities, and (4) its shareholders, by providing sound profits and returns, sustainable growth, regular dividends and committing to its local, independent status.

OPERATING STRATEGY

The Bank is a locally owned and managed financial institution. This allows the Bank to be flexible and responsive in the products and services it offers. The Bank grows primarily by lending funds to local residents and businesses at a competitive price that reflects the inherent risk of lending. The Bank attempts to fund these loans through deposits gathered from local residents and businesses. The Bank prices its deposits by comparing alternative sources of funds and selecting the lowest cost available. When deposits are not adequate to fund asset growth, the Bank relies on borrowings, both short and long term. The Bank’s primary source of borrowed funds is the Federal Home Loan Bank of Atlanta which offers numerous terms and rate structures to the Bank.

As interest rates change, the Bank attempts to maintain its net interest margin. This is accomplished by changing the price, terms, and mix of its financial assets and liabilities. The Bank also earns fees on services provided through its trust department, sales of investments through Eagle Investment Services, mortgage originations and deposit operations. The Bank also incurs noninterest expenses such as compensating employees, maintaining and acquiring fixed assets, and purchasing goods and services necessary to support its daily operations.

The Bank has a marketing department which seeks to develop new business. This is accomplished through an ongoing calling program whereby account officers visit with existing and potential customers to discuss the products and services offered. The Bank also utilizes traditional advertising such as television commercials, radio ads, newspaper ads, and billboards.

LENDING POLICIES

Administration and supervision over the lending process is provided by the Bank’s Credit Administration Department. The principal risk associated with the Bank’s loan portfolio is the creditworthiness of its borrowers. In an effort to manage this risk, the Bank’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. Credit risk is increased or decreased, depending on the type of loan and prevailing economic conditions. In consideration of the different types of loans in the portfolio, the risk associated with real estate mortgage loans, commercial loans and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay debt.

The Company has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular portfolio reviews to establish loss exposure and to ascertain compliance with the Company’s policies.

The Bank uses a tiered approach to approve credit requests consisting of individual lending authorities, a senior management loan committee, and a director loan committee. Lending limits for individuals and the Senior Loan Committee are set by the Board of Directors and are determined by loan purpose, collateral type, and internal risk rating of the borrower. The highest individual authority (Category I) is assigned to the Bank’s President / Chief Executive Officer, Senior Loan Officer and Senior Credit Officer (approval authority only). Two officers in Category I may combine their authority to approve loan requests to borrowers with credit exposure up to $1,000,000 on a secured basis and $500,000 unsecured. Officers in Category II, III, IV, V, VI and VII have lesser authorities and with approval of a Category I officer may extend loans to borrowers with exposure of $500,000 on a secured basis and $250,000 unsecured. Loan exposures up to $1,000,000 may be approved with the concurrence of two, Category I officers. Loans to borrowers with total credit exposures between $1,000,000 and $3,000,000 are approved by the Senior Loan Committee consisting of the President, Chief Operating Officer, Senior Loan

27

Officer, Senior Credit Officer, and Chief Financial Officer. Approval of the Senior Loan Committee is required prior to being referred to the Director Loan Committee for approval. Loans exceeding $3,000,000 and up to the Bank’s legal lending limit can be approved by the Director Loan Committee consisting of four directors (three directors constituting a forum). The Director’s Loan Committee also reviews and approves changes to the Bank’s Loan Policy as presented by management.

The following sections discuss the major loan categories within the total loan portfolio:

One-to-Four-Family Residential Real Estate Lending

Residential lending activity may be generated by the Bank’s loan officer solicitations, referrals by real estate professionals, and existing or new bank customers. Loan applications are taken by a Bank loan officer. As part of the application process, information is gathered concerning income, employment and credit history of the applicant. The valuation of residential collateral is provided by independent fee appraisers who have been approved by the Bank’s Directors Loan Committee. In connection with residential real estate loans, the Bank requires title insurance, hazard insurance and, if applicable, flood insurance. In addition to traditional residential mortgage loans secured by a first or junior lien on the property, the Bank offers home equity lines of credit.

Commercial Real Estate Lending

Commercial real estate loans are secured by various types of commercial real estate in the Bank’s market area, including multi-family residential buildings, commercial buildings and offices, small shopping centers and churches. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from customers. In its underwriting of commercial real estate, the Bank’s loan to original appraised value ratio is generally 80% or less. Commercial real estate lending entails significant additional risk as compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the repayment of loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or the economy, in general. The Bank’s commercial real estate loan underwriting criteria require an examination of debt service coverage ratios, the borrower’s creditworthiness, prior credit history and reputation, and the Bank typically requires personal guarantees or endorsements of the borrowers’ principal owners.

Construction and Land Development Lending

The Bank makes local construction loans, primarily residential, and land acquisition and development loans. The construction loans are secured by residential houses under construction and the underlying land for which the loan was obtained. The average life of most construction loans is less than one year and the Bank offers both fixed and variable rate interest structures. The interest rate structure offered to customers depends on the total amount of these loans outstanding and the impact of the interest rate structure on the Bank’s overall interest rate risk. There are two characteristics of construction lending which impact its overall risk as compared to residential mortgage lending. First, there is more concentration risk due to the extension of a large loan balance through several lines of credit to a single developer or contractor. Second, there is more collateral risk due to the fact that loan funds are provided to the borrower based upon the estimated value of the collateral after completion. This could cause an inaccurate estimate of the amount needed to complete construction or an excessive loan-to-value ratio. To mitigate the risks associated with construction lending, the Bank generally limits loan amounts to 80% of the estimated appraised value of the finished home. The Bank also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners. Finally, the Bank performs inspections of the construction projects to ensure that the percentage of construction completed correlates with the amount of draws on the construction line of credit.

Commercial and Industrial Lending

Commercial business loans generally have more risk than residential mortgage loans, but have higher yields. To manage these risks, the Bank generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate.

Consumer Lending

The Bank offers various secured and unsecured consumer loans, which include personal installment loans, personal lines of credit, automobile loans, and credit card loans. The Bank originates its consumer loans within its geographic market area and these loans are generally made to customers with whom the Bank has an existing relationship. Consumer loans generally entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral on a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

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The underwriting standards employed by the Bank for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and from any verifiable secondary income. Although creditworthiness of the applicant is the primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.

CRITICAL ACCOUNTING POLICIES

The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within these statements is, to a significant extent, based on measurements of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss factors as one element in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from the historical factors that are used. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of the transactions would be the same, the timing of events that would impact the transactions could change.

The allowance for loan losses is an estimate of the losses that may be sustained in the Company’s loan portfolio. As required by GAAP, the allowance for loan losses is accrued when their occurrence is probable and they can be estimated and that the losses be accrued based on the differences between the loan balance and the value of its collateral, the present value of future cash flows, or the price established in the secondary market. The Company’s allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when actual events occur. The formula allowance uses historical experience factors to estimate future losses and, as a result, the estimated amount of losses can differ significantly from the actual amount of losses which would be incurred in the future. However, the potential for significant differences is mitigated by continuously updating the loss history of the Company. The specific allowance is based upon the evaluation of specific loans on which a loss may be realized. Factors such as past due history, ability to pay, and collateral value are used to identify those loans on which a loss may be realized. Each of these loans is then classified as to how much loss would be realized on its disposition. The sum of the losses on the individual loans becomes the Company’s specific allowance. This process is inherently subjective and actual losses may be greater than or less than the estimated specific allowance. The unallocated allowance captures losses that are attributable to various economic events which may affect a certain loan type within the loan portfolio or a certain industrial or geographic sector within the Company’s market. As the loans, which are affected by these events, are identified or losses are experienced on the loans which are affected by these events, they will be reflected within the specific or formula allowances. Note 1 to the Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, of the 2010 Form 10-K, provides additional information related to the allowance for loan losses.

FORWARD LOOKING STATEMENTS

The Company makes forward looking statements in this report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

• the ability to successfully manage growth or implement growth strategies if the Bank is unable to identify attractive markets, locations or opportunities to expand in the future;

• competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

• the successful management of interest rate risk;

• risks inherent in making loans such as repayment risks and fluctuating collateral values;

• changes in general economic and business conditions in the market area;

• reliance on the management team, including the ability to attract and retain key personnel;

• changes in interest rates and interest rate policies;

• maintaining capital levels adequate to support growth;

• maintaining cost controls and asset qualities as new branches are opened or acquired;

• demand, development and acceptance of new products and services;

• problems with technology utilized by the Bank;

• changing trends in customer profiles and behavior;

• changes in banking and other laws and regulations; and

• other factors described in Item 1A., “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.

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RESULTS OF OPERATIONS

Net Income

Net income for the first nine months of 2011 was $3,629,000, an increase of $485,000 or 15.43% as compared to net income for the first nine months of 2010 of $3,144,000. Earnings per share, basic was $1.10 and $0.98 the first nine months of 2011 and 2010, respectively. Earnings per share, diluted was $1.10 and $0.97 the first nine months of 2011 and 2010, respectively. Net income for the third quarter of 2011 was $1,139,000, an increase of $1,058,000 when compared to net income for the third quarter of 2010 of $81,000. Earnings per share, basic was $0.34 and $0.03 for the third quarter of 2011 and 2010, respectively. Earnings per share, diluted was $0.34 and $0.02 for the third quarter of 2011 and 2010, respectively.

Return on average assets (ROA) measures how efficiently the Company uses its assets to produce net income. Some issues reflected within this efficiency include the Company’s asset mix, funding sources, pricing, fee generation, and cost control. The ROA of the Company, on an annualized basis, for the first nine months of 2011 and 2010 was 0.85% and 0.76%, respectively.

Return on average equity (ROE) measures the utilization of shareholders’ equity in generating net income. This measurement is affected by the same factors as ROA with consideration to how much of the Company’s assets are funded by shareholders. The ROE of the Company, on an annualized basis, for the first nine months of 2011 and 2010 was 8.75% and 7.85%, respectively.

Net Interest Income

Net interest income is our primary source of revenue, representing the difference between interest and fees earned on interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates. Net interest income was $16,910,000 and $16,535,000 for the first nine months of 2011 and 2010, respectively, which represents an increase of $375,000 or 2.27%. Net interest income was $5,732,000 and $5,571,000 for the third quarter of 2011 and 2010, respectively, which represents an increase of $161,000 or 2.89%. The amount of net interest income is derived from the volume of earning assets and the rates earned on those assets as compared to the cost of funds. Average interest earning assets increased $12,511,000 from the quarter ended September 30, 2010 to the quarter ended September 30, 2011 while the average yield decreased 13 basis points over that same period. Total interest income was $20,623,000 and $20,728,000 for the first nine months of 2011 and 2010, respectively, which represents a decrease of $105,000 or 0.51%. Total interest income was $6,920,000 and $6,950,000 for the third quarter of 2011 and 2010, respectively, which represents a decrease of $30,000 or 0.43%. Total interest expense was $3,713,000 and $4,193,000 for the first nine months of 2011 and 2010, respectively, which represents a decrease of $480,000 or 11.45%. Total interest expense was $1,188,000 and $1,379,000 for the third quarter of 2011 and 2010, respectively, which represents a decrease of $191,000 or 13.85%. Average interest bearing liabilities increased $4,364,000 from the quarter ended September 30, 2010 to the quarter ended September 30, 2011 while the interest bearing liabilities rate decreased 20 basis points over the same period.

The net interest margin was 4.33% and 4.37% for the first nine months of 2011 and 2010, respectively. The net interest margin was 4.34% and 4.31% for the third quarter of 2011 and 2010, respectively. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earnings assets. Tax-equivalent net interest income is calculated by adding the tax benefit on certain securities and loans, whose interest is tax-exempt, to total interest income then subtracting total interest expense. The tax rate used to calculate the tax benefit was 34% for 2011 and 2010. The following table reconciles tax-equivalent net interest income, which is not a measurement under accounting principles generally accepted in the United States of America (GAAP), to net interest income.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
	(in thousands)				(in thousands)
GAAP Financial Measurements:
Interest Income - Loans	$	5,750		5,875	$	17,192	$	17,555
Interest Income - Securities and Other Interest-Earnings Assets		1,170		1,075		3,431		3,173
Interest Expense - Deposits		595		741		1,890		2,290
Interest Expense - Other Borrowings		593		638		1,823		1,903
Total Net Interest Income	$	5,732	$	5,571	$	16,910	$	16,535
Non-GAAP Financial Measurements:
Add: Tax Benefit on Tax-Exempt Interest Income - Loans	$	25	$	33	$	79	$	102
Add: Tax Benefit on Tax-Exempt Interest Income - Securities		189		165		530		501
Total Tax Benefit on Tax-Exempt Interest Income	$	214	$	198	$	609	$	603
Tax-Equivalent Net Interest Income	$	5,946	$	5,769	$	17,519	$	17,138

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The tax-equivalent yield on earning assets decreased 20 basis points from 5.44% for the first nine months of 2010 to 5.24% for the same period in 2011. During that same time, the tax-equivalent yield on securities decreased 19 basis points from 4.68% to 4.49%. The tax equivalent yield on loans decreased ten basis points from 5.81% for the first nine months of 2010 to 5.71% for the same time period in 2011. The average rate on interest bearing liabilities decreased 18 basis points from 1.39% for the first nine months of 2010 to 1.21% for the same time period in 2011. The average rate on interest bearing deposits decreased 21 basis points from 0.95% to 0.74% during that same time. The Company’s management of interest rates on deposits contributed to the decrease in costs. In general, deposit pricing is done in response to monetary policy actions and yield curve changes. Also, local competition for funds affects the cost of time deposits, which are primarily comprised of certificates of deposit. The Company prefers to rely more heavily on non-maturity deposits, which include NOW accounts, money market accounts, and savings accounts. Changes in the average rate on interest-bearing liabilities can also be affected by the pricing on other sources of funds, namely borrowings. The Company utilizes overnight borrowings in the form of federal funds purchased, retail repurchase agreements and wholesale repurchase agreements. The average rate on these borrowings decreased 43 basis points from 2.51% to 2.08% for the first nine months of 2010 and 2011. The cost of federal funds purchased is affected by the Federal Reserve’s changes in the federal funds target rate. The rate on retail repurchase agreements is variable and changes monthly. The Company also borrows from the FHLB in the form of short and long term advances. The average rate on FHLB advances increased 71 basis points from 3.19% to 3.90% for the first nine months of 2010 and 2011.

