Xenith Bankshares (XBKS) 10-Q 2014 Q3 Quarterly report

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, 2014

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: 000-53380

Xenith Bankshares, Inc.

(Exact name of registrant as specified in its charter)

Virginia	80-0229922
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One James Center 901 E. Cary Street, Suite 1700 Richmond, Virginia	23219
(Address of principal executive offices)	(Zip Code)

(804) 433-2200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 past 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 Data 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.

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 Common Stock, par value $1.00 per share, outstanding at October 31, 2014 was 12,923,607.

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements		1
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3 Quantitative and Qualitative Disclosures About Market Risk		55
Item 4 Controls and Procedures		55
PART II - OTHER INFORMATION
Item 1 Legal Proceedings		56
Item 1A Risk Factors		56
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		56
Item 6 Exhibits		56
SIGNATURES

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2014 AND DECEMBER 31, 2013

	(Unaudited)
(in thousands, except share data)	September 30, 2014			December 31, 2013
Assets
Cash and cash equivalents
Cash and due from banks	$	20,665		$	24,944
Federal funds sold		6,826			5,749
Total cash and cash equivalents		27,491			30,693
Securities available for sale, at fair value		74,743			69,185
Securities held to maturity, at cost (fair value - $9,515)		9,281			—
Loans, net of allowance for loan and lease losses, 2014 - $5,569; 2013 - $5,305		738,809			536,500
Premises and equipment, net		8,113			5,069
Other real estate owned, net		1,283			199
Goodwill and other intangible assets, net		16,258			15,624
Accrued interest receivable		4,216			2,403
Deferred tax asset		6,170			4,345
Bank owned life insurance		14,002			9,690
Other assets		9,796			6,188
Total assets	$	910,162		$	679,896
Liabilities and Shareholders’ Equity
Deposits
Demand and money market	$	457,201		$	359,455
Savings		10,011			4,785
Time		299,312			204,958
Total deposits		766,524			569,198
Accrued interest payable		288			215
Federal funds purchased and borrowed funds		32,000			20,000
Supplemental executive retirement plan		2,262			—
Other liabilities		3,404			2,797
Total liabilities		804,478			592,210
Shareholders’ equity
Preferred stock, $1.00 par value, $1,000 liquidation value, 25,000,000 shares authorized as of September 30, 2014 and December 31, 2013; 8,381 shares issued and outstanding as of September 30, 2014 and December 31, 2013		8,381			8,381
Common stock, $1.00 par value, 100,000,000 shares authorized as of September 30, 2014 and December 31, 2013; 12,923,607 shares issued and outstanding as of September 30, 2014 and 10,437,630 shares issued and outstanding as of December 31, 2013		12,924			10,438
Additional paid-in capital		85,821			71,797
Accumulated deficit		(1,114	)		(1,758	)
Accumulated other comprehensive loss, net of tax		(328	)		(1,172	)
Total shareholders’ equity		105,684			87,686
Total liabilities and shareholders’ equity	$	910,162		$	679,896

See notes to consolidated financial statements.

1

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

(in thousands, except per share data)	September 30, 2014			September 30, 2013
Interest income
Interest and fees on loans	$	8,891		$	6,481
Interest on securities		422			350
Interest on federal funds sold and deposits in other banks		89			63
Total interest income		9,402			6,894
Interest expense
Interest on deposits		784			510
Interest on time certificates of $100,000 and over		412			226
Interest on federal funds purchased and borrowed funds		95			96
Total interest expense		1,291			832
Net interest income		8,111			6,062
Provision for loan and lease losses		1,560			497
Net interest income after provision for loan and lease losses		6,551			5,565
Noninterest income
Service charges on deposit accounts		157			113
Net loss on sale and write-down of other real estate owned and other collateral		—			(4	)
Gain on sales of securities		17			—
Bargain purchase gain		10			—
Loss on the write-down of equipment and other assets		(17	)		—
Increase in cash surrender value of bank owned life insurance		98			83
Other		92			153
Total noninterest income		357			345
Noninterest expense
Compensation and benefits		3,249			2,800
Occupancy		435			378
FDIC insurance		128			96
Bank franchise taxes		221			188
Technology		690			400
Communications		98			65
Insurance		74			74
Professional fees		257			283
Amortization of intangible assets		114			91
Guaranteed student loan servicing		152			—
Other		486			384
Total noninterest expense		5,904			4,759
Income before income tax		1,004			1,151
Income tax expense		347			403
Net income		657			748
Preferred stock dividend		(21	)		(21	)
Net income available to common shareholders	$	636		$	727
Earnings per common share (basic and diluted):	$	0.05		$	0.07

See notes to consolidated financial statements.

2

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

(in thousands, except per share data)	September 30, 2014			September 30, 2013
Interest income
Interest and fees on loans	$	21,073		$	18,099
Interest on securities		1,148			870
Interest on federal funds sold and deposits in other banks		223			217
Total interest income		22,444			19,186
Interest expense
Interest on deposits		1,776			1,625
Interest on time certificates of $100,000 and over		1,052			715
Interest on federal funds purchased and borrowed funds		291			282
Total interest expense		3,119			2,622
Net interest income		19,325			16,564
Provision for loan and lease losses		2,390			913
Net interest income after provision for loan and lease losses		16,935			15,651
Noninterest income
Service charges on deposit accounts		419			312
Net (loss) gain on sale and write-down of other real estate owned and other collateral		(39	)		342
Gain on sales of securities		39			291
Bargain purchase gain		42			—
Loss on the write-down of equipment and other assets		(17	)		—
Increase in cash surrender value of bank owned life insurance		258			106
Other		236			329
Total noninterest income		938			1,380
Noninterest expense
Compensation and benefits		8,856			8,548
Occupancy		1,154			1,112
FDIC insurance		368			304
Bank franchise taxes		602			601
Technology		1,652			1,220
Communications		254			186
Insurance		218			222
Professional fees		1,165			792
Amortization of intangible assets		297			273
Guaranteed student loan servicing		476			—
Other		1,560			1,130
Total noninterest expense		16,602			14,388
Income before income tax		1,271			2,643
Income tax expense		564			925
Net income		707			1,718
Preferred stock dividend		(63	)		(63	)
Net income available to common shareholders	$	644		$	1,655
Earnings per common share (basic and diluted):	$	0.06		$	0.16

See notes to consolidated financial statements.

3

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

	For the Three Months Ended September 30,
(in thousands)	2014			2013
Net income	$	657		$	748
Other comprehensive income (loss), before taxes:
Securities available for sale:
Unrealized loss arising during the year		(332	)		(267	)
Reclassification adjustment for gains included in net income		(17	)		—
Unrealized loss on available-for-sale securities		(349	)		(267	)
Securities held to maturity:
Amortization of unrealized loss transferred from available for sale		13			—
Unrealized loss on held-to-maturity securities		13			—
Unrealized gain (loss) on derivative:
Unrealized gain (loss) arising during the year		73			(93	)
Reclassification adjustment for losses included in net income		37			36
Unrealized gain (loss) on derivative		110			(57	)
Other comprehensive loss, before taxes		(226	)		(324	)
Income tax benefit related to other comprehensive loss		81			110
Comprehensive income	$	512		$	534

	For the Nine Months Ended September 30,
(in thousands)	2014			2013
Net income	$	707		$	1,718
Other comprehensive income (loss), before taxes:
Securities available for sale:
Unrealized gain (loss) arising during the year		1,960			(2,763	)
Reclassification adjustment for gains included in net income		(39	)		(291	)
Unrealized gain (loss) on available-for-sale securities		1,921			(3,054	)
Securities held to maturity:
Unrealized loss transferred to held to maturity		(518	)		—
Amortization of unrealized loss transferred from available for sale		36			—
Unrealized loss on held-to-maturity securities		(482	)		—
Unrealized loss on derivative:
Unrealized (loss) gain arising during the year		(275	)		99
Reclassification adjustment for losses included in net income		109			102
Unrealized (loss) gain on derivative		(166	)		201
Other comprehensive income (loss), before taxes		1,273			(2,853	)
Income tax (expense) benefit related to other comprehensive income (loss)		(429	)		970
Comprehensive income (loss)	$	1,551		$	(165	)

See notes to consolidated financial statements.

4

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

(in thousands)	September 30, 2014			September 30, 2013
Cash flows from operating activities
Net income	$	707		$	1,718
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan and lease losses		2,390			913
Depreciation and amortization		837			905
Net amortization of securities		301			509
Accretion of acquisition accounting adjustments		(1,549	)		(2,143	)
Deferred tax (benefit) expense		(358	)		710
Gain on sales of securities		(39	)		(291	)
Share-based compensation expense		694			481
Bargain purchase gain		(42	)		—
Net loss (gain) on sale and write-down of other real estate owned and other collateral		39			(342	)
Loss on the write-down of equipment and other assets		17			—
Increase in cash surrender value of bank owned life insurance		(258	)		(106	)
Change in operating assets and liabilities:
Accrued interest receivable		(1,494	)		144
Other assets		(1,270	)		44
Accrued interest payable		34			(5	)
Other liabilities		(99	)		338
Net cash (used in) provided by operating activities		(90	)		2,875
Cash flows from investing activities
Cash and cash equivalents acquired in bank acquisition		12,560			—
Proceeds from sales, maturities and calls of securities		9,137			23,799
Purchases of securities		(5,359	)		(41,968	)
Net increase in loans		(132,999	)		(5,356	)
Net proceeds from sale of other real estate owned and other collateral		64			217
Purchases of bank owned life insurance		—			(9,500	)
Net purchase of premises and equipment		(265	)		(351	)
Sale of FRB and FHLB stock		126			33
Net cash used in investing activities		(116,736	)		(33,126	)
Cash flows from financing activities
Net increase in demand and savings deposits		45,567			16,145
Net increase in time deposits		50,793			26,445
Proceeds from senior term loan		12,000			—
Issuance of common stock, net of issuance costs		5,592			—
Repurchase of common stock		(265	)		(100	)
Preferred stock dividend		(63	)		(63	)
Net cash provided by financing activities		113,624			42,427
Net increase (decrease) in cash and cash equivalents		(3,202	)		12,176
Cash and cash equivalents
Beginning of period		30,693			12,363
End of period	$	27,491		$	24,539
Supplementary disclosure of cash flow information
Cash payments for:
Interest	$	3,105		$	2,626
Income taxes	$	700		$	235
Transfer of loans to foreclosed assets	$	65		$	143
Transactions related to bank acquisition
Assets acquired	$	114,432		$	—
Liabilities assumed	$	103,900		$	—

See notes to consolidated financial statements.

5

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

September 30, 2014

Note 1. Organization

General

Xenith Bankshares, Inc. (“Xenith Bankshares” or the “company”) is the bank holding company for Xenith Bank (the “Bank”), a Virginia-based institution headquartered in Richmond, Virginia. As of September 30, 2014, the company, through the Bank, operates eight full-service branches: one branch in Tysons Corner, Virginia, two branches in Richmond, Virginia, three branches in Suffolk, Virginia, and, as a result of the acquisition of Colonial Virginia Bank (“CVB”) that was completed on June 30, 2014, discussed below, two branches in Gloucester, Virginia. Additionally, the Bank operates one loan production office in York County, Virginia, as a result of the acquisition of CVB.

Background

In December 2009, First Bankshares, Inc. (“First Bankshares”), the bank holding company for SuffolkFirst Bank, and Xenith Corporation completed the merger of Xenith Corporation with and into First Bankshares (the “merger”), with First Bankshares being the surviving entity in the merger. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank. Although the merger was structured as a merger of Xenith Corporation with and into First Bankshares, with First Bankshares being the surviving entity for legal purposes, Xenith Corporation was treated as the acquirer for accounting purposes.

Effective on July 29, 2011, the Bank completed the acquisition of select loans totaling $58.3 million and related assets associated with the Richmond, Virginia branch office of Paragon Commercial Bank, a North Carolina banking corporation, and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the branch office (the “Paragon Transaction”).

Also effective on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (the “FDIC”) acted as receiver of VBB. The Bank acquired total assets of $92.9 million, including $70.9 million in loans, and assumed liabilities of $86.9 million, including $77.5 million in deposits. Under the terms of the VBB Acquisition agreement, the Bank received a discount of $23.8 million on the net assets and did not pay a deposit premium. The VBB Acquisition was completed without any shared-loss agreement with the FDIC.

On June 30, 2014, the company completed the merger of CVB with and into the Bank (the “CVB Acquisition”), with the Bank being the surviving bank. The CVB Acquisition was completed in accordance with the terms of the Agreement of Merger, dated as of March 20, 2014, and the related Plan of Merger (the “Merger Agreement”), among the company, the Bank and CVB.