Provision for Loan Losses

The provision for loan losses is based upon management’s estimate of the amount required to maintain an adequate allowance for loan losses as discussed within the Critical Accounting Policies section above. The allowance represents an amount that, in management’s judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. The amount of provision for loan losses is affected by several factors including the growth rate of loans, net charge-offs, and the estimated amount of potential losses within the loan portfolio. The provision for loan losses was $2,850,000 and $4,150,000 for the first nine months of 2011 and 2010, respectively. The lower provision for loan losses is partially reflective of the decreased net loan charge-offs experienced during the first nine months of 2011, specifically those realized in the third quarter of 2011, compared to the same periods in 2010

Noninterest Income

Total noninterest income for the first nine months of 2011 and 2010 was $4,341,000 and $4,222,000, respectively, which represents an increase of $119,000 or 2.82%. Total noninterest income for the third quarter of 2011 and 2010 was $1,394,000 and $1,475,000, respectively, which represents a decrease of $81,000 or 5.49%. Management reviews the activities which generate noninterest income on an ongoing basis. The following paragraphs provide information about activities which are included within the respective Consolidated Statements of Income headings.

Sales and calls of securities during the first nine months of 2011 resulted in net gains of $155,000. Net gains on sales of securities were $98,000 for the first nine months of 2010.

Income from fiduciary activities, generated by trust services offered through Eagle Investment Group, decreased $12,000 or 1.69% from $710,000 for the first nine months of 2010 to $698,000 for the first nine months of 2011. Income from fiduciary activities decreased $59,000 or 23.79% from $248,000 for the third quarter of 2010 to $189,000 for the third quarter of 2011. The amount of income from fiduciary activities is determined by the number of active accounts and total assets under management. Also, income can fluctuate due to the number of estates settled within any period.

Service charges on deposit accounts decreased $171,000 or 12.56% from $1,361,000 to $1,190,000 for the first nine months of 2010 and 2011, respectively. Service charges on deposit accounts decreased $32,000 or 7.31% from $438,000 to $406,000 for the third quarter of 2010 and 2011, respectively. Service charges on deposit accounts are derived from the volume of demand and savings accounts generated through the Bank’s branch network. Although the Bank continues to see an increase in these account types, recent regulatory changes on the charging of fees on certain transactions have adversely impacted fee income.

Other service charges and fees increased $267,000 or 12.10% from $2,206,000 for the first nine months of 2010 to $2,473,000 for the first nine months of 2011. Other service charges and fees increased $67,000 or 8.44% from $794,000 for the third quarter of 2010 to $861,000 for the third quarter of 2011. The amount of other services charges and fees is comprised primarily of commissions from the sale of non-deposit investment products, fees received from the Bank’s credit card program, fees generated from the Bank’s ATM/debit card programs, and fees generated from the origination of mortgage loans for the secondary market. Commissions from the sale of non-deposit investment products through Eagle Investment Group were $536,000 and $386,000 for the first nine months of 2011 and 2010, respectively. The amount of fees generated from the Bank’s ATM/debit card programs increased $149,000 or 17.35% from $859,000 to $1,008,00 for the first nine months of 2010 and 2011, respectively. The Dodd-Frank Act amended the Electronic Funds Transfer Act to give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers. This could potentially lower the Bank’s debit card income significantly in the future.

Other operating income decreased $13,000 or 13.98% from $93,000 to $80,000 for the first nine months of 2010 and 2011, respectively. This change resulted mostly from a lesser increase in cash surrender value of officer life insurance recorded during the first nine months of 2011. Other operating income increased $30,000 to $24,000 for the third quarter of 2011.

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Noninterest Expenses

Total noninterest expenses increased $1,061,000 or 8.52% from $12,453,000 to $13,514,000 for the first nine months of 2010 and 2011, respectively. Total noninterest expenses increased $277,000 or 6.46% from $4,290,000 to $4,567,000 for the third quarter of 2010 and 2011, respectively. This increase can be attributed to increases in several expense items, computer software expense, other outside service fees and expenses related to other real estate owned. The efficiency ratio of the Company was 57.90% and 62.26% for the nine months ended September 30, 2011 and 2010. The efficiency ratio is not a measurement under accounting principles generally accepted in the United States. It is calculated by dividing non interest expense by the sum of tax equivalent net interest income and non interest income excluding gains and losses on the investment portfolio. The tax rate utilized is 34%. The following paragraphs provide information about expenses which are included within the respective Consolidated Statements of Income headings.

Salaries and benefits increased $721,000 or 10.50% from $6,867,000 for the first nine months of 2010 to $7,588,000 during the same period in 2011. Salaries and benefits increased $355,000 or 15.22% from $2,333,000 for the third quarter of 2010 to $2,688,000 for the third quarter of 2011. The Company added several new positions with the April 2011 opening of its newest bank branch in Loudoun County, VA. Occupancy expenses increased $43,000 or 5.16% from $834,000 to $877,000 for the first nine months of 2010 and 2011, respectively. Occupancy expenses during the third quarter of 2010 and 2011 were $261,000 and $286,000, respectively. Equipment expenses increased $39,000 or 8.33% from $468,000 to $507,000 for the first nine months of 2010 and 2011, respectively. Equipment expenses decreased $8,000 or 4.65% from $172,000 to $164,000 for the third quarter of 2010 and 2011, respectively.

Advertising and marketing expenses increased $69,000 or 20.35% from $339,000 to $408,000 for the first nine months of 2010 and 2011, respectively. Advertising and marketing expenses increased $18,000 or 12.95% from $139,000 to $157,000 for the third quarter of 2010 and 2011, respectively. This category contains numerous expense types such as advertising, public relations, business development and charitable contributions. The total amount of advertising and marketing expenses varies from quarter to quarter based on planned events and advertising campaigns. Expenses are allocated in a manner which focuses on effectively reaching the existing and potential customers within the market and contributing to the community.

FDIC assessments decreased $125,000 or 18.63% from $671,000 to $546,000 for the first nine months of 2010 and 2011, respectively. FDIC assessments decreased $9,000 or 5.03% from $179,000 to $170,000 for the third quarter of 2010 and 2011, respectively. On December 30 2009, the Company prepaid their estimated quarterly FDIC assessments of $2,300,000 for 2010, 2011, and 2012.

Computer software expenses increased $101,000 or 28.29% from $357,000 to $458,000 for the first nine months of 2010 and 2011, respectively. Computer software expenses increased $40,000 or 26.67% from $150,000 to $190,000 for the third quarter of 2010 and 2011, respectively.

Outside service fees increased $140,000 or 63.64% from $220,000 to $360,000 for the first nine months of 2010 and 2011, respectively. This increase resulted from the Company increasing the frequency that the Bank’s loan portfolio is reviewed by its outside vendor. Outside service fees decreased $4,000 or 5.19% from $77,000 to $73,000 for the third quarter of 2010 and 2011, respectively.

Other operating expenses decreased $39,000 or 1.76% from $2,211,000 to $2,172,000 for the first nine months of 2010 and 2011, respectively. Other operating expenses decreased $142,000 or 17.82% from $797,000 to $655,000 for the third quarter of 2010 and 2011, respectively. This category is primarily comprised of the cost for services required during normal operations of the Company. Expenses which are directly affected by the number of branch locations and volume of accounts at the Bank include postage, insurance, and credit card processing fees. Audit fees are also included within this category.

Income Taxes

Income tax expense was $1,010,000 and $1,258,000 for the first nine months of 2010 and 2011, respectively. These amounts correspond to an effective tax rate of 24.31% and 24.52% for the first nine months of 2010 and 2011, respectively. The difference between the effective tax rate and statutory income tax rate can be primarily attributed to tax-exempt interest earned on certain securities and loans.

FINANCIAL CONDITION

Securities

Total securities were $119,996,000 at September 30, 2011, compared to $109,794,000 at December 31, 2010. This represents an increase of $10,202,000 or 9.29%. The Company purchased $42,435,000 in securities during the first nine months of 2011. The Company had total maturities and principal repayments of $30,281,000 during the first nine months of 2011. The Company did not have any securities from a single issuer, other than U.S. government agencies, whose amount exceeded 10% of shareholders’ equity at September 30, 2011. Note 4 to the Consolidated Financial Statements provides additional details about the Company’s securities portfolio at September 30, 2011 and December 31, 2010. The Company had an unrealized gain on available for sale securities of $5,154,000 at September 30, 2011 as compared to an unrealized gain of $2,343,000 at December 31, 2010. 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.

Loan Portfolio

The Company’s primary use of funds is supporting lending activities from which it derives the greatest amount of interest income. Gross loans were $406,540,000 and $408,449,000 at September 30, 2011 and December 31, 2010, respectively. This represents a decrease of $1,909,000 or 0.47% for the first nine months of 2011. The ratio of loans to deposits decreased during the nine months of 2011 from 95.14% at December 31, 2010 to 90.34% at September 30, 2011.

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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. Note 5 to the Consolidated Financial Statements provides the composition of the loan portfolio at September 30, 2011 and December 31, 2010.

Loans secured by real estate were $364,053,000 or 89.55% and $364,852,000 or 89.33% of total loans at September 30, 2011 and December 31, 2010, respectively. This represents a decrease of $799,000 or 0.22% during the first nine months of 2011. Consumer installment loans were $13,470,000 or 3.31% and $14,518,000 or 3.55% of total loans at September 30, 2011 and December 31, 2010, respectively. This represents a decrease of $1,048,000 or 7.22% during the first nine months of 2011. Commercial and industrial loans were $24,891,000 or 6.12% and $24,449,000 or 5.99% of total loans at September 30, 2011 and December 31, 2010, respectively. This represents an increase of $442,000 or 1.81% for the first nine months of 2011.

Allowance for Loan Losses

The purpose of and the methods for measuring the allowance for loan losses are discussed in the Critical Accounting Policies section above. Note 6 to the Consolidated Financial Statements shows the activity within the allowance for loan losses during the nine months ended September 30, 2011 and 2010 and the year ended December 31, 2010. Charged-off loans were $2,638,000 and $2,430,000 for the nine months ended September 30, 2011 and 2010, respectively. Recoveries were $568,000 and $143,000 for the nine months ended September 30, 2011 and 2010, respectively. This resulted in net charge-offs of $2,070,000 and $2,287,000 for the nine months ended September 30, 2011 and 2010, respectively. The allowance for loan losses as a percentage of loans was 1.94% at September 30, 2011 and 1.74% at December 31, 2010. The allowance for loan losses was 125.47% of nonperforming assets at September 30, 2011 and 69.77% of nonperforming assets at December 31, 2010. Given the current economic environment, it is anticipated there could be an increase in past due loans, non performing loans and other real estate owned. However, the Company believes that the allowance for loan losses will be maintained at a level adequate to mitigate any negative impact resulting from such increases.

Nonperforming Assets and Other Assets

Nonperforming assets consist of nonaccrual loans, repossessed assets and other real estate owned (foreclosed properties). Nonaccrual loans were $2,635,000 and $8,377,000 at September 30, 2011 and December 31, 2010, respectively. The decrease in nonaccrual loans resulted mostly from loan charge-offs. Other real estate owned and repossessed assets were $3,489,000 and $1,805,000 at September 30, 2011 and December 31, 2010, respectively. The increase in other real estate owned resulted from the charge off and foreclosure of real estate assets during the nine months ended September 30, 2011. The Company held 11 other real estate assets with an average balance of $312,000 at September 30, 2011. At December 31, 2010, the Company held ten other real estate assets with an average balance of $190,000. The percentage of nonperforming assets to loans and other real estate owned was 1.48% at September 30, 2011 and 2.04% at December 31, 2010. Because the Company’s loan portfolio has a significant concentration in real estate loans, the softening of real estate values within the Company’s market as well as the declines in housing activity have negatively impacted non performing asset levels. Total loans past due 90 days or more and still accruing interest were $165,000 and $10,000 at September 30, 2011 and December 31, 2010, respectively.

During the first nine months of 2011, the Bank placed 11 loans totaling $2,722,000 on nonaccrual status. Management evaluates the financial condition of these borrowers and the value of any collateral on these loans. The results of these evaluations are used to estimate the amount of losses which may be realized on the disposition of these nonaccrual loans.

Loans are placed on nonaccrual status when collection of principal and interest is doubtful, generally when a loan becomes 90 days past due. There are three negative implications for earnings when a loan is placed on non-accrual status. First, all interest accrued but unpaid at the date that the loan is placed on non-accrual status is either deducted from interest income or written off as a loss. Second, accruals of interest are discontinued until it becomes certain that both principal and interest can be repaid. Finally, there may be actual losses that require additional provisions for loan losses to be charged against earnings.

For real estate loans, upon foreclosure, the balance of the loan is transferred to “Other Real Estate Owned” (“OREO”) and carried at the lower of the outstanding loan balance or the fair market value of the property based on current appraisals and other current market trends, less estimated selling costs. If a write down of the OREO property is necessary at the time of foreclosure, the amount is charged-off against the allowance for loan losses. A review of the recorded property value is performed in conjunction with normal loan reviews, and if market conditions indicate that the recorded value exceeds the fair market value, additional write downs of the property value are charged directly to operations.

In addition, the Company may, under certain circumstances, restructure loans in troubled debt restructurings as a concession to a borrower when the borrower is experiencing financial distress. Formal, standardized loan restructuring programs are not utilized by the Company. Each loan considered for restructuring is evaluated based on customer circumstances and may include modifications to one or more loan provisions. Such restructured loans are included in impaired loans. However, restructured loans are not necessarily considered nonperforming assets. At September 30, 2011, the Company had $10,069,000 in restructured loans with specific allowances totaling $1,185,000. At September 30, 2011, total restructured loans performing under the restructured terms and accruing interest were $9,866,000.

Deposits

Total deposits were $450,007,000 and $429,296,000 at September 30, 2011 and December 31, 2010, respectively. This represents an increase of $20,711,000 or 4.82% during the first nine months of 2011. Note 7 to the Consolidated Financial Statements provides the composition of total deposits at September 30, 2011 and December 31, 2010.

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Noninterest-bearing demand deposits which are comprised of checking accounts, increased $5,897,000 or 6.00% from $98,256,000 at December 31, 2010 to $104,153,000 at September 30, 2011. Savings and interest-bearing demand deposits, which include NOW accounts, money market accounts and regular savings accounts increased $9,487,000 or 5.14% from $184,548,000 at December 31, 2010 to $194,035,000 at September 30, 2011. Time deposits increased $5,327,000 or 3.64% from $146,492,000 at December 31, 2010 to $151,819,000 at September 30, 2011. This is comprised of an increase in time deposits of $100,000 and more of $2,753,000 or 4.50% and an increase in time deposits of less than $100,000 of $2,574,000 or 3.02%. Certificates of deposit also included $28,916,000 and $31,898,000 in brokered certificates of deposit at September 30, 2011 and December 31, 2010.

The Company attempts to fund asset growth with deposit accounts and focus upon core deposit growth as its primary source of funding. Core deposits consist of checking accounts, NOW accounts, money market accounts, regular savings accounts, and time deposits of less than $250,000. Core deposits totaled $366,911,000 or 81.53% and $347,901,000 or 81.04% of total deposits at September 30, 2011 and December 31, 2010, respectively.

CAPITAL RESOURCES

The Company continues to be a well capitalized financial institution. Total shareholders’ equity at September 30, 2011 was $57,923,000, reflecting a percentage of total assets of 10.14%, as compared to $53,829,000 and 9.63% at December 31, 2010. Shareholders’ equity per share increased $1.04 or 6.28% to $17.61 per share at September 30, 2011 from $16.57 per share at December 31, 2010. During the third quarter of 2010 and 2011, the Company paid a dividend of $0.18 and $0.17, respectively. Total dividends paid during 2010 were $0.69 per share. The Company has a Dividend Investment Plan that reinvests the dividends of the shareholder in Company stock.

Federal regulatory risk-based capital guidelines require percentages to be applied to various assets, including off-balance sheet assets, based on their perceived risk in order to calculate risk-weighted assets. Tier 1 capital consists of total shareholders’ equity plus qualifying trust preferred securities outstanding less net unrealized gains and losses on available for sale securities, goodwill and other intangible assets. Total capital is comprised of Tier 1 capital plus the allowable portion of the allowance for loan losses and any excess trust preferred securities that do not qualify as Tier 1 capital. The $7,000,000 in trust preferred securities, issued by the Company during 2007, qualifies as Tier 1 capital because this amount does not exceed 25% of total capital, including the trust preferred securities. For capital adequacy purposes, financial institutions must maintain a Tier 1 risk-based capital ratio of at least 4%, a total risk-based capital ratio of at least 8% and a minimum Tier 1 leverage ratio of 4%. The Company’s policy requires a Tier 1 risk-based capital ratio of at least 8%, a total risk-based capital ratio of at least 10% and a minimum Tier 1 leverage ratio of 5%. The Company’s Tier 1 risk-based capital ratio was 15.61% at September 30, 2011 as compared to 14.77% at December 31, 2010. The Company’s total risk-based capital ratio was 16.85% at September 30, 2011 as compared to 16.02% at December 31, 2010. The Company’s Tier 1 capital to average total assets ratio was 10.74% at September 30, 2011 as compared to 10.62% at December 31, 2010. The Company monitors these ratios on a quarterly basis and has several strategies, including without limitation the issuance of common stock, to ensure that these ratios remain above regulatory minimums.

LIQUIDITY

Liquidity management involves meeting the present and future financial obligations of the Company with the sale or maturity of assets or with the occurrence of additional liabilities. Liquidity needs are met with cash on hand, deposits in banks, federal funds sold, securities classified as available for sale and loans maturing within one year. At September 30, 2011, liquid assets totaled $251,208,000 as compared to $227,394,000 at December 31, 2010. These amounts represent 48.93% and 45.03% of total liabilities at September 30, 2011 and December 31, 2010, respectively. 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.

34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in Quantitative and Qualitative Disclosures about Market Risk as reported in the 2010 Form 10-K.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company, under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2011 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Internal Control over Financial Reporting

Management is also responsible for establishing and maintaining adequate internal control over the Company’s financial reporting (as defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended).

There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

35

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.

Item 1A. Risk Factors

Other than as set forth below, there were no material changes to the Company’s risk factors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2010 and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed with this Form 10-Q and this list includes the exhibit index:

Exhibit No.	Description
10.1	Agreement, dated August 23, 2011, by and between Eagle Financial Services, Inc. and Robert C. Boyd.
10.2	Addendum to the Agreement, dated August 23, 2011, by and between Eagle Financial Services, Inc. and Robert C. Boyd.
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Eagle Financial Service, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in Extensible Business Reporting Language (XBRL) : (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Shareholders” Equity, (iv) Consolidated Statements of Cash Flows and (v) notes to Consolidated Financial Statements.

36

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 14th day of November, 2011.

Eagle Financial Services, Inc.

By:	/S/ JOHN R. MILLESON
	John R. Milleson President and Chief Executive Officer
By:	/S/ KATHLEEN J. CHAPPELL
	Kathleen J. Chappell Vice President, Chief Financial Officer

37

EXHIBIT INDEX

Exhibit No.	Description
10.1	Agreement, dated August 23, 2011, by and between Eagle Financial Services, Inc. and Robert C. Boyd.
10.2	Addendum to the Agreement, dated August 23, 2011, by and between Eagle Financial Services, Inc. and Robert C. Boyd.
31.1	Certification by Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Eagle Financial Service, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in Extensible Business Reporting Language (XBRL) : (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Shareholders” Equity, (iv) Consolidated Statements of Cash Flows and (v) notes to Consolidated Financial Statements.

EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made and entered into as of the 23^rd day of August, 2011 by and between Eagle Financial Services, Inc., a Virginia corporation, hereinafter called the “Corporation”, and Robert C. Boyd hereinafter called “Employee”, and provides as follows:

RECITALS

WHEREAS, the Corporation is a bank holding company engaged in the operation of a bank; and

WHEREAS, Employee has been involved in the management of the business and affairs of the Corporation and, therefore, possesses managerial experience, knowledge, skills and expertise in such type of business; and

WHEREAS, the employment of Employee by the Corporation is in the best interests of the Corporation and Employee;

WHEREAS, the parties have mutually agreed upon the terms and conditions of Employee’s continued employment by the Corporation as hereinafter set forth; and

WHEREAS, the parties intend that this Agreement comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and Treasury Regulations thereunder.

TERMS OF AGREEMENT

NOW, THEREFORE, for and in consideration of the premises and of the mutual promises and undertakings of the parties as hereinafter set forth, the parties covenant and agree as follows:

Section 1. Employment. (a) Employee shall be employed as an executive officer of the Corporation. He shall perform such services for the Corporation and/or one or more Affiliates as may be assigned to Employee by the Corporation from time to time and that are commensurate with his training and experience upon the terms and conditions hereinafter set forth.

(b) References in this Agreement to services rendered for the Corporation and compensation and benefits payable or provided by the Corporation shall include services rendered for and compensation and benefits payable or provided by any Affiliate. References in this Agreement to the “Corporation” also shall mean and refer to each Affiliate for which Employee performs services. References in this Agreement to “Affiliate” shall mean any business entity that, directly or indirectly, through one or more intermediaries, is controlled by the Corporation.

Section 2. Term and Renewal. The initial term of this Agreement shall end December 31, 2011. However, on each December 31, beginning with December 31, 2011, the term of this Agreement shall be renewed and extended by one year unless Employee or the Corporation gives prior notice to the other in writing that the term shall not be renewed and extended. This Agreement shall terminate at the end of its term.

Section 3. Exclusive Service. Employee shall devote his best efforts and full time to rendering services on behalf of the Corporation in furtherance of its best interests. Employee shall comply with all policies, standards and regulations of the Corporation now or hereafter promulgated, and shall perform his duties under this Agreement to the best of his abilities and in accordance with standards of conduct applicable to officers of banks.

Section 4. Salary. (a) As compensation while employed hereunder, Employee, during his faithful performance of this Agreement, in whatever capacity rendered, shall receive an annual base salary of $132,000 payable on such terms and in such installments as the parties may from time to time mutually agree upon. The Board of Directors, in its discretion, may increase Employee’s base salary during the term of this Agreement.

(b) The Corporation shall withhold state and federal income taxes, social security taxes and such other payroll deductions as may from time to time be required by law or agreed upon in writing by Employee and the Corporation. The Corporation shall also withhold and remit to the proper party any amounts agreed to in writing by the Corporation and Employee for participation in any corporate sponsored benefit plans for which a contribution is required.

(c) Except as otherwise expressly set forth hereunder, no compensation shall be paid pursuant to this Agreement in respect of any month or portion thereof subsequent to any termination of Employee’s employment by the Corporation.

Section 5. Corporate Benefit Plans. Employee shall be entitled to participate in or become a participant in all cash and non-cash employee benefit plans maintained by the Corporation for its executive officers.

Section 6. Bonuses. Employee shall receive only such bonuses as the Board of Directors, in its discretion, decides to pay to Employee.

Section 7. Expense Account. The Corporation shall reimburse Employee for reasonable and customary business expenses incurred in the conduct of the Corporation’s business. Such expenses will include business meals, out-of-town lodging and travel expenses and other items identified in written rules and policies

of the Corporation. Employee agrees to timely submit records and receipts of reimbursable items and agrees that the Corporation can adopt reasonable rules and policies regarding such reimbursement. The Corporation agrees to make prompt payment to Employee following receipt and verification of such reports. No reimbursement provided under this Section during one calendar year shall affect the expenses eligible for reimbursement during another calendar year.

Section 8. Paid Time Off. Employee shall be entitled to the same paid time off policies as the Board of Directors may from time to time designate for all full-time employees of the Corporation.

Section 9. Termination. (a) Notwithstanding the termination of Employee’s employment pursuant to any provision of this Agreement, the parties shall be required to carry out any provisions of this Agreement which contemplate performance by them subsequent to such termination. In addition, no termination shall affect any liability or other obligation of either party which shall have accrued prior to such termination, including, but not limited to, any liability, loss or damage on account of breach. No termination of employment shall terminate the obligation of the Corporation to make payments of any vested benefits provided hereunder or the obligations of Employee under Sections 10, 11 and 12.

(b) Employee’s employment hereunder may be terminated by Employee upon thirty (30) days written notice to the Corporation or at any time by mutual agreement in writing.

(c) This Agreement shall terminate upon death of Employee; provided, however, that in such event the Corporation shall pay to the estate of Employee the compensation including salary and accrued bonus, if any, which otherwise would be payable to Employee through the end of the month in which his death occurs.