Pursuant to the terms of the Merger Agreement, each share of CVB common stock outstanding immediately prior to the effective time of the CVB Acquisition was converted into the right to receive 2.65 shares of Xenith Bankshares common stock (the “Exchange Ratio”) without interest and less applicable amounts for taxes. All fractional shares of Xenith Bankshares common stock that a CVB shareholder would otherwise have been entitled to receive as a result of the CVB Acquisition was aggregated and, if a fractional share resulted from such aggregation, such holder received, instead of the fractional share, an amount in cash equal to $6.40 multiplied by the fraction of a share of Xenith Bankshares common stock to which such holder would otherwise have been entitled. Based on the Exchange Ratio, an aggregate of 1,618,186 shares of Xenith Bankshares common stock was issued and $658 in cash was paid to the former shareholders of CVB in exchange for their shares of CVB common stock.

Options to purchase shares of CVB common stock outstanding at the effective time of the CVB Acquisition were converted into options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. Based on the Exchange Ratio, an aggregate of 39,004 options to purchase shares of CVB common stock were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock.

Pursuant to the CVB Acquisition, the company acquired approximately $114.4 million of assets, including approximately $70.1 million in loans and assumed approximately $103.9 million in liabilities, including approximately $101.0 million of deposits. Such amounts include preliminary estimated fair value adjustments, which are subject to change. CVB operated two full-services branches in Gloucester, Virginia, and one loan production office in York County, Virginia. The CVB branches will continue doing business as Colonial Virginia Bank for an undetermined period of time.

On September 25, 2014 and September 29, 2014, the company issued and sold an aggregate of 880,000 shares of its common stock, $1.00 par value per share, at a price of $6.35 per share to third-party investors for an aggregate purchase price, net of stock issuance costs, of approximately $5.6 million.

6

Note 2. Basis of Presentation

The consolidated financial statements include the accounts of Xenith Bankshares and its wholly-owned subsidiary, Xenith Bank. All significant intercompany accounts have been eliminated.

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim period reporting, and reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial positions at September 30, 2014 and December 31, 2013, the results of operations and comprehensive income for the three and nine months ended September 30, 2014 and 2013, and the statements of cash flows for the nine months ended September 30, 2014 and 2013. The results for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. The unaudited consolidated financial statements and accompanying notes should be read in conjunction with the company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

Revision of Financial Statements

During the second quarter of 2014, the company determined that loans held pursuant to a warehouse lending program in which the Bank participates should be classified as loans held for investment on the company’s consolidated balance sheets. Prior to the second quarter of 2014, these loans were classified as loans held for sale. All prior periods presented have been revised to reflect this classification. The reclassification in prior periods does not affect reported earnings, total loans, total assets or total shareholders’ equity. The reclassification does affect amounts previously reported as cash flows provided by (used in) operating activities and cash flows provided by (used in) investing activities, as purchases and sales of loans held for sale are reported as cash flows from operating activities, whereas increases and decreases in loans held for investment are reported as cash flows from investing activities. Management has evaluated the effect of the incorrect presentation in prior periods and has concluded that previously issued financial statements were not materially misstated.

The effect of the revision on the line items within the company’s consolidated balance sheet as of December 31, 2013 is as follows:

	December 31, 2013
	As Reported		Revisions			As Revised
Loans held for sale	$	3,363	$	(3,363	)	$	—
Loans held for investment, net of allowance for loan and lease losses		533,137		3,363			536,500

The effect of the revision on the line items within the company’s consolidated statements of cash flows for the period ended September 30, 2013 is as follows:

	September 30, 2013
	As Reported			Revisions			As Revised
Change in operating assets and liabilities:
Originations of loans held for sale	$	(444,066	)	$	444,066		$	—
Proceeds from sales of loans held for sale		490,685			(490,685	)		—
Net cash provided by operating activities		49,494			(46,619	)		2,875
Cash flows from investing activities:
Net increase in loans held for investment	$	(51,975	)	$	46,619		$	(5,356	)
Net cash used in investing activities		(79,745	)		46,619			(33,126	)

Note 3. Business Combination

The company has accounted for the CVB Acquisition under the acquisition method of accounting, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, whereby the acquired assets and assumed liabilities are recorded by the company at their estimated fair values as of the acquisition date, which was June 30, 2014. Fair value estimates were based on management’s assessment of the best information available and are preliminary and subject to change. The final determination of estimated fair values of assets and liabilities will be made when all necessary information becomes available and management has completed its analysis.

7

In accordance with the framework established by FASB ASC Topic 820,“Fair Value Measurements and Disclosure” (“Topic 820”), the company used a fair value hierarchy to prioritize the information used to form assumptions and estimates in determining fair values. These fair value hierarchies are further discussed in Note 19 – Fair Value Measurements.

The CVB Acquisition provides the opportunity for growth in one of the Bank’s target markets and allows the Bank to leverage its existing infrastructure.

The following table presents the preliminary allocation of the consideration paid to the acquired assets and assumed liabilities in the CVB Acquisition as of the acquisition date. The preliminary allocation results in a bargain purchase gain of $42 thousand.

Fair value of assets acquired:
Cash and cash equivalents	$	12,560
Securities available for sale		17,439
Loans		70,051
Premises and equipment		3,338
Other real estate owned		1,186
Core deposit intangible		930
Accrued interest receivable		318
Deferred tax asset		1,898
Bank owned life insurance		4,054
Other assets		2,658
Total assets	$	114,432
Fair value of liabilities assumed:
Deposits	$	100,985
Accrued interest payable		39
Supplemental executive retirement plan		2,277
Other liabilities		599
Total liabilities	$	103,900
Net identifiable assets acquired	$	10,532
Consideration:
Company’s common shares issued		1,618,186
Purchase price per share (1)	$	6.40
Value of common stock issued		10,356
Estimated fair value of stock options		133
Cash in lieu of fractional shares		1
Total consideration	$	10,490
Bargain purchase gain	$	42

(1) The value of the shares of common stock exchanged for shares of CVB common stock was based upon the closing price of the company’s common stock at June 27, 2014, the last trading day prior to the date of completion of the CVB Acquisition.

8

The following table presents the purchased performing and purchased impaired loans receivable at the date of the CVB Acquisition and the fair value adjustment recorded immediately following the acquisition:

	Purchased Performing			Purchased Impaired			Total
Contractual principal payments receivable	$	68,523		$	4,575		$	73,098
Fair value adjustment - credit and interest		(1,983	)		(1,064	)		(3,047	)
Fair value of acquired loans	$	66,540		$	3,511		$	70,051

The remaining fair value adjustment, as of September 30, 2014, related to loans acquired in the CVB Acquisition was $2.7 million. The carrying value, as of September 30, 2014, of purchased impaired loans was $3.5 million.

The following table presents the effect of the CVB Acquisition on the company as if the merger had occurred at the beginning of the three and nine-month periods ended September 30, 2014 and 2013, on a pro forma basis. Merger-related costs of $566 thousand and $1.2 million for the three and nine months ended September 30, 2014, respectively, which are included in the company’s consolidated statements of operations, are not included in the pro forma information below. CVB’s merger-related costs of $407 thousand for the six months ended June 30, 2014 that were incurred prior to the completion of the CVB Acquisition are not included in the company’s consolidated statements of operations, and are also not included in the pro forma information below. Net income includes pro forma adjustments for the amortization of core deposit intangibles. An effective income tax rate of 34% was used in determining pro forma net income.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
Revenue (net interest income plus noninterest income)	$	8,468	$	7,527	$	22,799	$	21,463
Net income	$	1,021	$	833	$	1,841	$	2,047
Earnings per common share (basic and diluted)	$	0.08	$	0.07	$	0.15	$	0.16

Note 4. Restrictions of Cash

To comply with regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement based on the weeks closest to September 30, 2014 and December 31, 2013 was $6.1 million and $8.5 million, respectively.

Note 5. Securities

The following tables present the book value and fair value of securities as of the dates stated:

	September 30, 2014
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Securities available for sale:
Agencies	$	4,938	$	31	$	—		$	4,969
Mortgage-backed securities
- Fixed rate		47,434		421		(386	)		47,469
- Variable rate		4,280		112		(17	)		4,375
Municipals - fixed rate
- Tax exempt		5,012		31		—			5,043
- Taxable		850		—		(2	)		848
Collateralized mortgage obligations - fixed rate		12,103		79		(143	)		12,039
Total securities available for sale		74,617		674		(548	)		74,743
Securities held to maturity:
Municipals - fixed rate
- Taxable		9,281		234		—			9,515
Total securities held to maturity		9,281		234		—			9,515
Total securities	$	83,898	$	908	$	(548	)	$	84,258

9

	December 31, 2013
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Mortgage-backed securities
- Fixed rate	$	45,693	$	368	$	(724	)	$	45,337
- Variable rate		4,903		77		(128	)		4,852
Municipals - fixed rate
- Taxable		9,810		—		(840	)		8,970
- Tax exempt		1,634		—		(61	)		1,573
Collateralized mortgage obligations - fixed rate		8,940		57		(544	)		8,453
Total securities available for sale	$	70,980	$	502	$	(2,297	)	$	69,185

As of September 30, 2014 and December 31, 2013, the company had securities with a fair value of $6.9 million and $6.3 million, respectively, pledged as collateral for public deposits.

The following table presents the book value and fair value of securities by contractual maturity as of the date stated:

	September 30, 2014
	Available for Sale				Held to Maturity
	Book Value		Fair Value		Book Value		Fair Value
Due within one year	$	308	$	307	$	—	$	—
Due after one year through five years		568		568		—		—
Due after five years through ten years		31,059		31,204		8,342		8,532
Due after ten years		42,682		42,664		939		983
Total securities	$	74,617	$	74,743	$	9,281	$	9,515

The following tables present fair values and the related unrealized losses in the company’s securities portfolio, with the information aggregated by investment category and by the length of time that individual securities have been in continuous unrealized loss positions as of the dates stated. The number of loss securities in each category is also noted.

	September 30, 2014
			Less than 12 months					More than 12 months					Total
	Number		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities available for sale:
Mortgage-backed securities
- Fixed rate		13	$	14,117	$	(95	)	$	11,073	$	(291	)	$	25,190	$	(386	)
- Variable rate		1		—		—			2,903		(17	)		2,903		(17	)
Municipals Fixed Rate
- Taxable		2		848		(2	)		—		—			848		(2	)
Collateralized mortgage obligations - fixed rate		7		3,147		(20	)		3,894		(123	)		7,041		(143	)
Total securities available for sale		23		18,112		(117	)		17,870		(431	)		35,982		(548	)
Total securities		23	$	18,112	$	(117	)	$	17,870	$	(431	)	$	35,982	$	(548	)

10

	December 31, 2013
			Less than 12 months					More than 12 months					Total
	Number		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Mortgage-backed securities
- Fixed rate		10	$	26,610	$	(724	)	$	—	$	—		$	26,610	$	(724	)
- Variable rate		2		3,214		(128	)		—		—			3,214		(128	)
Municipals - fixed rate
- Taxable		5		8,069		(697	)		901		(143	)		8,970		(840	)
- Tax exempt		1		1,573		(61	)		—		—			1,573		(61	)
Collateralized mortgage obligations - fixed rate		3		6,361		(544	)		—		—			6,361		(544	)
Total securities		21	$	45,827	$	(2,154	)	$	901	$	(143	)	$	46,728	$	(2,297	)

All securities held as of September 30, 2014 were investment grade. The unrealized loss positions at September 30, 2014 were directly related to interest rate movements, and management believes there is minimal credit risk exposure in these investments. There is no intent to sell investments that were in an unrealized loss position at September 30, 2014, and it is more likely than not that the company will not be required to sell these investments before a recovery of unrealized losses. These investments were not considered to be other-than-temporarily impaired at September 30, 2014; therefore, no impairment has been recognized.

Note 6. Loans

The following table presents the company’s composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans as of the dates stated:

	September 30, 2014						December 31, 2013
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	340,359			45.73	%	$	249,687			46.08	%
Commercial real estate		261,392			35.12	%		172,711			31.88	%
Residential real estate		42,764			5.74	%		22,004			4.06	%
Consumer		9,483			1.27	%		3,191			0.59	%
Guaranteed student loans		89,956			12.08	%		94,028			17.36	%
Overdrafts		424			0.06	%		184			0.03	%
Total loans	$	744,378			100.00	%	$	541,805			100.00	%
Allowance for loan and lease losses		(5,569	)					(5,305	)
Total loans, net of allowance	$	738,809					$	536,500

Loans, excluding guaranteed student loans, include unearned fees net of capitalized origination costs, of $344 thousand and $244 thousand, as of September 30, 2014 and December 31, 2013, respectively. As of September 30, 2014, $208.9 million of loans were pledged to the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank as collateral for borrowing capacity.