(d) (1) The Corporation may terminate Employee’s employment other than for “Cause”, as defined in Section 9(e), at any time upon written notice to Employee, which termination shall be effective immediately. Employee may resign thirty (30) days after notice to the Corporation for “Good Reason”, as hereafter defined. In the event the Employee’s employment terminates pursuant to this Section 9(d);

(i) Employee shall receive a monthly amount equal to one-twelfth (1/12) his rate of annual base salary in effect immediately preceding such termination in each month for the remainder of the term of this Agreement at the times such payments would have been made in accordance with Section 4(a);

(ii) Employee shall receive a payment in cash on the date his employment terminates equal to the greater of (a) the amount of the highest cash bonus paid or payable to him in respect of any of the three (3) fiscal years of the Corporation prior to the fiscal year in which his employment terminates, and (b) the amount of cash bonus Employee was designated to receive under the Corporation’s annual incentive plan;

(iii) To the to the extent required because Employee is a “specified employee” for purposes of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), on the date of his termination, the payments described in Section (d)(1)(i) and (ii), above, shall be made or commence, as the case may be, on the first day of the month following the six-month anniversary of Employee’s date of termination. The first payment shall include the payments, if any, required to be delayed under this sentence; and

(iv) The Corporation shall maintain in full force and effect for the continued benefit of the Employee for the remainder of the then current term of this Agreement all employee welfare benefit plans and programs or arrangements in which the Employee was entitled to participate immediately prior to such termination, provided that continued participation is possible under the general terms and provisions of such plans and programs. In the event that Employee’s participation in any such or program is barred, the Corporation shall arrange to provide the Employee with benefits substantially similar to those which the Employee was entitled to receive under such plans and programs. To the extent required by Code Section 409A and Treasury Regulations thereunder, (i) no reimbursement or in-kind benefit provided under this Section 9(d)(2)(iv) in one calendar year shall affect the expenses eligible for reimbursement or in-kind benefits provided during another calendar year; and (ii) any such reimbursement shall be paid by December 31 of the calendar year following the calendar year in which the reimbursed expense was incurred. It is intended and anticipated that benefits under this Section will qualify as medical reimbursements exempt from Code Section 409A or as payments made on a specified date or fixed schedule. Nonetheless, to the extent required by Code Section 409A and Treasury Regulations thereunder, benefits (whether through plan participation, reimbursement, in-kind benefits or otherwise) shall commence on the first day of the month following the six-month anniversary of the Employee’s termination or resignation, with any reimbursements or other payments delayed under this sentence payable in a single sum on such delayed commencement date; and

(2) Notwithstanding anything in this Agreement to the contrary:

(i) If Employee breaches Section 10 or 11, Employee will not thereafter be entitled to receive any further compensation or benefits pursuant to this Section 9(d); and

(ii) If, while he is receiving payments under this Section 9(d), Employee engages in a Competitive Business within the area described in Section 11(i), such payments will cease and he will not thereafter be entitled to receive any compensation or benefits pursuant to this Section 9(d) even though such conduct occurs after the covenants contained in Section 11 have expired.

(3) The Corporation shall not be required to make payment of the Termination Compensation or any portion thereof to the extent such payment is prohibited by the terms of the regulations presently found at 12 C.F.R. part 359 or to the extent that any other governmental approval of the payment required by law is not received.

(4) Except as set forth in Sections 9(d)(2) and 9(d)(3), the Corporation’s obligation to pay the Employee the compensation provided in Section 9(d)(1) shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against him or anyone else. All amounts payable by the Corporation hereunder shall be paid without notice or demand. Each and every payment made hereunder by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment from the Employee or from whosoever may be entitled thereto, for any reason whatsoever. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise.

(5) For purposes of this Agreement, “Good Reason” shall mean:

(i) The assignment of duties to the Employee by the Corporation which result in the Employee having significantly less authority or responsibility than he has on the date hereof, without his express written consent;

(ii) Requiring the Employee to maintain his principal office outside a 25 mile radius of Clarke County, Virginia unless the Corporation moves its principal executive offices to a place to which the Employee is required to move;

(iii) A reduction by the Corporation of the Employee’s base salary, as the same may have been increased from time to time;

(iv) The failure of the Corporation to provide the Employee with substantially the same fringe benefits that are provided to him at the inception of this agreement;

(v) The Corporation’s failure to comply with any material term of this Agreement; or

(vi) The failure of the Corporation to obtain the assumption of and agreement to perform this Agreement by any successor as contemplated in Section 13 hereof.

(e) The Corporation shall have the right to terminate Employee’s employment under this Agreement at any time for Cause, within 30 days of the occurrence, which termination shall be effective immediately. Termination for “Cause” shall include termination for Employee’s personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, conviction of a felony or of a misdemeanor involving moral turpitude, misappropriation of the Corporation’s assets (determined on a reasonable basis) or those of its Affiliates, or material breach of any other provision of this Agreement. In the event Employee’s employment under this Agreement is terminated for Cause, Employee shall thereafter have no right to receive compensation or other benefits under this Agreement.

(f) The Corporation may terminate Employee’s employment under this Agreement, after having established the Employee’s disability by giving to Employee written notice of its intention to terminate his employment for disability and his employment with the Corporation shall terminate effective on the 90th day after receipt of such notice if within 90 days after such receipt Employee shall fail to return to the full-time performance of the essential functions of his position (and if Employee’s disability has been established pursuant to the definition of “disability” set forth below). For purposes of this Agreement, “disability” means either (i) disability which after the expiration of more than 13 consecutive weeks after its commencement is determined to be total and permanent by a physician selected and paid for by the Corporation or its insurers, and acceptable to Employee or his legal representative, which consent shall not be unreasonably withheld or (ii) disability as defined in the policy of disability insurance maintained by the Corporation or its Affiliates for the benefit of Employee, whichever shall be more favorable to Employee. Notwithstanding any other provision of this Agreement, the Corporation shall comply with all requirements of the Americans with Disabilities Act, 42 U.S.C. § 12101 et. seq.

(g) If Employee is suspended and/or temporarily prohibited from participating in the conduct of the Corporation’s affairs by a notice served pursuant to the Federal Deposit Insurance Act, the Corporation’s obligations under this Employment Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Corporation may in its discretion (i) pay Employee all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended with any such payment made by March 15 following the calendar year in which such charges are dismissed.

(h) If Employee is removed and/or permanently prohibited from participating in the conduct of the Corporation’s affairs by an order issued under the Federal Deposit Insurance Act or the Code of Virginia, all obligations of the Corporation under this Employment Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected.

(i) (1) If Employee’s employment is terminated without Cause or if he resigns for Good Reason within one year after a Change of Control shall have occurred, then on or within thirty (30) days before Employee’s last day of employment with the Corporation, the Corporation shall pay to Employee as compensation for services rendered to the Corporation and its Affiliates a lump sum cash amount (subject to any applicable payroll or other taxes required to be withheld) equal to the excess, if any, of 299% of Employee’s “annualized includable compensation for the base period”, as defined in Section 280G of the Internal Revenue Code of 1986 (the “Code”), over the total amount payable to Employee under Section 9(d). Notwithstanding the foregoing, to the to the extent required because Employee is a “specified employee” for purposes of Code Section 409A, on the date of his termination, the payment described in this Section (i)(1), above, shall be made on the first day of the month following the six-month anniversary of Employee’s date of termination.

(2) For purposes of this Agreement, a Change of Control occurs if, after the date of this Agreement, (i) any person, including a “group” as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the owner or beneficial owner of Corporation securities having 50% or more of the combined voting power of the then outstanding Corporation securities that may be cast for the election of the Corporation’s directors other than a result of

an issuance of securities initiated by the Corporation, or open market purchases approved by the Board of Directors, as long as the majority of the Board of Directors approving the purchases is a majority at the time the purchases are made; or (ii) as the direct or indirect result of, or in connection with, a tender or exchange offer, a merger or other business combination, a sale of assets, a contested election of directors, or any combination of these events, the persons who were directors of the Corporation before such events cease to constitute a majority of the Corporation’s Board, or any successor’s board, within one year of the last of such transactions. For purposes of this Agreement, a Change of Control occurs on the date on which an event described in (i) or (ii) occurs. If a Change of Control occurs on account of a series of transactions or events, the Change of Control occurs on the date of the last of such transactions or events.

(3) It is the intention of the parties that no payment be made or benefit provided to Employee pursuant to this Agreement that would constitute an “excess parachute payment” within the meaning of Section 280G of the Code and any regulations thereunder, thereby resulting in a loss of an income tax deduction by the Corporation or the imposition of an excise tax on Employee under Section 4999 of the Code. If the independent accountants serving as auditors for the Corporation on the date of a Change of Control (or any other accounting firm designated by the Corporation) determine that some or all of the payments or benefits scheduled under this Agreement, as well as any other payments or benefits on a Change of Control, would be nondeductible by the Company under Section 280G of the Code, then the payments scheduled under this Agreement will be reduced to one dollar less than the maximum amount which may be paid without causing any such payment or benefit to be nondeductible. The determination made as to the reduction of benefits or payments required hereunder by the independent accountants shall be binding on the parties.

Section 10. Confidentiality/Nondisclosure. Employee covenants and agrees that any and all information concerning the customers, businesses and services of the Corporation of which he has knowledge or access as a result of his association with the Corporation in any capacity, shall be deemed confidential in nature and shall not, without the proper written consent of the Corporation, be directly or indirectly used, disseminated, disclosed or published by Employee to third parties other than in connection with the usual conduct of the business of the Corporation. Such information shall expressly include, but shall not be limited to, information concerning the Corporation’s trade secrets, business operations, business records, customer lists or other customer information. Upon termination of employment Employee shall deliver to the Corporation all originals and copies of documents, forms, records or other information, in whatever form it may exist, concerning the Corporation or its business, customers, products or services. In construing this provision it is agreed that it shall be interpreted broadly so as to provide the Corporation with the maximum protection. This Section 10 shall not be applicable to any information which, through no misconduct or negligence of Employee, has previously been disclosed to the public by anyone other than Employee.

Section 11. Covenant Not to Compete. During the term of this Agreement and throughout any further period that he is an officer or employee of the Corporation, and for a period of twelve (12) months from and after the date that Employee is (for any reason) no longer employed by the Corporation or for a period of twelve (12) months from the date of entry by a court of competent jurisdiction of a final judgment enforcing this covenant in the event of a breach by Employee, whichever is later, Employee covenants and agrees that he will not, directly or indirectly, either as a principal, agent, employee, employer, stockholder, co-partner or in any other individual or representative capacity whatsoever: (i) engage in a Competitive Business anywhere within a fifty (50) mile radius of the location of the Corporation’s principal executive offices on the date Employee’s employment terminates; or (ii) solicit, or assist any other person or business entity in soliciting, any depositors or other customers of the Corporation to make deposits in or to become customers of any other financial institution conducting a Competitive Business; or (iii) induce any individuals to terminate their employment with the Corporation or its Affiliates. As used in this Agreement, the term “Competitive Business” means all banking and financial products and services that are substantially similar to those offered by the Corporation on the date that Employee’s employment terminates. Employee’s obligations under this Section 11 shall terminate on the date a Change of Control occurs.

Section 12. Injunctive Relief, Damages, Etc. Employee agrees that given the nature of the positions held by Employee with the Corporation, that each and every one of the covenants and restrictions set forth in Sections 10 and 11 above are reasonable in scope, length of time and geographic area and are necessary for the protection of the significant investment of the Corporation in developing, maintaining and expanding its business. Accordingly, the parties hereto agree that in the event of any breach by Employee of any of the provisions of Sections 10 or 11 that monetary damages alone will not adequately compensate the Corporation for its losses and, therefore, that it may seek any and all legal or equitable relief available to it, specifically including, but not limited to, injunctive relief and Employee shall be liable for all damages, including actual and consequential damages, costs and expenses, including legal costs and actual attorneys’ fees, incurred by the Corporation as a result of taking action to enforce, or recover for any breach of, Section 10 or Section 11. The covenants contained in Sections 10 and 11 shall be construed and interpreted in any judicial proceeding to permit their enforcement to the maximum extent permitted by law. Should a court of competent jurisdiction determine that any provision of the covenants and restrictions set forth in Section 11 above is unenforceable as being overbroad as to time, area or scope, the court may strike the offending provision or reform such provision to substitute such other terms as are reasonable to protect the Corporation’s legitimate business interests.

Section 13. Binding Effect/Assignability. This Employment Agreement shall be binding upon and inure to the benefit of the Corporation and Employee and their respective heirs, legal representatives, executors, administrators, successors and assigns, but neither this Agreement, nor any of the rights hereunder, shall be assignable by Employee or any beneficiary or beneficiaries designated by Employee. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business, stock or assets of the Corporation, by agreement in form and substance reasonably satisfactory to the Employee, to expressly assume and agree to perform this Agreement in its entirety. Failure of the Corporation to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement. As used in this Agreement, “Corporation” shall include any successor to its business, stock or assets as aforesaid which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

Section 14. Governing Law. This Employment Agreement shall be subject to and construed in accordance with the laws of Virginia.

Section 15. Invalid Provisions. The invalidity or unenforceability of any particular provision of this Employment Agreement shall not affect the validity or enforceability of any other provisions hereof, and this Employment Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted.

Section 16. Notices. Any and all notices, designations, consents, offers, acceptance or any other communications provided for herein shall be given in writing and shall be deemed properly delivered if delivered in person or by registered or certified mail, return receipt requested, addressed in the case of the Corporation to its registered office or in the case of Employee to his last known address.