During the third quarter of 2013, the Bank began purchasing guaranteed student loans, which were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, these loans are substantially guaranteed by a guarantee agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers under defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders.

As of September 30, 2014, the company had $90.0 million of guaranteed student loans on its consolidated balance sheet. This balance includes premium and acquisition costs of $2.5 million and $1.4 million, respectively, which are amortized into interest income on the effective interest method. The guaranteed student loans carry an approximate 98% federal government guaranty as to the payment of principal and accrued interest.

The following table presents the company’s loans by regulatory risk ratings classification and by loan type as of the dates stated. As defined by the Federal Reserve and adopted by the company, “special mention” loans are defined as having potential

11

weaknesses that deserve management’s close attention; “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any; and “doubtful” loans have all the weaknesses inherent in substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not categorized as special mention, substandard or doubtful are classified as “pass.” The company’s risk ratings, which are assigned to loans, are embedded within these categories.

	September 30, 2014
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Commercial and industrial	$	334,398	$	1,604	$	4,357	$	—	$	340,359
Commercial real estate		249,396		5,723		6,273		—		261,392
Residential real estate		37,902		2,941		1,921		—		42,764
Consumer		9,230		40		213		—		9,483
Guaranteed student loans		89,956		—		—		—		89,956
Overdrafts		424		—		—		—		424
Total loans	$	721,306	$	10,308	$	12,764	$	—	$	744,378

	December 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Commercial and industrial	$	242,018	$	1,990	$	5,679	$	—	$	249,687
Commercial real estate		166,398		2,366		3,947		—		172,711
Residential real estate		21,014		132		858		—		22,004
Consumer		2,849		—		342		—		3,191
Guaranteed student loans		94,028		—		—		—		94,028
Overdrafts		184		—		—		—		184
Total loans	$	526,491	$	4,488	$	10,826	$	—	$	541,805

Allowance for Loan and Lease Losses

The allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to FASB ASC Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.” A loan is impaired when, based on current information and events, it is probable that all amounts due (principal and interest) according to the contractual terms of the loan agreement will not be collected.

The allowance for loan and lease losses is determined based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that are originated by the company. In evaluating the loan portfolio, qualitative factors, such as general economic conditions, nationally and in the company’s target markets, are considered, as well as threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors and estimates may be subject to significant change. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in the consolidated statements of operations. Loans or portions of loans deemed to be uncollectible are charged against the allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses.

The company’s allowance for loan and lease losses related to guaranteed student loans is based on historical and expected default rates for these and similar types of loans applied to the portion of carrying value in these loans that is not subject to federal guaranty.

12

The following tables present the allowance for loan and lease loss activity, by loan category, for the dates stated:

	For the Three Months Ended September 30,
	2014			2013
Balance at beginning of period	$	6,016		$	4,882
Charge-offs:
Commercial and industrial		30			50
Commercial real estate		—			136
Residential real estate		136			14
Consumer		—			—
Guaranteed student loans		1,741			—
Overdrafts		6			4
Total charge-offs		1,913			204
Recoveries:
Commercial and industrial		2			—
Commercial real estate		—			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		3			—
Total recoveries		5			—
Net charge-offs		1,908			204
Provision for loan and lease losses		1,560			497
Amount for unfunded commitments		(108	)		(46	)
Other (1)		9			—
Balance at end of period	$	5,569		$	5,129

(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

13

	For the Nine Months Ended September 30,
	2014			2013
Balance at beginning of period	$	5,305		$	4,875
Charge-offs:
Commercial and industrial		30			51
Commercial real estate		—			506
Residential real estate		171			39
Consumer		—			—
Guaranteed student loans		1,741			—
Overdrafts		20			6
Total charge-offs		1,962			602
Recoveries:
Commercial and industrial		3			—
Commercial real estate		4			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		4			1
Total recoveries		11			1
Net charge-offs		1,951			601
Provision for loan and lease losses		2,390			913
Amount for unfunded commitments		(118	)		(58	)
Other (1)		(57	)		—
Balance at end of period	$	5,569		$	5,129

(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

During the third quarter of 2014 and as a result of a comment received in the Bank’s most recent regulatory examination, the company charged off the portion of its guaranteed student loans that was (1) not subject to federal government guaranty and (2) greater than 120 days past due and has a high probability of default. Probability of default was determined by recent loss migration analysis. Such recent loss migration analysis and the acceleration of charging off a portion of these loans resulted in an increase to provision expense for guaranteed student loans in 2014. Loans greater than 120 days past due continue to accrue interest as interest receivable is guaranteed until a claim, if any, against the government guaranty is satisfied.

14

The following tables present the allowance for loan and lease losses, with the amount independently and collectively evaluated for impairment, and loan balances, by loan type, as of the dates stated:

	September 30, 2014
	Total Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses applicable to:
Commercial and industrial	$	2,006	$	374	$	1,632
Commercial real estate		3,309		193		3,116
Residential real estate		187		22		165
Consumer		12		—		12
Guaranteed student loans		55		—		55
Total allowance for loan and lease losses	$	5,569	$	589	$	4,980
Loan balances applicable to:
Commercial and industrial	$	340,359	$	3,866	$	336,493
Commercial real estate		261,392		4,731		256,661
Residential real estate		42,764		708		42,056
Consumer		9,907		—		9,907
Guaranteed student loans		89,956		—		89,956
Total loans	$	744,378	$	9,305	$	735,073

	December 31, 2013
	Total Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses applicable to:
Commercial and industrial	$	2,148	$	292	$	1,856
Commercial real estate		2,756		298		2,458
Residential real estate		194		10		184
Consumer		12		—		12
Guaranteed student loans		195		—		195
Total allowance for loan and lease losses	$	5,305	$	600	$	4,705
Loan balances applicable to:
Commercial and industrial	$	249,687	$	5,526	$	244,161
Commercial real estate		172,711		4,875		167,836
Residential real estate		22,004		632		21,372
Consumer		3,375		8		3,367
Guaranteed student loans		94,028		—		94,028
Total loans	$	541,805	$	11,041	$	530,764

15

The following tables present the loans that were individually evaluated for impairment, by loan type, as of the dates stated. The tables present those loans with and without an allowance and various additional data, as of the dates stated:

	September 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	1,824	$	2,939	$	—
Commercial real estate		2,029		2,565		—
Residential real estate		494		555		—
Consumer		—		—		—
With an allowance recorded:
Commercial and industrial		2,042		2,074		374
Commercial real estate		2,702		2,986		193
Residential real estate		214		214		22
Consumer		—		—		—
Total loans individually evaluated for impairment	$	9,305	$	11,333	$	589

	December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial	$	3,413	$	4,484	$	—
Commercial real estate		2,075		3,002		—
Residential real estate		444		474		—
Consumer		8		8		—
With an allowance recorded:
Commercial and industrial		2,113		2,194		292
Commercial real estate		2,800		3,085		298
Residential real estate		188		198		10
Consumer		—		—		—
Total loans individually evaluated for impairment	$	11,041	$	13,445	$	600

	For the Three Months Ended September 30,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	1,845	$	6	$	1,518	$	6
Commercial real estate		2,039		—		2,762		—
Residential real estate		498		—		476		3
Consumer		—		—		9		—
With an allowance recorded:
Commercial and industrial		2,059		16		2,172		11
Commercial real estate		2,689		58		4,713		65
Residential real estate		215		—		458		4
Consumer		—		—		—		—
Total loans individually evaluated for impairment	$	9,345	$	80	$	12,108	$	89

16

	For the Nine Months Ended September 30,
	2014				2013
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	1,919	$	20	$	1,545	$	20
Commercial real estate		2,055		—		2,904		19
Residential real estate		501		—		478		5
Consumer		—		—		10		1
With an allowance recorded:
Commercial and industrial		2,114		44		2,149		35
Commercial real estate		2,672		151		4,939		215
Residential real estate		217		—		461		14
Consumer		—		—		—		—
Total loans individually evaluated for impairment	$	9,478	$	215	$	12,486	$	309

Acquired loans pursuant to a business combination are initially recorded at estimated fair value as of the date of acquisition; therefore, any related allowance for loan and lease losses is not carried over or established at acquisition. The difference between contractually required amounts receivable and the acquisition date fair value of loans that are not deemed credit-impaired at acquisition is accreted (recognized) into income over the life of the loan either on a straight-line basis or based on the underlying principal payments on the loan. Any change in credit quality subsequent to acquisition for these loans is reflected in the allowance for loan and lease losses.

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that all contractually required principal and interest payments will not be collected are accounted for under FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). A portion of the loans acquired in the VBB Acquisition and the CVB Acquisition were deemed by management to be credit-impaired loans qualifying for accounting under ASC 310-30.

In July 2011, the loans acquired in the Paragon Transaction and the VBB Acquisition were adjusted to estimated fair value by recording a discount of $1.8 million and $14.0 million, respectively. Of the $14.0 million discount recorded on the VBB Acquisition, $12.7 million related to $40.2 million of purchased credit-impaired loans. The remaining fair value adjustment on the VBB purchased credit-impaired loans, as of September 30, 2014, was $1.9 million. The carrying value of VBB purchased credit-impaired loans, as of September 30, 2014, was approximately $6.7 million, which is net of any impairment charges recorded subsequent to acquisition.

For purchased credit-impaired loans, the excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and accreted into interest income over the remaining life of the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference. As of June 30, 2014, the date of the CVB Acquisition, the company had $1.6 million of nonaccretable difference related to the credit-impaired loans acquired in the CVB Acquisition.

In applying ASC 310-30 to acquired loans, the company must periodically estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including default rates, the amount and timing of prepayments and the liquidation value and timing of underlying collateral, in addition to other factors. Decreases in expected cash flows attributable to credit will generally result in an impairment charge to earnings such that the initial accretable yield remains unchanged. Increases in expected cash flows will result in an increase in the accretable yield, which is a reclassification from the nonaccretable difference. The increased accretable yield is recognized in income over the remaining period of expected cash flows from the loan. Impairments and reversals of impairments are recorded in the provision for loan and lease losses in the consolidated statements of operations and as a component of the allowance for loan and lease losses in the consolidated balance sheets.

17

The following table presents the accretion activity related to acquired loans as of the dates stated. Additions in the period ended September 30, 2014 relate to the CVB Acquisition.

	September 30, 2014			December 31, 2013
Balance at beginning of period	$	4,441		$	8,133
Additions		3,046			—
Accretion (1)		(1,530	)		(2,644	)
Disposals (2)		(51	)		(1,048	)
Other (3)		66			—
Balance at end of period	$	5,972		$	4,441

(1) Accretion amounts are reported in interest income.

(2) Disposals represent the reduction of purchase accounting discounts due to the resolution of acquired loans at amounts less than the contractually-owed receivable.

(3) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

The following tables present the age analysis of loans past due as of the dates stated:

	September 30, 2014
	30-89 days Past Due		90+ days Past Due		Total Past Due
Commercial and industrial	$	828	$	1,032	$	1,860
Commercial real estate		530		763		1,293
Residential real estate		1,246		443		1,689
Consumer		742		18		760
Guaranteed student loans		6,264		30,463		36,727
Total	$	9,610	$	32,719	$	42,329

	December 31, 2013
	30-89 days Past Due		90+ days Past Due		Total Past Due
Commercial and industrial	$	1,034	$	781	$	1,815
Commercial real estate		—		17		17
Residential real estate		228		385		613
Consumer		4		—		4
Guaranteed student loans		43,875		—		43,875
Total	$	45,141	$	1,183	$	46,324

18

The following table presents nonaccrual loans and OREO as of the dates stated. A loan is considered nonaccrual if it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of September 30, 2014, there were no loans, other than guaranteed student loans, past due 90 days or greater for which interest was accruing. Accrued interest on guaranteed student loans is subject to the guaranty and is payable under the claim to the time the claim is satisfied.

	September 30, 2014		December 31, 2013
Commercial and industrial	$	2,869	$	2,386
Commercial real estate		2,534		883
Residential real estate		1,396		553
Consumer		130		—
Total nonaccrual loans	$	6,929	$	3,822
Other real estate owned		1,283		199
Total nonperforming assets	$	8,212	$	4,021

In accordance with Accounting Standards Update (“ASU”) No. 2011-02, “Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” the company assesses all restructurings for potential identification as troubled debt restructurings (“TDR”). A modification of a loan’s terms constitutes a TDR, if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Modifications of terms for loans that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal payments, regardless of the period of the modification.

For loans classified as TDRs, the company further evaluates the loans as performing or nonperforming. If at the time of restructure the loan is on accrual status, it will be classified as performing and will continue to be classified as performing as long as the borrower continues making payments in accordance with the restructured terms. A modified loan will be classified as nonaccrual, if the loan becomes 90 days delinquent, or when collectability is in doubt. TDRs originally considered nonaccrual will be classified as nonperforming, but may be classified as performing TDRs, if subsequent to restructure the loan experiences payment performance according to the restructured terms for a consecutive six-month period and other required conditions are met.

The following table presents performing and nonperforming loans identified as TDRs, by loan type, as of the dates stated:

	September 30, 2014		December 31, 2013
Performing:
Commercial and industrial	$	397	$	1,030
Commercial real estate		—		908
Residential real estate		—		—
Consumer		—		—
Total performing TDRs	$	397	$	1,938
Nonperforming:
Commercial and industrial	$	1,811	$	1,940
Commercial real estate		12		17
Residential real estate		214		120
Consumer		—		—
Total nonperforming TDRs	$	2,037	$	2,077
Total TDRs	$	2,434	$	4,015

19

The following tables present loans classified as TDRs, including the type of modification, number of loans and loan type, as of the dates stated:

	September 30, 2014
	Number of Loans Modified		Rate Modification (1)		Term Extension and/or Other Concessions		Total
Commercial and industrial		6	$	1,086	$	1,122	$	2,208
Commercial real estate		1		—		12		12
Residential real estate		2		88		126		214
Consumer		—		—		—		—
Total TDRs		9	$	1,174	$	1,260	$	2,434

(1) Restructured loans that had a modification of the loan’s contractual interest rate may also have had an extension of the loan’s contractual maturity date.

	December 31, 2013
	Number of Loans Modified		Rate Modification (1)		Term Extension and/or Other Concessions		Total
Commercial and industrial		8	$	1,159	$	1,812	$	2,971
Commercial real estate		3		908		17		925
Residential real estate		1		—		119		119
Consumer		—		—		—		—
Total TDRs		12	$	2,067	$	1,948	$	4,015

(1) Restructured loans that had a modification of the loan’s contractual interest rate may also have had an extension of the loan’s contractual maturity date.

During the three months ended September 30, 2014, there were no loans identified as TDRs. During the nine months ended September 30, 2014, the company identified one loan as a TDR, which totaled $88 thousand and is included in the tables above.

Note 7. Goodwill and Other Intangible Assets

As part of the purchase price allocation of consideration paid in the CVB Acquisition, the company recorded an estimated fair value amount of $930 thousand of core deposit intangibles. Core deposit intangible assets are being amortized over a 10-year period on a straight-line basis.

The following table presents goodwill and other intangible assets as of the dates stated:

	September 30, 2014			December 31, 2013
Amortizable core deposit intangibles:
Gross carrying value	$	4,640		$	3,710
Accumulated amortization		(1,371	)		(1,075	)
Net core deposit intangibles		3,269			2,635
Unamortizable goodwill		12,989			12,989
Total goodwill and other intangible assets, net	$	16,258		$	15,624

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The following table presents the estimated future amortization expense for core deposit intangibles:

Year	Core Deposit Intangibles
2014	$	114
2015		458
2016		458
2017		458
2018		458
Thereafter		1,323
Total	$	3,269

Note 8. Deposits

The following table presents a summary of deposit accounts as of the dates stated:

	September 30, 2014		December 31, 2013
Noninterest-bearing demand deposits	$	129,742	$	116,083
Interest-bearing:
Demand and money market		327,459		243,372
Savings deposits		10,011		4,785
Time deposits of $100,000 or more		214,064		146,834
Other time deposits		85,248		58,124
Total deposits	$	766,524	$	569,198

Note 9. Derivatives

Cash Flow Hedges

The company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements. The company is a party to three interest rate swap agreements. Pursuant to one of the agreements, the company pays fixed amounts to a counterparty in exchange for receiving LIBOR-based variable payments over the life of the agreement without exchange of the underlying notional amount of $20 million. Pursuant to the other agreements, the company has minimized its exposure to interest rate movements by exchanging variable for fixed interest payments beginning at a specified future date without exchange of underlying notional amounts of $17.5 million. As of September 30, 2014, the company’s three interest rate swaps were designated as cash flow hedges, in accordance with FASB ASC Topic 815, “Derivatives and Hedging.”

The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into net income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the three- and nine-month periods ended September 30, 2014 and 2013, the ineffective portion was insignificant. The amount reported in AOCI as of September 30, 2014 was a loss of $97 thousand, net of a tax benefit of $50 thousand. As of September 30, 2014, a liability of $165 thousand was recorded in other liabilities on the consolidated balance sheet related to these derivatives.

Non-hedge Derivatives

Derivatives not designated as hedges are not speculative and result from a service the company provides to certain customers. The company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the company executes with third parties, thus minimizing its net exposure from such transactions. These derivatives do not meet hedge accounting requirements; therefore, changes in the fair value of both the customer derivative and the offsetting derivative are recognized in earnings. As of September 30, 2014, $569 thousand was recorded in other assets and $584 thousand was recorded in other liabilities related to non-designated hedges. For the three-month periods ended September 30, 2014 and 2013, $30 thousand and $98 thousand of income, respectively, were recorded in net income related to non-designated hedges. For the nine-month periods ended September 30, 2014 and 2013, $68 thousand and $145 thousand of income, respectively, were recorded in net income related to non-designated hedges.

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Additionally, the company has minimum collateral requirements with its counterparties for both cash flow hedges and non-hedge derivatives, and as of September 30, 2014, $1.1 million has been pledged as collateral under the agreements, as the valuation of these derivatives has surpassed the contractually specified minimum transfer amount of $250 thousand. If the company is not in compliance with the terms of the derivative agreements, it could be required to settle its obligations under the agreements at termination value.

Note 10. Bank Owned Life Insurance

The Bank holds bank owned life insurance (“BOLI”), which is life insurance purchased by the Bank on a chosen group of employees. The Bank is the owner and primary beneficiary of the policies. BOLI is carried at the cash surrender value of the underlying policies. Earnings from the increase in cash surrender value of the policies are included in noninterest income on the statements of operations. The Bank has rights under the insurance contracts to redeem them for book value at any time. As of September 30, 2014, the company had $14.0 million of BOLI recorded in its consolidated balance sheets, of which $4.1 million was acquired in the CVB Acquisition.

Note 11. Income Taxes

Net deferred tax assets as of September 30, 2014 and December 31, 2013 were $6.2 million and $4.3 million, respectively. The following table presents the statutory tax rate reconciled to the company’s effective tax rate for the dates stated:

	For the Nine Months Ended						For the Year Ended
	September 30, 2014						December 31, 2013
	Tax			Rate			Tax			Rate
Income tax expense at statutory rate	$	432			34.00	%	$	1,037			34.00	%
Meals and entertainment		10			0.80	%		9			0.31	%
Share-based compensation		52			4.13	%		86			2.80	%
Transaction-related expenses		147			11.60	%		—			0.00	%
Tax exempt income		(98	)		-7.68	%		(67	)		-2.21	%
Other		21			1.52	%		—			0.00	%
Income tax expense reported	$	564			44.37	%	$	1,065			34.90	%

Note 12. Earnings per Common Share

The following tables summarize basic and diluted earnings per common share calculations for the periods stated. Weighted average shares outstanding for the calculation of basic earnings per share include vested restricted stock units.

	For the Three Months Ended September 30,
	2014			2013
Net income	$	657		$	748
Preferred stock dividend		(21	)		(21	)
Net income available to common shareholders	$	636		$	727
Weighted average shares outstanding, basic		12,124			10,499
Dilutive shares		187			69
Weighted average shares outstanding, diluted		12,311			10,568
Earnings per common share, basic	$	0.05		$	0.07
Earnings per common share, diluted	$	0.05		$	0.07

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	For the Nine Months Ended September 30,
	2014			2013
Net income	$	707		$	1,718
Preferred stock dividend		(63	)		(63	)
Net income available to common shareholders	$	644		$	1,655
Weighted average shares outstanding, basic		11,037			10,495
Dilutive shares		146			40
Weighted average shares outstanding, diluted		11,183			10,535
Earnings per common share, basic	$	0.06		$	0.16
Earnings per common share, diluted	$	0.06		$	0.16

Note 13. Share Repurchase Program

In July 2013, the company’s board of directors authorized a share repurchase program permitting the company to repurchase in the open market or otherwise up to 210,000 shares of the company’s outstanding common stock. The authorization has no time limit. There is no guarantee as to the number of shares that will be repurchased by the company, and the company may discontinue the program at any time.

The company repurchased the following shares of common stock pursuant to the repurchase program for the periods stated. The repurchases were made using available cash resources and occurred in the open market.

	Three Months Ended		Nine Months Ended
	September 30, 2014		September 30, 2014
Shares of common stock repurchased		—		43,900
Total price paid for common stock repurchased	$	—	$	265
Average price paid per common share	$	—	$	6.04

Note 14. Share-based Compensation

In connection with the CVB Acquisition, the company adopted the 2004 Equity Compensation Plan of CVB (the “CVB Equity Plan”), which was for key employees and directors of CVB. An aggregate of 39,004 options to purchase shares of CVB common stock outstanding at the effective date of the CVB Acquisition were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. All options were fully vested at the effective date of the CVB Acquisition. These stock options remained outstanding following the CVB Acquisition and are exercisable for shares of the company’s common stock. The company does not intend to grant any additional awards under the CVB Equity Plan.

Note 15. Pension Plan

In connection with the CVB Acquisition, the company assumed the Colonial Virginia Bank Executive Retirement Plan (“SERP”). The SERP provides for the payment of supplemental retirement benefits to three former CVB executives. Benefits under the SERP accrue over the service period of the employees; however, upon a change of control, the employees become fully vested in the retirement benefit, and there is no future service obligation. The CVB Acquisition constituted a change of control; therefore, all benefits to the employees became fully vested and payments may begin six months following the employee’s termination, as defined by the SERP. One former CVB employee is currently receiving payments under the SERP. As of September 30, 2014, the company paid $16 thousand of benefits to this employee and the company expects to pay an additional $23 thousand to this employee through December 31, 2014. As of September 30, 2014, a $2.3 million liability was recorded on the company’s consolidated balance sheet related to the SERP. A discount rate of 4% was used in determining the SERP liability.

The SERP also required upon a change of control that a grantor trust (rabbi trust) be established as a source of funds to pay benefits under the SERP. As of September 30, 2014, $2.0 million in cash was held in the rabbi trust and is recorded in other assets on the company’s consolidated balance sheet. The rabbi trust assets are subject to the general unsecured creditors of the company.

Note 16. Senior Term Loan

On September 30, 2014, the company entered into an agreement with a national bank that provides for an unsecured senior term loan credit facility up to $15 million (the “Credit Agreement”). The company borrowed $12 million upon the closing of the Credit Agreement on September 30, 2014 and has the right to borrow up to an additional $3 million under a delayed-draw term loan

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commitment, subject to customary conditions, on or before September 30, 2015. The term loans are repayable in monthly payments of accrued interest only for the first six months and then, beginning on March 31, 2015, the term loans are repayable in quarterly installments of principal, based on a 10-year amortization schedule, plus accrued interest. Unless extended or earlier prepaid, the maturity date of all term loans made under the Credit Agreement is September 30, 2019, at which time all unpaid principal, with accrued interest thereon, will become due and payable in full. All borrowings under the Credit Agreement will bear interest at the 30-day LIBOR in effect from time to time, plus 3.5% per annum. The Credit Agreement is unsecured but the Lender has the benefit of a negative pledge on all of the outstanding capital stock of the company’s wholly-owned subsidiary, Xenith Bank.

The Credit Agreement contains financial covenants that require (1) the company to be, and to cause the Bank to be, “well capitalized” as defined in federal banking regulations, at all times, (2) the Bank’s total risk-based capital ratio to be at least equal to 11.5% as of the last day of each fiscal quarter, (3) the Bank’s ratio of nonperforming assets to tangible primary capital to be no more than 30% as of the last day of each fiscal quarter, (4) the Bank’s ratio of loan loss reserves, including loans discounts relating to acquired loans, to nonperforming loans to be at least equal to 70% at all times and (5) the company’s fixed charge coverage ratio, determined on a consolidated basis, to be at least 1.25 to 1.0 at the end of each fiscal quarter for the trailing four fiscal quarters. As of September 30, 2014, the company and the Bank, as applicable, were in compliance with these financial covenants.