Section 17. Entire Agreement.

(a) This Employment Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes any and all other agreements, either oral or in writing, among the parties hereto with respect to the subject matter hereof.

(b) This Employment Agreement may be executed in one or more counterparts, each of which shall be considered an original copy of this Agreement, but all of which together shall evidence only one agreement.

Section 18. Amendment and Waiver. This Employment Agreement may not be amended except by an instrument in writing signed by or on behalf of each of the parties hereto. No waiver of any provision of this Employment Agreement shall be valid unless in writing and signed by the person or party to be charged.

Section 19. Case and Gender. Wherever required by the context of this Employment Agreement, the singular or plural case and the masculine, feminine and neuter genders shall be interchangeable.

Section 20. Captions. The captions used in this Employment Agreement are intended for descriptive and reference purposes only and are not intended to affect the meaning of any Section hereunder.

Section 21. Code Section 409A. Any benefit, payment or other right provided by this Agreement shall be provided and made in a manner, and at such time, and in such form, as complies with the applicable requirements of Code Section 409A to avoid a plan failure described in Code Section 409A(a)(1), including without limitation, deferring payment until the occurrence of a specified payment event described in Code Section 409A(a)(2). Notwithstanding any other provision hereof or document pertaining hereto, this Agreement shall be so construed and interpreted.

IN WITNESS WHEREOF, the Corporation has caused this Employment Agreement to be signed by its duly authorized officer and Employee has hereunto set his hand and seal on the day and year first above written.

EAGLE FINANCIAL SERVICES, INC.
By:	/s/ JOHN R. MILLESON
Title: President

ATTEST:

/s/ KALEY P. CROSEN

EMPLOYEE

/s/ ROBERT C. BOYD (SEAL)

Robert C. Boyd

ATTEST:

/s/ KALEY P. CROSEN

EX-10.2

Exhibit 10.2

ADDENDUM TO THE EMPLOYMENT AGREEMENT

OF ROBERT C. BOYD

THIS ADDENDUM is made and entered into as of the 23^rd day of August, 2011 by and between Eagle Financial Services, Inc., a Virginia corporation, hereinafter called the “Corporation”, and Robert C. Boyd hereinafter called “Employee”, and provides as follows:

Upon Employee’s termination from the Corporation due to having met the requirements to receive U.S. Social Security benefits, Employee is permitted to engage in loan and credit administration activities, on a part-time basis as an employee or independent contractor of a Competitive Business, without limitation of geographic location.

Termination of Employee for “Cause”, as defined in Employee’s original Employment Agreement, dated August 23, 2011, nullifies this Addendum.

EAGLE FINANCIAL SERVICES, INC.
BY:	/s/ JOHN R. MILLESON
	President

Attest:

/s/ KALEY P. CROSEN

EMPLOYEE

/s/ ROBERT C. BOYD (SEAL)

Robert C. Boyd

Attest:

/s/ KALEY P. CROSEN

EX-31.1

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John R. Milleson, certify that:

1. I have reviewed the quarterly report on Form 10-Q of Eagle Financial Services, Inc. for the period ended September 30, 2011;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2011

/S/ JOHN R. MILLESON

John R. Milleson

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kathleen J. Chappell., certify that:

1. I have reviewed the quarterly report on Form 10-Q of Eagle Financial Services, Inc. for the period ended September 30, 2011;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2011

/S/ KATHLEEN J. CHAPPELL

Kathleen J. Chappell

Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Eagle Financial Services, Inc. (the “Company”) for the period ended September 30, 2011 to be filed with the Securities and Exchange Commission (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. Code Section 1350, as adopted pursuant to Code Section 906 of the Sarbanes-Oxley Act of 2002 that, to our knowledge:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/S/ JOHN R. MILLESON

John R. Milleson

President and Chief Executive Officer

/S/ KATHLEEN J. CHAPPELL

Kathleen J. Chappell

Vice President and Chief Financial Officer

Date: November 14, 2011

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 10	$ 10
Preferred stock, shares authorized	500,000	500,000
Preferred stock, shares issued	0	0
Common stock, par value	$ 2.50	$ 2.50
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	3,289,553	3,249,477

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Consolidated Statements Of Income (USD $) In Thousands, except Per Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Interest and Dividend Income
Interest and fees on loans	$ 5,750	$ 5,875	$ 17,192	$ 17,555
Interest on federal funds sold				2
Interest and dividends on securities available for sale:
Taxable interest income	603	673	2,056	1,968
Interest income exempt from federal income taxes	367	320	1,029	972
Dividends	189	76	315	215
Interest on deposits in banks	11	6	31	16
Total interest and dividend income	6,920	6,950	20,623	20,728
Interest Expense
Interest on deposits	595	741	1,890	2,290
Interest on federal funds purchased and securities sold under agreements to repurchase	93	97	275	290
Interest on Federal Home Loan Bank advances	420	462	1,310	1,377
Interest on trust preferred capital notes	34	37	102	104
Interest on interest rate swap	46	42	136	132
Total interest expense	1,188	1,379	3,713	4,193
Net interest income	5,732	5,571	16,910	16,535
Provision For Loan Losses	1,050	2,850	2,850	4,150
Net interest income after provision for loan losses	4,682	2,721	14,060	12,385
Noninterest Income
Income from fiduciary activities	189	248	698	710
Service charges on deposit accounts	406	438	1,190	1,361
Other service charges and fees	861	794	2,473	2,206
(Loss) gain on the sale of other real estate owned	(78)	1	(255)	(246)
(Loss) gain on securities	(8)		155	98
Other operating income (loss)	24	(6)	80	93
Total noninterest income	1,394	1,475	4,341	4,222
Noninterest Expenses
Salaries and employee benefits	2,688	2,333	7,588	6,867
Occupancy expenses	286	261	877	834
Equipment expenses	164	172	507	468
Advertising and marketing expenses	157	139	408	339
Stationery and supplies	53	69	221	181
ATM network fees	131	113	377	305
FDIC assessment	170	179	546	671
Computer software expense	190	150	458	357
Outside service fees	73	77	360	220
Other operating expenses	655	797	2,172	2,211
Total noninterest expenses	4,567	4,290	13,514	12,453
Income (loss) before income taxes	1,509	(94)	4,887	4,154
Income Tax Expense	370	(175)	1,258	1,010
Net income	$ 1,139	$ 81	$ 3,629	$ 3,144
Earnings Per Share
Net income per common share, basic	$ 0.34	$ 0.03	$ 1.10	$ 0.98
Net income per common share, diluted	$ 0.34	$ 0.02	$ 1.10	$ 0.97

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Document And Entity Information	9 Months Ended
	Sep. 30, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2011
Entity Registrant Name	EAGLE FINANCIAL SERVICES INC
Entity Central Index Key	0000880641
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding	3,289,553

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Allowance For Loan Losses

9 Months Ended

Sep. 30, 2011

Allowance For Loan Losses [Abstract]

Allowance For Loan Losses

NOTE 5. Allowance for Loan Losses

Changes in the allowance for loan losses for the nine months ended September 30, 2011 and 2010 and the year ended December 31, 2010 were as follows:

	Nine Months Ended	Year Ended	Nine Months Ended
	September 30, 2011	December 31, 2010	September 30, 2010
	(in thousands)
Balance, beginning	$                       7,111	$                       5,970	$                       5,970
Provision charged to operating expense	2,850	6,325	4,150
Recoveries added to the allowance	568	291	143
Loan losses charged to the allowance	(2,638)	(5,475)	(2,430)
Balance, ending	$                       7,891	$                       7,111	$                       7,833

Nonaccrual and past due loans by class at September 30, 2011 and December 31, 2010 were as follows:

	As of September 30, 2011
	(in thousands)
	30 - 59	60 - 89	90 or More				90 or More
	Days	Days	Days	Total Past			Days Past Due	Nonaccrual
	Past Due	Past Due	Past Due	Due	Current	Total Loans	Still Accruing	Loans
Commercial - Non Real Estate:
Commercial & Industrial	$        50	$      197	$             -	$      247	$   24,644	$      24,891	$                  -	$       128
Commercial Real Estate:
Owner Occupied	467	-	297	764	82,025	82,789	-	455
Non-owner occupied	245	-	244	489	32,382	32,871	-	245
Construction and Farmland:
Residential	-	315	-	315	8,949	9,264	-	-
Commercial	464	-	-	464	22,992	23,456	-	-
Consumer:
Installment	136	41	2	179	13,291	13,470	2	-
Residential:
Equity Lines	225	-	-	225	33,281	33,506	-	180
Single family	4,742	2,245	910	7,897	169,746	177,643	163	1,627
Multifamily	-	-	-	-	4,524	4,524	-	-
All Other Loans	7	-	-	7	4,119	4,126	-	-
Total	$   6,336	$   2,798	$     1,453	$ 10,587	$ 395,953	$    406,540	$             165	$    2,635

	As of December 31, 2010
	(in thousands)
	30 - 59	60 - 89	90 or More				90 or More
	Days	Days	Days	Total Past			Past Due	Nonaccrual
	Past Due	Past Due	Past Due	Due	Current	Total Loans	Still Accruing	Loans
Commercial - Non Real Estate:
Commercial & Industrial	$        91	$      129	$            7	$      227	$   24,222	$      24,449	$                 7	$       267
Commercial Real Estate:
Owner Occupied	1,100	938	177	2,215	81,176	83,391	-	1,071
Non-owner occupied	248	-	294	542	32,448	32,990	-	-
Construction and Farmland:
Residential	63	70	1,122	1,255	9,042	10,297	-	3,808
Commercial	1,222	-	911	2,133	23,462	25,595	-	-
Consumer:
Installment	181	72	3	256	14,262	14,518	3	-
Residential:
Equity Lines	781	60	-	841	41,848	42,689	-	190
Single family	1,814	490	502	2,806	162,176	164,982	-	3,041
Multifamily	-	-	-	-	4,908	4,908	-	-
All Other Loans	-	696	-	696	3,934	4,630	-	-
Total	$   5,500	$   2,455	$     3,016	$ 10,971	$ 397,478	$    408,449	$               10	$    8,377

Allowance for loan losses by segment at September 30, 2011 and December 31, 2010 were as follows:

	As of and for the Nine Months Ended September 30, 2011
	(in thousands)
	Construction	Residential	Commercial			All Other
	and Farmland	Real Estate	Real Estate	Commercial	Consumer	Loans	Unallocated	Total
Allowance for credit losses:
Beginning Balance	$              1,386	$           3,457	$             1,231	$                819	$                182	$                 36	$                     -	$              7,111
Charge-Offs	710	1,053	24	572	236	43	-	2,638
Recoveries	4	295	-	125	128	16	-	568
Provision	1,202	522	42	1,009	65	10	-	2,850
Ending balance	$              1,882	$            3,221	$            1,249	$             1,381	$                139	$                  19	$                     -	$            7,891
Ending balance: Individually
evaluated for impairment	$              1,078	$            1,739	$               333	$               573	$                     -	$                     -	$                     -	$           3,723
Ending balance: collectively
evaluated for impairment	$                 804	$            1,482	$                916	$               808	$                139	$                  19	$                     -	$            4,168
Financing receivables:
Ending balance	$           32,720	$       215,673	$        115,660	$          24,891	$          13,470	$            4,126	$                     -	$      406,540
Ending balance individually
evaluated for impairment	$              3,186	$            8,125	$           4,593	$               634	$                     -	$                     -	$                     -	$          16,538
Ending balance collectively evaluated
for impairment	$           29,534	$      207,548	$         111,067	$         24,257	$          13,470	$            4,126	$                     -	$      390,002

	As of December 31, 2010
	(in thousands)
	Construction	Residential	Commercial			All Other
	and Farmland	Real Estate	Real Estate	Commercial	Consumer	Loans	Unallocated	Total
Allowance for credit losses:
Ending balance	$              1,386	$           3,457	$             1,231	$                819	$                182	$                 36	$                     -	$              7,111
Ending balance: Individually
evaluated for impairment	$                 622	$            1,623	$               273	$                139	$                   -	$                   -	$                   -	$           2,657
Ending balance: collectively
evaluated for impairment	$                 764	$            1,834	$               958	$               680	$                182	$                 36	$                     -	$           4,454
Financing receivables:
Ending balance	$           35,892	$       212,579	$         116,381	$         24,449	$           14,518	$           4,630	$                     -	$      408,449
Ending balance individually
evaluated for impairment	$             3,549	$            11,172	$             5,141	$                319	$                   -	$                   -	$                   -	$           20,181
Ending balance collectively evaluated
for impairment	$           32,343	$       201,407	$         111,240	$          24,130	$           14,518	$           4,630	$                   -	$      388,268

Impaired loans by class at September 30, 2011 and December 31, 2010 were as follows:

	As of  September 30, 2011
		(in thousands)
		Unpaid			Average	Interest
		Principal	Recorded	Related	Recorded	Income
		Balance	Investment	Allowance	Investment	Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial		$              -	$              -	$              -	$              -	$              -
Commercial Real Estate:
Owner Occupied		1,935	1,928	-	1,940	93
Non-owner occupied		1,555	1,550	-	1,562	41
Construction and Farmland:
Residential		-	-	-	-	-
Commercial		-	-	-	-	-
Residential
Equity lines		-	-	-	-	-
Single family		2,525	2,520	-	2,570	78
Multifamily		-	-	-	-	-
Other Loans		-	-	-	-	-
		$       6,015	$       5,998	$              -	$       6,072	$          212
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial		$          647	$          634	$          573	$          640	$            20
Commercial Real Estate:
Owner Occupied		332	297	111	334	-
Non-owner occupied		820	818	222	826	42
Construction and Farmland:
Residential		1,628	1,622	444	1,632	48
Commercial		1,581	1,564	634	1,581	62
Residential
Equity lines		404	402	330	404	10
Single family		4,489	4,717	1,409	5,028	135
Multifamily		-	-	-	-	-
Other Loans		-	-	-	-	-
		$       9,901	$     10,054	$       3,723	$     10,445	$          317
Total:
Commercial		$          647	$          634	$          573	$          640	$            20
Commercial Real Estate		4,642	4,593	333	4,662	176
Construction and Farmland		3,209	3,186	1,078	3,213	110
Residential		7,418	7,639	1,739	8,002	223
Other		-	-	-	-	-
Total		$     15,916	$     16,052	$       3,723	$     16,517	$          529

The average recorded investment of impaired loans for the three month period ended September 30, 2011 was $16,475,000. The interest income recognized on impaired loans for the three months ended September 30, 2011 was $58,500.