Note 17. Senior Non-Cumulative Perpetual Preferred Stock

On September 21, 2011, as part of the Small Business Lending Fund (“SBLF”) of the U.S. Department of Treasury (“U.S. Treasury”), the company issued and sold 8,381 shares of non-cumulative perpetual preferred stock to the Secretary of the U.S. Treasury (the “SBLF Preferred Stock”) for a purchase price of $8.4 million. The SBLF Preferred Stock investment qualifies as Tier 1 capital. The SBLF Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis based upon changes in the level of “Qualified Small Business Lending” (as defined in the SBLF purchase agreement) by the Bank with the lowest rate of 1%. For the three-month periods ended September 30, 2014 and 2013, the company’s dividend was $21 thousand, representing an effective dividend rate of 1% for both periods. For the nine-month periods ended September 30, 2014 and 2013, the company’s dividend was $63 thousand, representing an effective dividend rate of 1% for both periods.

Note 18. Commitment and Contingencies

In the normal course of business, the Bank has commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additionally, the Bank issues letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

The following table presents unfunded commitments outstanding as of the dates stated:

	September 30, 2014		December 31, 2013
Commercial lines of credit	$	121,183	$	74,419
Commercial real estate		67,347		44,324
Residential real estate		11,610		7,183
Consumer		2,315		481
Letters of credit		7,725		6,796
Total commitments	$	210,180	$	133,203

In addition, the Bank has a commitment to invest in a limited partnership that operates as a small business investment company. As of September 30, 2014, the Bank had invested $650 thousand. An additional $350 thousand will be funded at the request of the general partner of the partnership.

Note 19. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.

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FASB ASC Topic 820, “Fair Value Measurements and Disclosure” (“ASC 820”), establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Under the guidance in ASC 820, the company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1	Quoted prices in active markets for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2	Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3	Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The company evaluates its hierarchy disclosures each quarter, and, based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The company expects changes in classifications between levels will be rare.

Securities available for sale:

Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, collateralized mortgage obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other real estate owned:

OREO is measured at the asset’s fair value less costs for disposal. The company estimates fair value at the asset’s liquidation value less disposal costs using management’s assumptions, which are based on current market analysis or recent appraisals. Other real estate owned is classified as a nonrecurring Level 3 valuation.

Impaired loans:

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. As of September 30, 2014, all of the impaired loans accounted for under ASC 310-30 were evaluated based on discounted cash flows or on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the company records the impaired loan as nonrecurring Level 2. When a current appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or management evaluates fair value based on discounted cash flows, the company records the impaired loan as nonrecurring Level 3.

Derivatives:

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

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Although the company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2014 and December 31, 2013, the company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

In conjunction with the FASB’s fair value measurement guidance, the company has elected to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Cash, cash equivalents and accrued interest:

The carrying value for cash and cash equivalents and accrued interest approximates fair value.

The methodology for measuring the fair value of other financial assets and financial liabilities that are not recorded at fair value on a recurring or nonrecurring basis are discussed below.

Securities held to maturity:

Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, collateralized mortgage obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Performing loans:

For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms.

Deposit liabilities:

The balance of demand, money market and savings deposits approximates the fair value payable on demand to the accountholder. The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings:

The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses at the company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of long-term borrowings, for which interest rates reset quarterly or less, approximate their fair value.

Other commitments:

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date or “settlement date.”

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As noted, certain assets and liabilities are measured at fair value on a recurring and nonrecurring basis. The following tables present assets measured at fair value on a recurring and nonrecurring basis as of the dates stated:

				Fair Value Measurements as of September 30, 2014 Using
	September 30, 2014 Balance			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Securities available for sale:
Agencies	$	4,969		$	—	$	4,969		$	—
Mortgage-backed securities
- Fixed rate		47,469			—		47,469			—
- Variable rate		4,375			—		4,375			—
Municipals		5,891			—		5,891			—
Collateralized mortgage obligations		12,039			—		12,039			—
Cash flow hedge - asset		—			—		—			—
Cash flow hedge - liability		(165	)		—		(165	)		—
Interest rate derivative - asset		569			—		569			—
Interest rate derivative - liability		(584	)		—		(584	)		—
Assets measured on a nonrecurring basis:
Impaired loans		9,305			—		—			9,305
Other real estate owned		1,283			—		—			1,283

				Fair Value Measurements as of December 31, 2013 Using
	December 31, 2013 Balance			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Securities available for sale:
Mortgage-backed securities
- Fixed rate	$	45,337		$	—	$	45,337		$	—
- Variable rate		4,852			—		4,852			—
Municipals
- Taxable		8,970			—		8,970			—
- Tax exempt		1,573			—		1,573			—
Collateralized mortgage obligations		8,453			—		8,453			—
Cash flow hedge - asset		192			—		192			—
Cash flow hedge - liability		(191	)		—		(191	)		—
Interest rate derivative - asset		135			—		135			—
Interest rate derivative - liability		(113	)		—		(113	)		—
Assets measured on a nonrecurring basis:
Impaired loans		11,041			—		—			11,041
Other real estate owned		199			—		—			199

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The following tables present the carrying amounts and approximate fair values of the company’s financial assets and liabilities as of the dates stated:

	September 30, 2014				Fair Value Measurements as of September 30, 2014 Using
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	20,665	$	20,665	$	20,665	$	—	$	—
Federal funds sold		6,826		6,826		—		6,826		—
Securities available for sale		74,743		74,743		—		74,743		—
Securities held to maturity		9,281		9,515		—		9,515		—
Loans, net		738,809		741,747		—		—		741,747
Interest rate derivative		569		569		—		569		—
Accrued interest receivable		4,216		4,216		—		4,216		—
Other assets		1,991		1,991		1,991		—		—
Financial liabilities:
Cash flow hedge	$	165	$	165	$	—	$	165	$	—
Interest rate derivative		584		584		—		584		—
Borrowings		32,000		32,000		—		32,000		—
Deposits		766,524		765,521		—		765,521		—
Accrued interest payable		288		288		—		288		—

	December 31, 2013				Fair Value Measurements as of December 31, 2013 Using
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	24,944	$	24,944	$	24,944	$	—	$	—
Federal funds sold		5,749		5,749		—		5,749		—
Securities available for sale		69,185		69,185		—		69,185		—
Loans, net		536,500		537,595		—		—		537,595
Cash flow hedge		192		192		—		192		—
Interest rate derivative		135		135		—		135		—
Accrued interest receivable		2,403		2,403		—		2,403		—
Financial liabilities:
Cash flow hedge	$	191	$	191	$	—	$	191	$	—
Interest rate derivative		113		113		—		113		—
Long-term borrowings		20,000		20,000		—		20,000		—
Deposits		569,198		568,775		—		568,775		—
Accrued interest payable		215		215		—		215		—

Fair value estimates are made at a specific point in time and are based on relevant market information, as well as information about the financial instruments or other assets. These estimates do not reflect any premium or discount that could result from offering for sale the company’s entire holdings of a particular financial instrument at one time. Fair value estimates are based on judgments

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regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets, premises and equipment, and OREO. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Note 20. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (ASU Subtopic 310-40), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendments in this ASU are intended to clarify the terms defining when an in substance repossession or foreclosure occurs, which determines when the receivable should be derecognized and the real estate property recognized. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this standard is not expected to have a significant impact on the company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with early adoption prohibited. The company is evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

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

The following is management’s discussion and analysis of the company’s consolidated financial condition, changes in financial condition, results of operations, liquidity, cash flows and capital resources. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q (“Form 10-Q”) and Part II, Item 8, “Financial Statements and Supplementary Data” in the company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”). The data presented as of September 30, 2014 and for the three and nine-month periods ended September 30, 2014 and 2013 is derived from our unaudited interim financial statements and includes, in the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the data for such period. The data presented as of December 31, 2013 is derived from our audited financial statements as of and for the year ended December 31, 2013, which is included in the 2013 Form 10-K.

All references to “Xenith Bankshares,” “our company,” “the company,” “we,” “our” or “us” are to Xenith Bankshares, Inc. and its wholly-owned subsidiary, Xenith Bank, collectively. All references to “the Bank” are to Xenith Bank.

All dollar amounts included in the tables in this discussion and analysis are in thousands, except per share data. Columns and rows of amounts presented in tables may not total due to rounding.

BUSINESS OVERVIEW

Xenith Bankshares, Inc. is a Virginia corporation that is the bank holding company for Xenith Bank, which is a Virginia banking corporation organized and chartered pursuant to the laws of the Commonwealth of Virginia and a member of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a full-service, locally-managed commercial bank specifically targeting the banking needs of middle market and small businesses, local real estate developers and investors, private banking clients and select retail clients, which we refer to as our target customers. We are geographically focused on the Greater Washington, DC, Richmond, Virginia, and the Greater Hampton Roads, Virginia metropolitan statistical areas, which we refer to as our target markets. The Bank conducts its principal banking activities through its eight branches, with one branch located in Tysons Corner, Virginia, two branches located in Richmond, Virginia, three branches located in Suffolk, Virginia, and two branches located in Gloucester, Virginia. The Bank also has a loan production office in York County, Virginia. We acquired the three branches located in Suffolk in the merger of Xenith Corporation with and into First Bankshares, Inc., the parent company of its wholly-owned subsidiary SuffolkFirst Bank. Prior to the merger, SuffolkFirst Bank opened the first branch in Suffolk, Virginia in 2003 under the name of SuffolkFirst Bank. All of the SuffolkFirst Bank branches now operate under the name Xenith Bank. We acquired the two branches in Gloucester and the loan production office in the acquisition of Colonial Virginia Bank (“CVB”) on June 30, 2014, which is further discussed below. The acquired CVB branches will continue doing business as Colonial Virginia Bank for an undetermined period of time. As of September 30, 2014, we had total assets of $910.2 million, total loans, net of our allowance for loan and lease losses, of $738.8 million, total deposits of $766.5 million, and shareholders’ equity of $105.7 million.

Our services and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial and retail banking products, including commercial and industrial loans, commercial and residential real estate loans, and select consumer loans. We also offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, and Internet and mobile banking and bill pay service. We do not engage in any activities other than banking activities.

On September 25, 2014 and September 29, 2014 we issued and sold an aggregate of 880,000 shares of our common stock, $1.00 par value per share, at a price of $6.35 per share to third-party investors for an aggregate purchase price, net of stock issuance costs, of approximately $5.6 million.

On September 30, 2014, we entered into an agreement with a national bank that provides for an unsecured senior term loan credit facility up to $15 million (the “Credit Agreement”). We borrowed $12 million upon the closing of the Credit Agreement on September 30, 2014, and have the right to borrow up to an additional $3 million under a delayed-draw term loan commitment, subject to customary conditions, on or before September 30, 2015.

We contributed a significant portion of the proceeds from both the sale of our common stock and borrowings under the Credit Agreement to the Bank as equity. We retained the remainder of the proceeds to fund holding company obligations, including obligations under the Credit Agreement for a period of time.

In July 2013, our board of directors authorized a share repurchase program under which we may repurchase in the open market or otherwise up to 210,000 shares of our outstanding common stock. There is no guarantee as to the number of shares that will be repurchased by the company, and the program can be discontinued at any time. In the three months ended September 30, 2014, the company did not purchase any shares of its common stock. In the nine months ended September 30, 2014, the company purchased 43,900 shares of its common stock at an average price of $6.04.

During the second quarter of 2014, we determined that loans held pursuant to a warehouse lending program in which the Bank participates should be classified as loans held for investment on our consolidated balance sheets. Prior to the second quarter of 2014,

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these loans were classified as loans held for sale. All prior periods presented were revised to reflect this classification. The reclassification in prior periods does not affect reported earnings, total loans, total assets or total shareholders’ equity. The reclassification does affect amounts previously reported as cash flows provided by (used in) operating activities and cash flows provided by (used in) investing activities, as purchases and sales of loans held for sale are reported as cash flows from operating activities, whereas increases and decreases in loans held for investment are reported as cash flows from investing activities. We evaluated the effect of the incorrect presentation in prior periods and concluded that previously issued financial statements were not materially misstated.

In the third quarter of 2013, we began purchasing rehabilitated student loans, a significant portion of which are guaranteed by the federal government. These loans were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, the student loans are substantially guaranteed by a guarantee agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers on defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders. We have an agreement with a third-party servicer of student loans that provides all day-to-day operational requirements for the servicing of these loans. As of September 30, 2014, guaranteed student loans were $90.0 million, which are classified as loans in our consolidated balance sheet. These loans carry a nearly 98% guaranty of principal and interest by a guarantee agency and are reinsured by the U.S. Department of Education.

The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on liabilities used to fund those assets. Interest-earning assets include loans, securities and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of noninterest income include service charges on deposit accounts, fees on treasury services, gains on the sale of securities and other assets, and other miscellaneous income. Deposits, Federal Home Loan Bank (“FHLB”) borrowed funds, and federal funds purchased are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits. Measures of our performance include net interest margin, return on average assets (“ROAA”), return on average equity (“ROAE”), and efficiency ratio. Such measures are common performance indicators in the banking industry.

The following tables present selected financial performance measures, for the dates stated:

	Three Months Ended September 30,
	2014			2013
Net interest margin (1)		3.90	%		4.38	%
Return on average assets (2)		0.29	%		0.50	%
Return on average common equity (3)		2.86	%		3.78	%
Efficiency ratio (4)		70	%		74	%

	Nine Months Ended September 30,
	2014			2013
Net interest margin (1)		3.59	%		4.04	%
Return on average assets (2)		0.12	%		0.39	%
Return on average common equity (3)		1.12	%		2.88	%
Efficiency ratio (4)		82	%		80	%

(1) Net interest margin is net interest income divided by average interest-earning assets. Average interest-earning assets are presented within the average balances, income and expenses, yields and rates table below.

(2) ROAA is net income divided by average total assets. Average total assets are presented within the average balances, income and expenses, yields and rates table below.

(3) ROAE is net income divided by average shareholders’ equity less average preferred stock. Average shareholders’ equity is presented within the average balances, income and expenses, yields and rates table below.

(4) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.

Merger of First Bankshares, Inc. and Xenith Corporation

First Bankshares, Inc. (“First Bankshares”) was incorporated in Virginia in 2008, and was the holding company for SuffolkFirst Bank, a community bank founded in the City of Suffolk, Virginia in 2002.

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On December 22, 2009, First Bankshares and Xenith Corporation, a Virginia corporation, completed the merger of Xenith Corporation with and into First Bankshares (the “merger”), with First Bankshares being the surviving entity in the merger. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. Following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank.

Acquisitions

On June 30, 2014, the company completed the merger of CVB with and into the Bank (the “CVB Acquisition”), with the Bank being the surviving bank. The CVB Acquisition was completed in accordance with the terms of the Agreement of Merger, dated as of March 20, 2014, and the related Plan of Merger (the “Merger Agreement”), among the company, the Bank and CVB. Pursuant to the terms of the Merger Agreement, each share of CVB common stock outstanding immediately prior to the effective time of the CVB Acquisition was converted into the right to receive 2.65 shares of Xenith Bankshares common stock (the “Exchange Ratio”) without interest and less applicable amounts for taxes. All fractional shares of Xenith Bankshares common stock that a CVB shareholder would otherwise have been entitled to receive as a result of the CVB Acquisition was aggregated and, if a fractional share resulted from such aggregation, such holder received, instead of the fractional share, an amount in cash equal to $6.40 multiplied by the fraction of a share of Xenith Bankshares common stock to which such holder would otherwise have been entitled. Based on the Exchange Ratio, an aggregate of 1,618,186 shares of Xenith Bankshares common stock was issued and $658 in cash was paid to the former shareholders of CVB in exchange for their shares of CVB common stock. Options to purchase shares of CVB common stock outstanding at the effective time of the CVB Acquisition were converted into options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. Based on the Exchange Ratio, an aggregate of 39,004 options to purchase shares of CVB common stock were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock.

Pursuant to the CVB Acquisition, the company acquired approximately $114.4 million of assets, including approximately $70.1 million in loans and assumed $103.9 million in liabilities, including approximately $101.0 million of deposits. Such amounts include preliminary estimated fair value adjustments, which are subject to change.

Effective on July 29, 2011, the Bank acquired select loans totaling $58.3 million and related assets associated with the Richmond, Virginia branch office of Paragon Commercial Bank, a North Carolina banking corporation, and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the branch office (the “Paragon Transaction”).

Also effective on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (“FDIC”) acted as receiver of VBB. The Bank acquired total assets of $92.9 million, including $70.9 million in loans, and assumed liabilities of $86.9 million, including $77.5 million in deposits. Under the terms of the VBB Acquisition agreement, the Bank received a discount of $23.8 million on the net assets and did not pay a deposit premium. The VBB Acquisition was completed without any shared-loss agreement with the FDIC.

Industry Conditions

The economy showed signs of improvement in the third quarter of 2014, with a slight decline in unemployment, an improvement in consumer confidence, and some stabilization in housing markets. The national unemployment rate, seasonally adjusted and as published by the Bureau of Labor Statistics, for September 2014 was reported at 5.9%, a decline from 6.7% in December 2013. In the Fifth District of the Federal Reserve Bank (the “Fifth District”), which includes our target markets, the August 2014 unemployment rate was 6.3%, up from 6.2% at the end of 2013. More specifically, the unemployment rate in Virginia in May 2014 was 5.6%, based on data published by the Fifth District. Additionally as published by the Fifth District, in the last year, all industry sectors in the Fifth District grew except for the information and government sectors, which showed only a modest decline.

The Federal Open Market Committee (the “FOMC”) stated in an October 29, 2014 release that growth in economic activity is expanding at a moderate pace, and labor market conditions improved, with the unemployment rate continuing to decline. The FOMC stated household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.

In the October release, the FOMC stated it has decided to conclude its asset purchase program this month as the FOMC continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. The FOMC reaffirmed its view that the current 0 to ¹⁄₄% target range for the federal funds rate remains appropriate to support continued progress toward maximum employment and price stability. In determining how long to maintain this target range, the FOMC stated it will assess progress (both realized and expected) toward its objectives of maximum employment and 2% inflation. The FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run.

Low interest rates and intense competition, due to limited business investment, in addition to other factors, have put pressure on net interest margins of banks, including the Bank. Banks with which we compete are offering aggressive terms and may be loosening credit underwriting standards. We anticipate intense competition in our markets until the economy shows stronger signs of improvement.

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Outlook

We believe we are well positioned to take advantage of competitive opportunities. We believe we will benefit from (1) our team of skilled bankers, (2) our advantageous market locations in our target markets, (3) our variety of banking services and products, and (4) our experienced management team. We intend to execute our business strategy by focusing on developing long-term relationships with our target customer base through a team of bankers with significant experience in our target markets.

Intense competition for quality loans in this low interest rate environment requires that we remain firm in applying our established credit underwriting practices, providing exceptional customer service, and offering competitive treasury services products, as well as continually monitoring our expenses.

In our continuing evaluation of our business strategy, we continue to believe that properly priced acquisitions can complement our organic growth. We may seek to acquire other financial institutions or branches or assets of those institutions. Although our principal acquisition focus will be to expand our presence in our target markets, we may also expand into new markets or related banking lines of business and related services and products. We evaluate potential acquisitions to determine what is in the best interest of our company and long-term strategy. Our goal in making these decisions is to maximize shareholder value.

Critical Accounting Policies

Our accounting policies are fundamental to an understanding of our consolidated financial position and consolidated results of operations. We believe that our accounting and reporting policies are in accordance with generally accepted accounting principles in the United States of America and conform to general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and the amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or results of operations or both our consolidated financial position and results of operations.

We consider a policy critical if (1) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate and (2) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that our most critical accounting policy relates to the allowance for loan and lease losses, which reflects our estimate of losses in the event of borrower default. An additional accounting policy that we deem critical using these criteria is our measurement of probable cash flows with respect to purchased credit-impaired loans accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Yield and impairment for purchased credit-impaired loans is based on management’s estimate of future cash flows, which are re-estimated on a periodic basis. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, adjustments to our estimates would be made and additional provisions for loan and lease losses could be required, which could have a material adverse impact on our results of operations and financial condition. Further discussion of the estimates used in determining the allowance for loan and lease losses is contained in the discussion under “—Financial Condition—Allowance for Loan and Lease Losses” below and in measuring impairment for purchased credit-impaired loans is contained under “—Financial Condition—Allowance for Loan and Lease Losses —Acquired Loans” below.

Our critical accounting policies are discussed in detail in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and “Summary of Significant Accounting Policies” in the notes to the consolidated financial statements in our 2013 Form 10-K. Since December 31, 2013, there have been no changes in these policies that have had or could reasonably be expected to have a material effect on our results of operations or financial condition.

RESULTS OF OPERATIONS

Net Income

For the three months ended September 30, 2014, net income was $657 thousand compared to net income of $748 thousand for the three months ended September 30, 2013. Income before income tax expense was $1.0 million for the three months ended September 30, 2014 compared to income before income tax expense of $1.2 million for the same period in 2013. In the three months ended September 30, 2014, pretax income included $566 thousand of costs related to the CVB Acquisition.

For the nine months ended September 30, 2014, net income was $707 thousand compared to net income of $1.7 million for the nine months ended September 30, 2013. Income before income tax expense was $1.3 million for the nine months ended September 30, 2014 compared to $2.6 million for the same period in 2013. In the nine months ended September 30, 2014, pretax income included $1.2 million of costs related to the CVB Acquisition and a $205 thousand charge related to an unauthorized automated clearing house (“ACH”) transaction discussed below.

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In the second quarter of 2014, the Bank experienced a $205 thousand loss resulting from an unauthorized ACH transaction originated on our on-line banking platform, which was recorded in pretax income. This unauthorized activity is under investigation by relevant authorities, and we are pursuing recovery of the loss under our insurance policies. We cannot predict the outcome or timing of a recovery, if any, and as such, any recovery will be recognized in the period of receipt.

Income tax expense in the three months ended September 30, 2014 was $347 thousand, or an effective tax rate of 35%. Income tax expense in the nine months ended September 30, 2014 was $564 thousand, or an effective tax rate of 44%. Income tax expense in the three and nine months ended September 30, 2014 reflects the non-deductibility of a portion or our CVB Acquisition-related costs.

The following tables present our net income and earnings per common share information for the periods stated:

	Three Months Ended September 30,
	2014			2013
Net income	$	657		$	748
Preferred stock dividend		(21	)		(21	)
Net income available to common shareholders	$	636		$	727
Earnings per common share, basic and diluted	$	0.05		$	0.07

	Nine Months Ended September 30,
	2014			2013
Net income	$	707		$	1,718
Preferred stock dividend		(63	)		(63	)
Net income available to common shareholders	$	644		$	1,655
Earnings per common share, basic and diluted	$	0.06		$	0.16

Net Interest Income

For the three months ended September 30, 2014, net interest income was $8.1 million compared to $6.1 million for the three months ended September 30, 2013. Higher net interest income in the 2014 period was primarily due to higher average balances of loans, including guaranteed student loans, and lower costs of deposits, partially offset by lower yields on loans and higher average balances of deposits. Higher average balances of loans, which increased $247.8 million, and deposits, which increased $261.7 million, were partially due to the addition of $70.1 million in loans and $101.0 million in deposits acquired in the CVB Acquisition on June 30, 2014. As presented in the table below, our net interest margin for the three-month period ended September 30, 2014 was 3.90%, a 48 basis point decrease from 4.38% for the same period in 2013. Excluding the effect of purchase accounting adjustments, net interest margin declined 26 basis points for the three-month period ended September 30, 2014 compared to the same period of 2013. The continued low interest rate environment and competition for quality borrowers have put pressure on our asset yields and net interest margin. Higher balances of guaranteed student loans have also negatively affected our net interest margin, as these loans earn lower yields than our originated and acquired loans; however, we believe these loans, which carry a federal guaranty and reprice quarterly, offer attractive risk-adjusted returns.

Average interest-earning assets increased $279.2 million, while related interest income increased $2.5 million, for the three-month period ended September 30, 2014 compared to the same period in 2013. Of the increase in average interest-earning assets, approximately 33% of the growth was due to the CVB Acquisition and 32% of the growth was due to our investment in guaranteed student loans; the remainder was due primarily to growth in loans held for investment.

Average interest-bearing liabilities increased $261.5 million, while related interest expense increased $459 thousand, for the three-month period ended September 30, 2014 compared to the same period in 2013. Of the growth in our interest bearing liabilities, approximately 39% was due to the CVB Acquisition. Yields on interest-earning assets decreased 46 basis points to 4.52%, and costs of interest-bearing liabilities decreased 4 basis points to 0.77%, when comparing the three-month period ended September 30, 2014 to the same period in 2013. Average interest-earning assets as a percentage of total assets were 92.5% for the three-month period ended September 30, 2014, a decline from 92.8% for the same period in 2013.

For the nine months ended September 30, 2014, net interest income was $19.3 million compared to $16.6 million for the nine months ended September 30, 2013. Higher net interest income was primarily due to higher average balances of loans, including guaranteed student loans, and lower costs of interest-bearing deposits, partially offset by lower yields on loans held for investment and higher average balances of deposits. Also in the nine-month period ended September 30, 2014, lower accretion on loans negatively affected yields and net interest margin, as further discussed below. As presented in the table below, net interest margin for the nine months ended September 30, 2014 was 3.59%, a 45 basis point decrease from 4.04% for the same period in 2013. Competitive pressures and the low interest rate environment also negatively affected our net interest margin in the nine month period of 2014.