	As of December 31, 2010
		(in thousands)
		Unpaid			Average	Interest
		Principal	Recorded	Related	Recorded	Income
		Balance	Investment	Allowance	Investment	Recognized
With no related allowance:
Commercial - Non Real Estate:
Commercial & Industrial		$              -	$              -	$              -	$              -	$              -
Commercial Real Estate:
Owner Occupied		2,143	2,151	-	2,164	131
Non-owner occupied		2,144	2,153	-	2,153	34
Construction and Farmland:
Residential		-	-	-	-	-
Commercial		2,447	2,447	-	2,451	70
Residential
Equity lines		685	689	-	690	33
Single family		4,432	4,450	-	4,736	90
Multifamily		-	-	-	-	-
		$     11,851	$     11,890	$              -	$     12,194	$          358
With an allowance recorded:
Commercial - Non Real Estate:
Commercial & Industrial		$          319	$          319	$          139	$          695	$            29
Commercial Real Estate:
Owner Occupied		306	306	122	406	-
Non-owner occupied		548	549	151	202	23
Construction and Farmland:
Residential		-	-	-	-	-
Commercial		1,102	1,102	622	1,259	68
Residential
Equity lines		-	-	-	-	-
Single family		6,055	6,093	1,623	3,653	319
Multifamily		-	-	-	-	-
		$       8,330	$       8,369	$       2,657	$       6,215	$          439
Total:
Commercial		$          319	$          319	$          139	$          695	$            29
Commercial Real Estate		5,141	5,159	273	4,925	188
Construction and Farmland		3,549	3,549	622	3,710	138
Residential		11,172	11,232	1,623	9,079	442
		$     20,181	$     20,259	$       2,657	$     18,409	$          797

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in nonaccrual loans is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.

There were twenty-three (23) troubled debt restructured loans totaling $10,069,000 at September 30, 2011. At December 31, 2010 there were thirty-one (31) troubled debt restructured loans totaling $8,469,000. There were no outstanding commitments to lend additional amounts to troubled debt restructured borrowers at September 30, 2011.

The Company uses a rating system for evaluating the risks associated with non-consumer loans. Consumer loans are not evaluated for risk unless the characteristics of the loan fall within classified categories. Descriptions of these ratings are as follows:

Pass	Pass loans exhibit acceptable operating trends, balance sheet trends, and liquidity.  Sufficient cash flow exists to service the loan.  All obligations have been paid by the borrower in an as agreed manner.
Watch	Watch loans exhibit income volatility, negative operating trends, and a highly leveraged balance sheet.  A higher level of supervision is required for these loans as the potential for a negative event could impact the borrower's ability to repay the loan.
Special mention	Special mention loans exhibit a potential weakness, if left uncorrected, may negatively affect the borrower's ability to repay its debt obligation.  The risk of default is not imminent and the borrower still demonstrates sufficient cash flow to support the loan.
Substandard	Substandard loans exhibit well defined weaknesses and have a potential of default.  The borrowers exhibit adverse financial trends but still have the ability to service debt obligations.
Doubtful	Doubtful loans exhibit all of the characteristics inherent in substandard loans but the weaknesses make collection or full liquidation highly questionable.
Loss	Loss loans are considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.

Credit quality information by class at September 30, 2011 and December 31, 2010 was as follows:

	As of September 30, 2011
	(in thousands)
			Special
INTERNAL RISK RATING GRADES	Pass	Watch	Mention	Substandard	Doubtful	Loss	Total
Commercial - Non Real Estate:
Commercial & Industrial	$         19,967	$                 587	$            1,946	$            2,231	$               160	$                    -	$          24,891
Commercial Real Estate:
Owner Occupied	63,122	7,298	6,797	5,275	297	-	82,789
Non-owner occupied	21,260	4,354	2,636	4,377	244	-	32,871
Construction and Farmland:
Residential	7,428	94	306	899	-	-	8,727
Commercial	16,125	1,825	3,960	2,083	-	-	23,993
Consumer:
Installment	-	5	25	16	7	-	53
Residential:
Equity Lines	39,392	378	209	826	149	-	40,954
Single family	144,463	3,115	8,854	10,176	3,550	-	170,158
Multifamily	2,006	1,581	937	-	-	-	4,524
All other loans	3,470	-	693	-	-	-	4,163
Total	$       317,233	$            19,237	$        26,363	$        25,883	$           4,407	$                    -	$       393,123
	Performing	Nonperforming
Consumer Credit Exposure by
Payment Activity	$          13,417	$                       -

	As of December 31, 2010
	(in thousands)
			Special
INTERNAL RISK RATING GRADES	Pass	Watch	Mention	Substandard	Doubtful	Loss	Total
Commercial - Non Real Estate:
Commercial & Industrial	$         19,990	$                 845	$            1,535	$             1,812	$              267	$                  -	$         24,449
Commercial Real Estate:							-
Owner Occupied	65,983	5,686	8,823	2,899	-	-	83,391
Non-owner occupied	25,569	3,322	3,113	986	-	-	32,990
Construction and Farmland:							-
Residential	7,875	1,556	-	-	-	-	9,431
Commercial	17,492	790	2,378	2,672	3,129	-	26,461
Consumer:
Installment	-	23	-	10	-	-	33
Residential:							-
Equity Lines	41,430	182	67	860	150	-	42,689
Single family	147,445	3,674	2,229	9,132	2,502	-	164,982
Multifamily	3,272	1,636	-	-	-	-	4,908
All other loans	4,581	49	-	-	-	-	4,630
Total	$      333,637	$            17,763	$          18,145	$          18,371	$           6,048	$                    -	$      393,964
	Performing	Nonperforming
Consumer Credit Exposure by
Payment Activity	$         14,237	$                 248

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Fair Value Measurements

9 Months Ended

Sep. 30, 2011

Fair Value Measurements [Abstract]

Fair Value Measurements

NOTE 10. Fair Value Measurements

GAAP requires the Company to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

"Fair Value Measurements" defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

•	Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•	Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following sections provide a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Interest Rate Swap: The fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents balances of financial assets and liabilities measured at fair value on a recurring basis at September 30, 2011 and December 31, 2010:

		Fair Value Measurements at September 30, 2011 Using
		Quoted Prices
		in Active	Significant
		Markets for	Other	Significant
	Balance as of	Identical	Observable	Unobservable
	September 30,	Assets	Inputs	Inputs
	2011	(Level 1)	(Level 2)	(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government
corporations and agencies	$            25,635	$                      -	$            25,635	$                      -
Mortgage-backed securities	33,923	-	33,923	-
Obligations of states and
political subdivisions	45,173	-	45,173	-
Corporate securities	13,066	-	13,066	-
Equity securities:
Bank preferred stock	2,199	2,199	-	-
Total assets at fair value	$          119,996	$              2,199	$          117,797	$                      -
Liabilities:
Interest rate swap	577	-	577	-
Total liabilities at fair value	$                 577	$                      -	$                 577	$                      -

		Fair Value Measurements at December 31, 2010 Using
		Quoted Prices
		in Active	Significant
		Markets for	Other	Significant
	Balance as of	Identical	Observable	Unobservable
	December 31,	Assets	Inputs	Inputs
	2010	(Level 1)	(Level 2)	(Level 3)
	(in thousands)
Assets:
Securities available for sale
Obligations of U.S. government
corporations and agencies	$            33,150	$                      -	$            33,150	$                      -
Mortgage-backed securities	16,157	-	16,157	-
Obligations of states and
political subdivisions	42,908	-	42,908	-
Corporate securities	15,401		15,401
Equity securities:
Bank preferred stock	2,178	2,178	-	-
Total assets at fair value	$          109,794	$              2,178	$          107,616	$                      -
Liabilities:
Interest rate swap	169	-	169	-
Total liabilities at fair value	$                 169	$                      -	$                 169	$                      -

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial and nonfinancial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans:  Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected.  The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral securing the loans.  Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.  The vast majority of the collateral is real estate.  Level 2 impaired loan value is determined by utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data.  The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business' financial statements if not considered significant using observable market data.  Level 3 impaired loan values are determined using inventory and accounts receivables collateral and are based on financial statement balances or aging reports.  If the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old or has been discounted based on management's historical knowledge, changes in market conditions from the time of valuation, and/or management's expertise and knowledge of the client and client's business, then the fair value is considered Level 3. Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis.  Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.  

Other Real Estate Owned: Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lesser of the fair value of the property, less estimated selling costs or the loan balance outstanding at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Any subsequent valuation adjustments are applied to earnings in the consolidated statements of income. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write-downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of GAAP.

The following table summarizes the Company's financial and nonfinancial assets that were measured at fair value on a nonrecurring basis at September 30, 2011 and December 31, 2010:

		Carrying value at September 30, 2011
	Balance as of	Identical	Observable	Unobservable
	September 30,	Assets	Inputs	Inputs
	2011	(Level 1)	(Level 2)	(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$            12,329	$                      -	$                      -	$            12,329
Nonfinancial Assets:
Other real estate owned	3,437	-	-	3,437
		Carrying value at December 31, 2010
		Quoted Prices
		in Active	Significant
		Markets for	Other	Significant
	Balance as of	Identical	Observable	Unobservable
	December 31,	Assets	Inputs	Inputs
	2010	(Level 1)	(Level 2)	(Level 3)
	(in thousands)
Financial Assets:
Impaired loans	$            17,524	$                      -	$                      -	$            17,524
Nonfinancial Assets:
Other real estate owned	1,783	-	-	1,783

GAAP defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than through a forced or liquidation sale for purposes of this disclosure. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The following methods and assumptions were used to estimate the fair value of the Company's financial instruments:

Cash and short-term investments/accrued interest: The fair value was equal to the carrying amount.

Securities: The fair value, excluding restricted securities, was based on quoted market prices. The fair value of restricted securities approximated the carrying amount based on the redemption provisions of the issuers.

Loans: The fair value of variable rate loans, which reprice frequently and with no significant change in credit risk, was equal to the carrying amount. The fair value of all other loans was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products.

Deposits and borrowings: The fair value of demand deposits, savings accounts, and certain money market deposits was equal to the carrying amount. The fair value of all other deposits and borrowings was determined using discounted cash flow analysis. The discount rate was equal to the current interest rate on similar products.

Off-balance-sheet financial instruments: The fair value of commitments to extend credit was estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the credit worthiness of the counterparties. The fair value of fixed rate loan commitments also considered the difference between current interest rates and the committed interest rates. The fair value of standby letters of credit was estimated using the fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties.

The carrying amount and fair value of the Company's financial instruments at September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011		December 31, 2010
	Carrying	Fair	Carrying	Fair
	Amount	Value	Amount	Value
	(in thousands)		(in thousands)
Financial assets:
Cash and short-term investments	$      18,839	$      18,839	$      13,970	$      13,970
Securities	123,699	123,699	109,794	109,794
Loans, net	398,649	416,788	401,338	416,669
Accrued interest receivable	2,136	2,136	2,179	2,179
Financial liabilities:
Deposits	$    450,007	$    451,852	$    429,296	$    430,627
Federal funds purchased and securities
sold under agreements to repurchase	10,000	10,421	14,395	14,950
Federal Home Loan Bank advances	42,250	45,060	52,250	54,853
Trust preferred capital notes	7,217	7,217	7,217	7,217
Accrued interest payable	403	403	417	417
Interest rate swap contract	577	577	169	169

The Company assumes interest rate risk (the risk that general interest rate levels will change) during its normal operations.  As a result, the fair value of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company.  Management attempts to match maturities of assets and liabilities in order to minimize interest rate risk.  However, borrowers with fixed rate obligations are less likely to prepay their principal balance in a rising rate environment and more likely to do so in a falling rate environment.  Conversely, depositors who are receiving fixed rate interest payments are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment.  Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting the terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk.