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Average interest-earning assets increased $171.9 million, and related interest income increased $3.3 million, for the nine-month period ended September 30, 2014 compared to the same period in 2013. Average interest-bearing liabilities increased $155.8 million, and related interest expense increased $497 thousand, for the nine-month period ended September 30, 2014 compared to the same period in 2013. Yields on interest-earning assets decreased 51 basis points to 4.16%, and costs of interest-bearing liabilities decreased 12 basis points to 0.74%, when comparing the nine-month period ended September 30, 2014 to the same period in 2013. Average interest-earning assets as a percentage of total assets was 93.3% for the nine-month period ended September 30, 2014 compared to 94.1% for the same period in 2013.

Our loan portfolios acquired in the merger with First Bankshares, the Paragon Transaction, the VBB Acquisition and the CVB Acquisition were discounted to estimated fair value (for credit and interest rates) as of the acquisition dates. A portion of the discounts taken to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans or the period of expected cash flows from the loans. Amounts received in excess of the carrying value of loans accounted for on cost recovery are also accreted into interest income at the time of recovery. The preliminary estimated fair value adjustment (for credit and interest rates) on the loans acquired in the CVB Acquisition, as of September 30, 2014, was $3.0 million and is subject to change, as we finalize our analysis of the loan portfolio.

Loan discount accretion was $1.3 million for the three months ended September 30, 2014 compared to $1.1 million for the same period ended September 30, 2013. For the nine-month periods ended September 30, 2014 and 2013, loan discount accretion was $1.5 million and $2.1 million, respectively.

The following tables present the effect of purchase accounting adjustments on our net interest margin for the periods stated:

	Three Months Ended September 30,
	2014			2013
Net interest margin		3.90	%		4.38	%
Purchase accounting adjustments impact (1)		0.61	%		0.83	%
Net interest margin excluding the impact of purchase accounting adjustments		3.29	%		3.55	%

	Nine Months Ended September 30,
	2014			2013
Net interest margin		3.59	%		4.04	%
Purchase accounting adjustments impact (1)		0.29	%		0.53	%
Net interest margin excluding the impact of purchase accounting adjustments		3.30	%		3.51	%

(1) Purchase accounting adjustments include accretion of discounts on acquired loans.

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The following tables provide an analysis of the effective yields and rates on average interest-earning assets and average interest-bearing liabilities as of and for the periods stated. The average balances and other statistical data used in this table were calculated using daily average balances. Tax-exempt income is reported on a taxable equivalent basis.

	Average Balances, Income and Expenses, Yields and Rates As of and For the Three Months Ended September 30,
																	2014 vs. 2013
	Average Balances (1)						Yield / Rate						Income / Expense (7) (8) (10)				Increase			Change due to (2)
	2014			2013			2014			2013			2014		2013		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	20,202		$	6,691			0.26	%		0.22	%	$	13	$	4	$	9		$	—		$	9
Interest-earning deposits		21,208			14,145			0.32	%		0.21	%		17		8		9			4			5
Investments		87,995			77,180			2.24	%		2.10	%		493		405		88			29			59
Guaranteed student loans, gross		92,064			3,418			3.23	%		2.38	%		743		20		723			10			713
Loans held for investment, gross (3) (9)		611,945			452,768			5.33	%		5.71	%		8,149		6,461		1,688			(456	)		2,144
Total interest-earning assets		833,414			554,202			4.52	%		4.98	%		9,415		6,898		2,517			(413	)		2,930
Allowance for loan and lease losses		(6,357	)		(3,304	)
Noninterest-earning assets:
Cash and due from banks		18,551			8,252
Premises and fixed assets		8,183			5,244
Other assets		46,746			33,082
Total noninterest-earning assets		73,480			46,579
Total assets	$	900,537		$	597,476
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	35,449		$	20,705			0.18	%		0.28	%	$	16	$	15	$	1		$	(7	)	$	8
Savings and money market deposits		311,220			218,363			0.70	%		0.55	%		543		302		241			92			149
Time deposits		303,114			148,991			0.84	%		1.13	%		637		419		218			(127	)		345
Federal funds purchased and borrowed funds		21,884			22,084			1.74	%		1.74	%		95		96		(1	)		(0	)		(1	)
Total interest-bearing liabilities		671,667			410,143			0.77	%		0.81	%		1,291		832		459			(42	)		501
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		122,023			97,452
Other liabilities		6,513			2,283
Total noninterest-bearing liabilities		128,536			99,735
Shareholders’ equity		100,334			87,598
Total liabilities and shareholders’ equity	$	900,537		$	597,476
Interest rate spread (4)								3.75	%		4.17	%
Net interest income (5)													$	8,124	$	6,066	$	2,058		$	(371	)	$	2,429
Net interest margin (6)								3.90	%		4.38	%

(1) Average balances are computed on a daily basis.

(2) Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

(3) Nonaccrual loans have been included in the average balances. Guaranteed student loans are excluded.

(4) Interest rate spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.

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(5) Net interest income is interest income less interest expense.

(6) Net interest margin is net interest income divided by average interest-earning assets.

(7) Tax-exempt interest income is stated on a taxable equivalent basis.

(8) Interest income from loans held for investment in 2014 and 2013 includes $1,252 thousand and $1,144 thousand, respectively, in accretion related to acquired loans.

(9) Balances previously reported as loans held for sale have been reclassified as loans held for investment, gross.

(10) Interest expense on time deposits in 2014 is reduced by $19 thousand related to fair value adjustments related to the merger with Colonial Virginia Bank.

	Average Balances, Income and Expenses, Yields and Rates
	As of and For the Nine Months Ended September 30,
																	2014 vs. 2013
	Average Balances (1)						Yield / Rate						Income / Expense (7) (8) (10)				Increase			Change due to (2)
	2014			2013			2014			2013			2014		2013		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	12,309		$	4,563			0.24	%		0.22	%	$	22	$	8	$	14		$	—		$	14
Interest-earning deposits		15,900			29,726			0.31	%		0.28	%		37		61		(24	)		6			(30	)
Investments		77,761			67,192			2.29	%		2.03	%		1,333		1,022		311			139			172
Guaranteed student loans, gross		92,857			1,152			3.24	%		2.36	%		2,256		20		2,236			11			2,225
Loans held for investment, gross (3) (9)		520,433			444,742			4.82	%		5.42	%		18,817		18,079		738			(2,132	)		2,870
Total interest-earning assets		719,260			547,375			4.16	%		4.67	%		22,465		19,190		3,275			(1,976	)		5,251
Allowance for loan and lease losses		(5,784	)		(4,452	)
Noninterest-earning assets:
Cash and due from banks		12,802			6,195
Premises and fixed assets		6,072			5,353
Other assets		38,969			27,443
Total noninterest-earning assets		57,843			38,991
Total assets	$	771,319		$	581,914
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	30,821		$	16,840			0.18	%		0.26	%	$	43	$	33	$	10		$	(12	)	$	22
Savings and money market deposits		251,899			228,188			0.61	%		0.59	%		1,148		1,002		146			39			107
Time deposits		256,207			141,695			0.85	%		1.23	%		1,637		1,305		332			(489	)		821
Federal funds purchased and borrowed funds		24,642			21,078			1.58	%		1.79	%		291		282		9			(36	)		45
Total interest-bearing liabilities		563,569			407,801			0.74	%		0.86	%		3,119		2,622		497			(498	)		995
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		110,521			83,954
Other liabilities		4,371			2,274
Total noninterest-bearing liabilities		114,892			86,228
Shareholders’ equity		92,858			87,885
Total liabilities and shareholders’ equity	$	771,319		$	581,914
Interest rate spread (4)								3.42	%		3.81	%
Net interest income (5)													$	19,346	$	16,568	$	2,778		$	(1,478	)	$	4,256
Net interest margin (6)								3.59	%		4.04	%

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(1) Average balances are computed on a daily basis.

(2) Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

(3) Nonaccrual loans have been included in the average balances. Guaranteed student loans are excluded.

(4) Interest rate spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.

(5) Net interest income is interest income less interest expense.

(6) Net interest margin is net interest income divided by average interest-earning assets.

(7) Tax-exempt interest income is stated on a taxable equivalent basis.

(8) Interest income from loans held for investment in 2014 and 2013 includes $1,530 thousand and $2,143 thousand, respectively, in accretion related to acquired loans.

(9) Balances previously reported as loans held for sale have been reclassified as loans held for investment, gross.

(10) Interest expense on time deposits in 2014 is reduced by $19 thousand related to fair value adjustments related to the merger with Colonial Virginia Bank.

Provision for Loan and Lease Losses

For the three months ended September 30, 2014, our provision for loan and lease losses was $1.6 million compared to $497 thousand for the same period of 2013. For the nine months ended September 30, 2014, provision expense was $2.4 million compared to $913 thousand for the same period of 2013. Higher loan loss provision in the 2014 periods was primarily due to greater loan growth, including the addition of guaranteed student loans late in the third quarter of 2013. During the second quarter of 2014, we analyzed our guaranteed student loan portfolio for the migration of past due accounts and the probability of default of such accounts, and as a result, have increased provision expense for the unguaranteed portion of these loans due to greater than expected past due loans in this portfolio. Additionally, as a result of a comment received in our most recent regulatory examination, we charged off a portion of our guaranteed student loans, which is discussed in “Financial Condition—Allowance for Loan and Lease Losses” below. The acceleration of this charge-off resulted in additional provision expense in the third quarter of 2014. In the three and nine months ended September 30, 2014, provision expense for guaranteed student loans was $1.1 million and $1.6 million, respectively.

Noninterest Income

For the three months ended September 30, 2014, noninterest income was $357 thousand compared to $345 thousand for the same period of 2013. Greater noninterest income in the 2014 period compared to the 2013 period was primarily due to higher service charges and fees on deposit accounts, partially offset by lower income from derivatives.

For the nine months ended September 30, 2014, noninterest income was $938 thousand compared to $1.4 million for the nine months ended September 30, 2013. In the 2014 period, service charges and fees on deposits were $107 thousand higher than in the 2013 period. The 2014 period also included a $152 thousand increase in earnings from bank owned life insurance (“BOLI”). We invested in BOLI in the second quarter of 2013 and acquired additional BOLI in the CVB Acquisition. In the 2013 period, noninterest income included a gain of $361 thousand on the sale of collateral related to an impaired loan acquired in the VBB Acquisition and higher gains on the sale of securities ($252 thousand) compared to the 2014 period.

In the nine months ended September 30, 2014, we recorded a bargain purchase gain of $42 thousand on the allocation of the purchase price to assets acquired and liabilities assumed in the CVB Acquisition, a portion of which was recorded in the third quarter. The amount of bargain purchase gain is subject to change, as we finalize the estimated fair value adjustments required under purchase accounting. Any adjustment to the bargain purchase gain will be recorded in the period(s) in which purchase accounting adjustments are finalized.

Noninterest Expense

For the three-month period ended September 30, 2014, noninterest expense was $5.9 million, a $1.1 million increase from $4.8 million for the same period of 2013. Noninterest expense in the 2014 period included $566 thousand of costs related to the CVB Acquisition, of which $298 thousand was for severance benefits for former CVB employees. The remaining acquisition-related costs were primarily for professional fees and technology expenses.

For the nine-month period ended September 30, 2014, noninterest expense was $16.6 million, a $2.2 million increase from $14.4 million for the same period of 2013. Noninterest expense in the 2014 period included $1.2 million of costs related to the CVB Acquisition, and the $205 thousand loss incurred on the unauthorized ACH transaction recorded as other noninterest expense on our consolidated statements of operations. Of the $1.2 million acquisition-related costs, $298 thousand was for severance benefits for the former CVB employees, $520 thousand was for professional fees, and $305 thousand was for technology; the remainder was recorded in other expense.

Noninterest expenses for the three- and nine-month periods ended September 30, 2014 include $152 thousand and $476 thousand, respectively, of expenses related to the servicing of our guaranteed student loans, which we began purchasing late in the third quarter of 2013.

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Income Taxes

For the three months ended September 30, 2014 and 2013, income tax expense was $347 thousand and $403 thousand, respectively. For the nine months ended September 30, 2014 and 2013, income tax expense was $564 thousand and $925 thousand, respectively. Income tax expense and our effective tax rate in the 2014 periods reflect the non-deductibility of certain transaction costs related to the CVB Acquisition. Our net deferred tax asset as of September 30, 2014 and December 31, 2013 was $6.2 million and $4.3 million, respectively. Our net deferred tax asset as of September 30, 2014 included $1.9 million due to the CVB Acquisition, of which $841 thousand resulted from the allocation of purchase consideration, and the remainder was the net deferred tax asset of CVB at June 30, 2014.