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General

9 Months Ended

Sep. 30, 2011

General [Abstract]

General

NOTE 1. General

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2011 and December 31, 2010, the results of operations for the three and nine months ended September 30, 2011 and 2010 and cash flows for the nine months ended September 30, 2011 and 2010. The results of operations for the three and nine months ended September 30, 2011 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, 2010 (the "2010 Form 10-K").

The Company owns 100% of Bank of Clarke County (the "Bank") and Eagle Financial Statutory Trust II. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions between the Company and the Bank have been eliminated. The subordinated debt of Eagle Financial Statutory Trust II is reflected as a liability of the Company.

Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations.

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Deposits

9 Months Ended

Sep. 30, 2011

Deposits [Abstract]

Deposits

NOTE 7. Deposits

The composition of deposits at September 30, 2011 and December 31, 2010 was as follows:

	September 30, 2011	December 31, 2010
	(in thousands)
Noninterest bearing demand deposits	$                104,153	$                  98,256
Savings and interest bearing demand deposits:
NOW accounts	$                  69,660	$                  72,413
Money market accounts	77,446	69,766
Regular savings accounts	46,929	42,369
	$                194,035	$                184,548
Time deposits:
Balances of less than $100,000	$                  87,843	$                  85,269
Balances of $100,000 and more	63,976	61,223
	$                151,819	$                146,492
	$                450,007	$                429,296

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2011

Recent Accounting Pronouncements [Abstract]

Recent Accounting Pronouncements

NOTE 12. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements." ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers' disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company's (consolidated) financial statements.

In July 2010, the FASB issued ASU 2010-20, "Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses."  The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into an entity's exposure to credit losses from lending arrangements.  The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010.  Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures were required for periods beginning on or after December 15, 2010.  The Company has included the required disclosures in its (consolidated) financial statements.

In December 2010, the FASB issued ASU 2010-28, "Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts." The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company's (consolidated) financial statements.

In December 2010, the FASB issued ASU 2010-29, "Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations." The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company's (consolidated) financial statements.

The Securities Exchange Commission (SEC) issued Final Rule No. 33-9002, "Interactive Data to Improve Financial Reporting."The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company complied with this Rule beginning with the filing of the June 30, 2011 Form 10-Q.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114.  This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series.  This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB's Codification.  The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series.  The effective date for SAB 114 is March 28, 2011.   The adoption of the new guidance did not have a material impact on the Company's (consolidated) financial statements.

In April 2011, the FASB issued ASU 2011-02, "Receivables (Topic 310) – A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring."  The amendments in this ASU clarify the guidance on a creditor's evaluation of whether it has granted a concession to a debtor.  They also clarify the guidance on a creditor's evaluation of whether a debtor is experiencing financial difficulty.  The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011.  Early adoption is permitted.  Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required.  As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired.  For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in its (consolidated) financial statements.

In April 2011, the FASB issued ASU 2011-03, "Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements." The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its (consolidated) financial statements.

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its (consolidated) financial statements.

In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (Topic 220) – Presentation of Comprehensive Income." The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its (consolidated) financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, "Technical Amendments to Commission Rules and Forms related to the FASB's Accounting Standards Codification."The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940.These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification.The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act.The Release was effective as of August 12, 2011.The adoption of the release did not have a material impact on the Company's (consolidated) financial statements.

In September 2011, the FASB issued ASU 2011-08, "Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment."  The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity's financial statements for the most recent annual or interim period have not yet been issued.  The Company is currently assessing the impact that ASU 2011-08 will have on its (consolidated) financial statements.

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Pension And Postretirement Benefit Plans

9 Months Ended

Sep. 30, 2011

Pension And Postretirement Benefit Plans [Abstract]

Pension And Postretirement Benefit Plans

NOTE 8. Pension and Postretirement Benefit Plans

The Company has a funded noncontributory defined benefit pension plan that covers substantially all of its employees. The plan provides defined benefits based on years of service and final average salary. Effective December 31, 2006, the pension plan was amended so that no further benefits will accrue under the plan and no additional employees may become participants. In September 2010, the board of directors voted to terminate the pension plan effective September 30, 2010. Pending regulatory, approval, a payout is expected to occur in the fourth quarter of 2011. Defined benefit pension plan expenses are projected to be approximately $581,000 in 2011 and nothing going forward.

The Company provides certain health care and life insurance benefits for nine retired employees who have met certain eligibility requirements. All other employees retiring after reaching age 65 and having at least 15 years of service with the Company will be allowed to stay on the Company's group life and health insurance policies, but will be required to pay premiums. The Company's share of the estimated costs that will be paid after retirement is generally being accrued by charges to expense over the employees' active service periods to the dates they are fully eligible for benefits, except that the Company's unfunded cost that existed at January 1, 1993 is being accrued primarily in a straight-line manner that will result in its full accrual by December 31, 2013.

Generally Accepted Accounting Principles ("GAAP") requires the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its pension and postretirement benefit plans in the consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of taxes.

The following tables provide the components of net periodic benefit cost of the pension plan and postretirement benefit plan for the three and nine months ended September 30, 2011 and 2010:

	Pension Benefits		Postretirement Benefits
	Three Months Ended September 30,		Three Months Ended September 30,
	2011	2010	2011	2010
	(in thousands)
Components of Net Periodic Benefit Cost:
Service cost	$                         -	$                         -	$                         -	$                         -
Interest cost	49	47	1	2
Expected return on plan assets	(40)	(37)	-	-
Amortization of prior service costs	-	-	-	-
Amortization of transition obligation	-	-	-	-
Recognized net actuarial loss (gain)	16	59	(2)	(2)
Net periodic benefit cost	$                      25	$                      69	$                       (1)	$                         -
	Pension Benefits		Postretirement Benefits
	Nine Months Ended September 30,		Nine Months Ended September 30,
	2011	2010	2011	2010
	(in thousands)
Components of Net Periodic Benefit Cost:
Service cost	$                         -	$                         -	$                         -	$                         -
Interest cost	147	141	3	6
Expected return on plan assets	(120)	(111)	-	-
Amortization of prior service costs	-	-	-	-
Amortization of transition obligation	-	-	-	-
Recognized net actuarial loss (gain)	48	177	(6)	(6)
Net periodic benefit cost	$                      75	$                    207	$                       (3)	$                         -

The pension financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:

•	Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•	Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•	Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table presents balances of pension assets measured at fair value on September 30, 2011 and December 31, 2010:

		Fair Value Measurements at September 30, 2011 Using
		Quoted Prices
		in Active	Significant
		Markets for	Other	Significant
	Balance as of	Identical	Observable	Unobservable
	September 30,	Assets	Inputs	Inputs
	2011	(Level 1)	(Level 2)	(Level 3)
	(in thousands)
Cash Equivalents	$              3,278	$              3,278	$                      -	$                      -
Total assets at fair value	$              3,278	$              3,278	$                      -	$                      -
		Fair Value Measurements at December 31, 2010 Using
		Quoted Prices
		in Active	Significant
		Markets for	Other	Significant
	Balance as of	Identical	Observable	Unobservable
	December 30,	Assets	Inputs	Inputs
	2010	(Level 1)	(Level 2)	(Level 3)
	(in thousands)
Cash	$                     1	$                     1	$                      -	$                      -
Cash Equivalents	1,406	1,406
AA corporate bonds	131	-	131	-
Mutual funds (a)	1,714	1,714	-	-
Total assets at fair value	$              3,252	$              3,121	$                 131	$                      -
(a) 100% of mutual funds are invested in fixed income corporate bond securities.

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Troubled Debt Restructurings

9 Months Ended

Sep. 30, 2011

Troubled Debt Restructurings [Abstract]

Troubled Debt Restructurings

NOTE 6. Troubled Debt Restructurings

All loans deemed a troubled debt restructuring, or "TDR", are considered impaired, and are evaluated for collateral and cash-flow sufficiency. A loan is considered a TDR when the Company, for economic or legal reasons related to a borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. All of the following factors are indicators that the Bank has granted a concession (one or multiple items may be present):

•The borrower receives a reduction of the stated interest rate to a rate less than the institution is willing to accept at the time of the restructure for a new loan with comparable risk.

•The borrower receives an extension of the maturity date or dates at a stated interest rate lower than the current market interest rate for new debt with similar risk characteristics.

•The borrower receives a reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.

•The borrower receives a deferral of required payments (principal and/or interest).

•The borrower receives a reduction of the accrued interest.

The following tables set forth information on the Company's troubled debt restructurings by class of financing receivable occurring during the stated periods:

	Three Months Ended September 30, 2011
	(in thousands)
		Pre-Modification	Post-Modification
		Outstanding	Outstanding
	Number of	Recorded	Recorded	Impairment
	Contracts	Investment	Investment	Accrued
Residential
Single family	1	$                       72	$                          74	$                 19
Total	1	$                       72	$                          74	$                 19

	Nine Months Ended September 30, 2011
	(in thousands)
		Pre-Modification	Post-Modification
		Outstanding	Outstanding
	Number of	Recorded	Recorded	Impairment
	Contracts	Investment	Investment	Accrued
Commercial Real Estate:
Non-owner occupied	1	$                     890	$                        890	$                 -
Construction and Farmland:
Residential	1	1,530	1,530	389
Residential
Single family	6	2,713	2,767	504
Total	8	$                  5,133	$                     5,187	$               893

During the three months ended September 30, 2011, the Company restructured one loan by granting concessions to a borrower experiencing financial difficulties. A residential loan was modified by granting an interest rate reduction. During the nine months ended September 30, 2011, the Company restructured eight loans by granting concessions to borrowers experiencing financial difficulties.  Two commercial real estate loans were combined into the one restructured commercial real estate loan reflected in the table above.  Monthly payments on this loan were converted from principal and interest to interest only. The residential construction loan was modified by granting a reduction in the required monthly payment. Six single family residential loans were modified during the nine months ended September 30, 2011.  Three of the loans were modified by granting interest rate reductions, another two had payment requirements modified from principal and interest to interest only while the remaining loan was modified by granting a reduction in the required monthly payment.    

Loans by class of financing receivable modified as TDRs within the previous 12 months and for which there was a payment default during the stated periods were:

	Three Months Ended September 30, 2011
	(in thousands)
	Number of	Recorded
	Contracts	Investment
Residential
Single family	3	$                            983
Total	3	$                            983
	Nine Months Ended September 30, 2011
	(in thousands)
	Number of	Recorded
	Contracts	Investment
Commercial Real Estate:
Owner occupied	2	$                            613
Residential
Single family	5	1,904
Total	7	$                         2,517

A loan is considered to be in payment default once it is thirty days contractually past due under the modified terms.

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Consolidated Statements Of Changes In Shareholders' Equity (Parenthetical) (USD $) In Thousands, except Per Share data	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Consolidated Statements Of Changes In Shareholders' Equity [Abstract]
Unrealized gain on available for sale securities, deferred income taxes	$ 956	$ 863
Change in market value of interest rate swap, deferred income taxes	$ 139	$ 235
Issuance of restricted stock, stock incentive plan, shares	5,691	7,936
Issuance of common stock, dividend investment plan, shares	29,201	28,493
Issuance of common stock, employee benefit plan	5,184
Dividends declared, per share	$ 0.54	$ 0.51

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Stock-Based Compensation Plan

9 Months Ended

Sep. 30, 2011

Stock-Based Compensation Plan [Abstract]

Stock-Based Compensation Plan

NOTE 2.  Stock-Based Compensation Plan

During 2003, 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 300,000 shares of common stock.

The Company periodically grants Restricted Stock to its directors and 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 nine months. Beginning during 2006, executive officers were granted restricted shares which vest over a three year service period and restricted shares which vest based on meeting annual performance measures. The Company recognizes compensation expense over the restricted period. The following table presents Restricted Stock activity for the nine months ended September 30, 2011 and 2010:

	Nine Months Ended September 30,
	2011		2010
		Weighted		Weighted
		Average		Average
		Grant Date		Grant Date
	Shares	Fair Value	Shares	Fair Value
Nonvested, beginning of period	12,772	$       16.89	13,335	$       20.00
Granted	12,300	16.76	12,900	16.14
Vested	(5,691)	17.26	(7,936)	22.06
Forfeited	(2,081)	18.38	(4,160)	19.87
Nonvested, end of period	17,300	$       16.50	14,139	$       16.83

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Earnings Per Common Share

9 Months Ended

Sep. 30, 2011

Earnings Per Common Share [Abstract]

Earnings Per Common Share

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. 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 and relates to outstanding stock options and unvested restricted stock grants.

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, 2011 and 2010 and the effect on the weighted average number of shares of dilutive potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2011	2010	2011	2010
Average number of common shares outstanding	3,302,082	3,249,236	3,287,943	3,238,010
Effect of dilutive common stock	9,390	9,995	7,953	8,011
Average number of common shares outstanding
used to calculate diluted earnings per share	3,311,472	3,259,231	3,295,896	3,246,021

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Derivative Instruments And Hedging Activities

9 Months Ended

Sep. 30, 2011

Derivative Instruments And Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

NOTE 11. Derivative Instruments and Hedging Activities

Interest Rate Swaps

The Company uses interest rate swaps to reduce interest rate risk and to manage interest expense. By entering into these agreements, the Company converts floating rate debt into fixed rate debt, or alternatively, converts fixed rate debt into floating rate debt. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest expense. These interest rate swap agreements are derivative instruments that qualify for hedge accounting as discussed in Note 1. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the agreements at current market rates.

On December 4, 2008, the Company entered into an interest rate swap agreement related to the outstanding trust preferred capital notes. The swap agreement became effective on December 1, 2008. The notional amount of the interest rate swap was $7,000,000 and has an expiration date of December 1, 2016. Under the terms of the agreement, the Company pays interest quarterly at a fixed rate of 2.85% and receives interest quarterly at a variable rate of three month LIBOR. The variable rate resets on each interest payment date.

The following table summarizes the fair value of derivative instruments at September 30, 2011 and December 31, 2010:

	September 30, 2011		December 31, 2010
	Balance Sheet	Fair	Balance Sheet	Fair
	Location	Value	Location	Value
	(dollars in thousands)
Derivatives designated
as hedging instruments
under GAAP
Interest rate swap contracts	Other Liabilities	$           577	Other Liabilities	$               169

The following tables present the effect of the derivative instrument on the Consolidated Balance Sheet at September 30, 2011 and 2010 and the Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,
	Amount of Gain (Loss)
	Recognized in OCI			Amount of Gain (Loss)
Derivatives in GAAP	on Derivative		Location of Gain (Loss)	Recognized in Income
Cash Flow Hedging	(Effective Portion)		Recognized in Income	(Ineffective Portion)
Relationships	2011	2010	(Ineffective Portion)	2011	2010
	(dollars in thousands)			(dollars in thousands)
Interest rate swap
contracts, net of tax	$             (195)	$             (161)	Not applicable	$                   -	$                   -
	Nine Months Ended September 30,
	Amount of Gain (Loss)
	Recognized in OCI			Amount of Gain (Loss)
Derivatives in GAAP	on Derivative		Location of Gain (Loss)	Recognized in Income
Cash Flow Hedging	(Effective Portion)		Recognized in Income	(Ineffective Portion)
Relationships	2011	2010	(Ineffective Portion)	2011	2010
	(dollars in thousands)			(dollars in thousands)
Interest rate swap
contracts, net of tax	$             (270)	$             (457)	Not applicable	$                   -	$                   -

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Securities

9 Months Ended

Sep. 30, 2011

Securities [Abstract]

Securities

NOTE 4. Securities

Amortized costs and fair values of securities available for sale at September 30, 2011 and December 31, 2010 were as follows:

		Gross	Gross
	Amortized	Unrealized	Unrealized	Fair
	Cost	Gains	(Losses)	Value
	September 30, 2011
	(in thousands)
Obligations of U.S. government
corporations and agencies	$             24,658	$                  977	$                      -	$             25,635
Mortgage-backed securities	32,519	1,404	-	33,923
Obligations of states and
political subdivisions	43,113	2,105	(45)	45,173
Corporate securities	12,498	785	(217)	13,066
Equity securities	2,054	145	-	2,199
	$           114,842	$               5,416	$                (262)	$           119,996
	December 31, 2010
	(in thousands)
Obligations of U.S. government
corporations and agencies	$             32,716	$                  531	$                  (97)	$             33,150
Mortgage-backed securities	15,706	524	(73)	16,157
Obligations of states and
political subdivisions	42,511	928	(531)	42,908
Corporate securities	14,464	994	(57)	15,401
Equity securities	2,054	124	-	2,178
	$           107,451	$               3,101	$                (758)	$           109,794

Sales and calls of securities available for sale totaled $4,849,000 during the first nine months of 2011 for a net gain of $155,000. During the first nine months of 2010, the Company sold $2,853,000 in available for sale securities for a net gain of $98,000.

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, 2011 and December 31, 2010 were as follows:

	Less than 12 months		12 months or more		Total
		Gross		Gross		Gross
		Unrealized		Unrealized		Unrealized
	Fair Value	Losses	Fair Value	Losses	Fair Value	Losses
	September 30, 2011
	(in thousands)
Obligations of U.S. government
corporations and agencies	$                  -	$              -	$                  -	$              -	$                  -	$              -
Mortgage-backed securities	-	-	-	-	-	-
Obligations of states and
political subdivisions	543	5	296	40	839	45
Corporate securities	3,356	142	50	75	3,406	217
Equity securities	-	-	-	-	-	-
	$           3,899	$          147	$              346	$          115	$           4,245	$          262
	December 31, 2010
	(in thousands)
Obligations of U.S. government
corporations and agencies	$           6,916	$            97	$                  -	$              -	$           6,916	$            97
Mortgage-backed securities	4,355	73	-	-	4,355	73
Obligations of states and
political subdivisions	11,464	481	320	50	11,784	531
Corporate securities	1,047	57	-	-	1,047	57
Equity securities	-	-	-	-	-	-
	$         23,782	$          708	$              320	$            50	$         24,102	$          758

Gross unrealized losses on available for sale securities included nine (9) and thirty-five (35) debt securities at September 30, 2011 and December 31, 2010, 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. 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. 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, 2011 and December 31, 2010 was changes in market interest rates. Since the losses can be primarily attributed to changes in market interest rates and not expected cash flows or an issuer's financial condition, the unrealized losses are deemed to be temporary. The Company's holdings of corporate securities and equity securities represent investments in larger financial institutions. The current economic crisis involving housing, liquidity and credit were the primary causes of the unrealized losses on these securities at December 31, 2010 and September 30, 2011. 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. In addition, recent economic uncertainty and market events have led to unprecedented volatility in currency, commodity, credit and equity markets culminating in failures of some banking and financial services firms and government intervention to solidify others.  These recent events underscore the level of investment risk associated with the current economic environment, and accordingly the level of risk in the Company's securities.

Securities having a carrying value of $17,581,000 at September 30, 2011 were pledged to secure securities sold under agreements to repurchase and other purposes required by law.

The composition of restricted investments at September 30, 2011 and December 31, 2010 was as follows:

	September 30, 2011	December 31, 2010
	(in thousands)
Federal Reserve Bank Stock	$                       344	$                       344
Federal Home Loan Bank Stock	3,219	3,498
Community Bankers' Bank Stock	140	140
	$                    3,703	$                    3,982

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Consolidated Statements Of Changes In Shareholders' Equity (USD $) In Thousands	Common Stock [Member]	Surplus [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income [Member]	Comprehensive Income [Member]	Total
Balance at Dec. 31, 2009	$ 7,999	$ 8,504	$ 34,048	$ 1,092		$ 51,643
Comprehensive income:
Net income			3,144		3,144	3,144
Other comprehensive income:
Unrealized gain on available for sale securities, net of deferred income taxes				1,676	1,676	1,676
Change in market value of interest rate swap, net of deferred income taxes				(457)	(457)	(457)
Total comprehensive income					4,363
Restricted stock awards, stock incentive plan	20	(20)
Stock-based compensation expense		77				77
Issuance of common stock, dividend investment plan	71	369				440
Dividends declared			(1,648)			(1,648)
Balance at Sep. 30, 2010	8,090	8,930	35,544	2,311		54,875
Balance at Dec. 31, 2010	8,124	9,076	35,419	1,210		53,829
Comprehensive income:
Net income			3,629		3,629	3,629
Other comprehensive income:
Unrealized gain on available for sale securities, net of deferred income taxes				1,855	1,855	1,855
Change in market value of interest rate swap, net of deferred income taxes				(270)	(270)	(270)
Total comprehensive income					5,214
Restricted stock awards, stock incentive plan	14	(14)
Stock-based compensation expense		110				110
Issuance of common stock, dividend investment plan	73	380				453
Issuance of common stock, employee benefit plan	13	76				89
Dividends declared			(1,772)			(1,772)
Balance at Sep. 30, 2011	$ 8,224	$ 9,628	$ 37,276	$ 2,795		$ 57,923

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Consolidated Statements Of Cash Flows (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash Flows from Operating Activities
Net income	$ 3,629	$ 3,144
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	629	574
Amortization of intangible and other assets	67	103
Provision for loan losses	2,850	4,150
Provision for other real estate owned	75	80
Loss on the sale and disposal of assets	21	10
Loss on the sale of other real estate owned	255	246
(Gain) on the sale of securities	(155)	(98)
Accrual of restricted stock awards	110	77
Premium amortization (discount accretion) on securities, net	69	33
Changes in assets and liabilities:
Decrease (increase) in other assets	423	(2,427)
Increase in other liabilities	1,678	1,374
Net cash provided by operating activities	9,651	7,266
Cash Flows from Investing Activities
Proceeds from maturities and principal payments of securities available for sale	30,281	26,749
Proceeds from the buyback fo restricted assets	278	281
Purchases of securities available for sale	(42,435)	(38,238)
Proceeds from the sale of securities	4,849	2,853
Purchases of bank premises and equipment	(648)	(1,712)
Proceeds from the sale of bank premises and equipment	3
Proceeds from the sale of other real estate owned	1,673	1,727
Proceeds from the sale of repossessed assets	123	39
Net (increase) in loans	(3,991)	(12,309)
Net cash (used in) investing activities	(9,867)	(20,610)
Cash Flows from Financing Activities
Net increase in demand deposits, money market and savings accounts	15,384	14,147
Net increase in certificates of deposit	5,327	14,409
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase	(4,395)	904
Net (decrease) in Federal Home Loan Bank advances	(10,000)	(10,000)
Issuance of common stock, employee benefit plan	89
Cash dividends paid	(1,320)	(1,209)
Net cash used by financing activities	5,085	18,251
Increase in cash and cash equivalents	4,869	4,907
Cash and Cash Equivalents
Beginning	13,970	7,533
Ending	18,839	12,440
Supplemental Disclosures of Cash Flow Information
Interest	3,687	4,193
Income taxes	850	2,250
Supplemental Schedule of Noncash Investing and Financing Activities:
Unrealized gain (loss) on securities available for sale	2,811	2,539
Change in market value of interest rate swap	(409)	(692)
Other real estate acquired in settlement of loans	3,657	1,179
Issuance of common stock, dividend investment plan	$ 453	$ 440

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Trust Preferred Capital Notes

9 Months Ended

Sep. 30, 2011

Trust Preferred Capital Notes [Abstract]

Trust Preferred Capital Notes

NOTE 9.Trust Preferred Capital Notes

In September 2007, Eagle Financial Statutory Trust II (the "Trust II"), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On September 20, 2007, Trust II issued $7,000,000 of trust preferred securities and $217,000 in common equity. The principal asset of Trust II is $7,217,000 of the Company's junior subordinated debt securities with the same maturity and interest rate structures as the capital securities. The securities have a LIBOR-indexed floating rate of interest and the interest rate at September 30, 2011 was 1.95%. The securities have a mandatory redemption date of September 1, 2037, and are subject to varying call provisions beginning September 1, 2012.

The trust preferred securities are included in Tier 1 capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier 1 capital, including total trust preferred securities. The portion of the trust preferred securities not considered as Tier 1 capital, if any, may be included in Tier 2 capital. At September 30, 2011, the total amount ($7,000,000) of trust preferred securities issued by Trust II is included in the Company's Tier 1 capital.

The obligations of the Company with respect to the issuance of the capital securities constitute a full and unconditional guarantee by the Company of the Trust's obligations with respect to the capital securities.

Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital securities.

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Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events

NOTE 13. Subsequent Events

The Company has evaluated events and transactions subsequent to September 30, 2011 through the date these financial statements were issued.  Based on definitions and requirements of Generally Accepted Accounting Principles for "Subsequent Events", the Company has not identified any events that would require adjustments to, or disclosure in the financial statements.

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Consolidated Balance Sheets (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash and due from banks	$ 12,987	$ 6,884
Interest-bearing deposits with other institutions	5,852	7,086
Federal funds sold
Total cash and cash equivalents	18,839	13,970
Securities available for sale, at fair value	119,996	109,794
Restricted investments	3,703	3,982
Loans	406,540	408,449
Allowance for loan losses	(7,891)	(7,111)
Net Loans	398,649	401,338
Bank premises and equipment, net	15,728	15,712
Other real estate owned, net of allowance	3,437	1,783
Other assets	10,984	12,261
Total assets	571,336	558,840
Liabilities and Shareholders' Equity
Noninterest bearing demand deposits	104,153	98,256
Savings and interest bearing demand deposits	194,035	184,548
Time deposits	151,819	146,492
Total deposits	450,007	429,296
Federal funds purchased and securities sold under agreements to repurchase	10,000	14,395
Federal Home Loan Bank advances	42,250	52,250
Trust preferred capital notes	7,217	7,217
Other liabilities	3,939	1,853
Total liabilities	513,413	505,011
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 2011, 3,289,553; issued 2010, 3,249,477	8,224	8,124
Surplus	9,628	9,076
Retained earnings	37,276	35,419
Accumulated other comprehensive income	2,795	1,210
Total shareholders' equity	57,923	53,829
Total liabilities and shareholders' equity	$ 571,336	$ 558,840