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BUSINESS COMBINATION

The CVB Acquisition was accounted for in accordance with FASB ASC Topic 805, “Business Combinations”, whereby the acquired assets and assumed liabilities are recorded by the company at their estimated fair values as of the acquisition date, which was June 30, 2014. Fair value estimates were based on our assessment of the best information available as of the acquisition date and are subject to change. The final determination of estimated fair values of assets and liabilities will be made when all necessary information becomes available, and we have completed our analysis.

The following table presents the preliminary allocation of the consideration received to the assets acquired and liabilities assumed in the CVB Acquisition as of the acquisition date. Our preliminary allocation resulted in a bargain purchase gain of $42 thousand.

Fair value of assets acquired:
Cash and cash equivalents	$	12,560
Securities available for sale		17,439
Loans		70,051
Premises and equipment		3,338
Other real estate owned		1,186
Core deposit intangible		930
Accrued interest receivable		318
Deferred tax asset		1,898
Bank owned life insurance		4,054
Other assets		2,658
Total assets	$	114,432
Fair value of liabilities assumed:
Deposits	$	100,985
Accrued interest payable		39
Supplemental executive retirement plan		2,277
Other liabilities		599
Total liabilities	$	103,900
Net identifiable assets acquired	$	10,532
Consideration:
Company’s common shares issued		1,618,186
Purchase price per share (1)	$	6.40
Value of common stock issued		10,356
Estimated fair value of stock options		133
Cash in lieu of fractional shares		1
Total consideration	$	10,490
Bargain purchase gain	$	42

(1) The value of the shares of common stock exchanged for shares of CVB common stock was based upon the closing price of the company’s common stock at June 27, 2014, the last trading day prior to the date of completion of the CVB Acquisition.

40

FINANCIAL CONDITION

Securities

The following tables present information about our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated. During the first quarter of 2014, we reclassified certain nonamortizing, fixed-rate securities to held to maturity.

	September 30, 2014
	Book Value		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available for sale:
Agencies	$	4,938	$	4,969		1.02		2.26	%
Mortgage-backed securities
- Fixed rate		47,434		47,469		3.99		2.03	%
- Variable rate		4,280		4,375		5.29		1.31	%
Municipals - fixed rate
- Taxable		850		849		4.59		1.83	%
- Tax exempt (1)		5,012		5,043		5.28		3.14	%
Collateralized mortgage obligations - fixed rate		12,103		12,039		3.77		2.12	%
Total securities available for sale		74,617		74,743		3.93		2.09	%
Securities held to maturity:
Municipals - fixed rate
- Taxable		9,281		9,515		8.48		3.39	%
Total securities held to maturity		9,281		9,515		8.48		3.39	%
Total securities	$	83,898	$	84,258		4.43		2.25	%

(1) Yields on tax-exempt securities are calculated on a tax equivalent basis.

	December 31, 2013
	Book Value		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available for sale:
Mortgage-backed securities
- Fixed rate	$	45,693	$	45,338		4.54		2.09	%
- Variable rate		4,903		4,852		4.20		1.68	%
Municipals - fixed rate
- Taxable		9,810		8,970		9.23		2.71	%
- Tax exempt (1)		1,634		1,573		8.12		2.95	%
Collateralized mortgage obligations - fixed rate		8,940		8,452		4.01		2.18	%
Total securities available for sale	$	70,980	$	69,185		5.16		2.17	%

(1) Yields on tax-exempt securities are calculated on a tax equivalent basis.

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The following table presents a maturity analysis of our securities portfolio as of the dates stated. Weighted average yield calculations are based on the current level of contractual maturities and expected prepayments as of the dates stated.

	September 30, 2014
	Within 1 Year		Weighted Average Yield			After 1 Year Through 5 Years		Weighted Average Yield			After 5 Years Through 10 Years		Weighted Average Yield			After 10 Years		Weighted Average Yield			Total		Weighted Average Yield
Securities available for sale:
Agencies	$	—		—		$	—		—		$	3,990		1.94	%	$	979		3.58	%	$	4,969		2.26	%
Mortgage-backed securities
- Fixed rate		—		—			19		2.47	%		25,278		1.88	%		22,172		2.20	%		47,469		2.03	%
- Variable rate		—		—			—		—			—		—			4,375		1.31	%		4,375		1.31	%
Municipals - fixed rate
- Taxable							549		1.56	%		299		2.32	%		—		—			848		1.83	%
- Tax exempt (1)		307		1.00	%		—		—			1,637		1.95	%		3,099		2.25	%		5,043		3.14	%
Collateralized mortgage obligations - fixed rate		—		—			—		—			—		—			12,039		2.12	%		12,039		2.12	%
Total securities available for sale		307					568					31,204					42,664					74,743
Securities held to maturity:
Municipals - fixed rate
- Taxable		—		—			—		—			8,532		3.31	%		983		4.12	%		9,515		3.39	%
Total securities held to maturity		—					—					8,532					983					9,515
Total securities	$	307		1.00	%	$	568		1.59	%	$	39,736		2.20	%	$	43,647		2.17	%	$	84,258		2.24	%

(1) Yields on tax-exempt securities are calculated on a tax equivalent basis.

The following table presents the book value and fair value of securities for which the book value exceeded 10% of shareholders’ equity as of the date stated:

	September 30, 2014
	Book Value		Fair Value		Book Value as a Percentage of Shareholders’ Equity
Mortgage-backed securities
- Federal National Mortgage Association	$	40,691	$	40,880		38.5	%
Municipals		10,592		10,760		10.02	%

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Loans

The following table presents the company’s composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans as of the dates stated. In the second quarter of 2014, loans previously reported as loans held for sale were reclassified as loans held for investment for the periods presented. See Note 2—Basis of Presentation—Revised Financial Statements in Part 1, Item 1, “Financial Statements” in this Form 10-Q for more information of the reclassification.

	September 30, 2014						December 31, 2013
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	340,359			45.73	%	$	249,687			46.08	%
Commercial real estate		261,392			35.12	%		172,711			31.88	%
Residential real estate		42,764			5.74	%		22,004			4.06	%
Consumer		9,483			1.27	%		3,191			0.59	%
Guaranteed student loans		89,956			12.08	%		94,028			17.36	%
Overdrafts		424			0.06	%		184			0.03	%
Total loans	$	744,378			100.00	%	$	541,805			100.00	%
Allowance for loan and lease losses		(5,569	)					(5,305	)
Total loans, net of allowance	$	738,809					$	536,500

Loans, net of allowance for loan losses, increased $202.3 million from $536.5 million as of December 31, 2013 to $738.8 million as of September 30, 2014. This increase included $70.1 million of loans acquired in the CVB Acquisition. As of September 30, 2014, loan balances from our participation in a mortgage warehouse lending program increased to $63.5 million compared to $3.4 million at December 31, 2013, as mortgage financing activity for the national bank with which the company participates has increased. As of September 30, 2014, guaranteed student loan balances were $90.0 million, and we believe these balances will decline by approximately $20 million by year-end 2014 as claims filed pursuant to the government guaranty have been made.

The following tables provide the maturity analysis of our loans as of the dates stated based on whether loans are variable-rate or fixed-rate loans:

	September 30, 2014
			Variable Rate						Fixed Rate
	Within 1 year		1 to 5 years		After 5 years		Total variable > 1 year		1 to 5 years		After 5 years		Total fixed > 1 year		Total Maturities
Commercial and industrial (1)	$	160,552	$	109,208	$	15,169	$	124,377	$	41,724	$	10,813	$	52,537	$	337,466
Commercial real estate (2)		67,203		98,804		49,896		148,700		37,678		5,278		42,956		258,859
Residential real estate (3)		5,597		7,274		21,994		29,268		5,164		1,339		6,503		41,368
Consumer (4)		6,644		115		1,102		1,217		1,456		36		1,492		9,353
Guaranteed student loans		46		1,039		88,871		89,910		—		—		—		89,956
Overdrafts		424		—		—		—		—		—		—		424
Total loans	$	240,466	$	216,440	$	177,032	$	393,472	$	86,022	$	17,466	$	103,488	$	737,426

(1) Excludes $1.4 million in nonaccrual fixed-rate loans and $1.5 million in nonaccrual variable-rate loans.

(2) Excludes $1.8 million in nonaccrual fixed-rate loans and $764 thousand in nonaccrual variable-rate loans.

(3) Excludes $170 thousand in nonaccrual fixed-rate loans and $1.2 million in nonaccrual variable-rate loans.

(4) Excludes $6 thousand in nonaccrual fixed-rate loans and $123 thousand in nonaccrual variable-rate loans.

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	December 31, 2013
			Variable Rate						Fixed Rate
	Within 1 year		1 to 5 years		After 5 years		Total variable > 1 year		1 to 5 years		After 5 years		Total fixed > 1 year		Total Maturities
Commercial and industrial (1)	$	102,663	$	79,277	$	9,980	$	89,257	$	43,496	$	8,522	$	52,018	$	243,938
Commercial real estate (2)		57,749		78,167		8,489		86,656		23,029		4,394		27,423		171,828
Residential real estate (3)		6,994		3,615		5,006		8,621		5,355		481		5,836		21,451
Consumer		2,242		319		69		388		559		2		561		3,191
Guaranteed student loans		30		1,247		92,751		93,998		—		—		—		94,028
Overdrafts		185		—		—		—		—		—		—		185
Total loans	$	169,863	$	162,625	$	116,295	$	278,920	$	72,439	$	13,399	$	85,838	$	534,621

(1) Excludes $1.5 million in nonaccrual fixed-rate loans and $874 thousand in nonaccrual variable-rate loans.

(2) Excludes $384 thousand in nonaccrual fixed-rate loans and $499 thousand in nonaccrual variable-rate loans.

(3) Excludes $119 thousand in nonaccrual fixed-rate loans and $434 thousand in nonaccrual variable-rate loans.

A certain degree of risk is inherent in the extension of credit. Management has established loan and credit policies and guidelines designed to control both the types and amounts of risks we take and to minimize losses. Such policies and guidelines include loan underwriting parameters, loan-to-value parameters, credit monitoring guidelines, adherence to regulations, and other prudent credit practices.

Loans secured by real estate comprised 57.1% of our loan portfolio at September 30, 2014 and 47.9% at December 31, 2013. The percentage as of September 30, 2014 reflects the loans acquired in the CVB Acquisition. Commercial real estate (“CRE”) loans are secured by commercial properties. Typically, our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt service coverage ratios as well. Residential real estate loans consist primarily of first and second lien loans, including home equity lines and credit loans, secured by residential real estate located primarily in our target markets, offered to select customers. These customers primarily include branch and private banking customers. Typically, our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt-to-income ratios as well. The repayment of both residential and owner-occupied commercial real estate (“OORE”) loans depends primarily on the income and cash flows of the borrowers, with the real estate serving as a secondary source of repayment. We classify OORE loans as commercial and industrial (“C&I”), as the primary source of repayment of the loan is generally dependent on the financial performance of the commercial enterprise occupying the property, with the real estate being a secondary source of repayment.

Allowance for Loan and Lease Losses

Our allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to FASB ASC Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.”

We determine the allowance for loan and lease losses based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that we originate in our portfolio. We also consider qualitative factors, such as general economic conditions, nationally and in our target markets, as well as threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors are estimates and may be subject to significant change. Increases to our allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in our consolidated statements of operations. Loans deemed to be uncollectible, in full or in part, are charged against our allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to our allowance for loan and lease losses.

In assessing the adequacy of our allowance for loan and lease losses as of the end of a reporting period, we also evaluate our loan risk ratings. Each loan is assigned two “risk ratings” at origination. One risk rating is based on our assessment of our borrower’s financial capacity and the other is based on the type of collateral and estimated loan to value. Our assigned risk ratings generally determine the quantitative factors used in the calculation of our allowance for loan and lease losses. In addition to our assessment of risk ratings, we also consider internal observable data related to trends within the loan portfolio, such as concentrations, aging of the portfolio, changes to our policies and procedures, and external observable data such as industry and general economic trends.

In evaluating loans accounted for under ASC 310-30, we periodically estimate the amount and timing of cash flows expected to be collected. Upon re-estimation, any deterioration in the timing and/or amount of cash flows results in an impairment charge, which is reported as a provision for loan and lease losses in net income and a component of our allowance for loan and lease losses. A subsequent improvement in the expected timing or amount of future cash flows for those loans could result in the reduction of the allowance for loan and lease losses and an increase in our net income.

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In evaluating our acquired guaranteed student loans, our allowance for loan and lease losses is based on historical and expected default rates for similar types of loans applied to the portion of carrying value in these loans that is not subject to federal guaranty.

Our allowance for loan and lease losses does not include amounts for loan losses on loans held pursuant to the mortgage warehouse lending program. Loans pursuant to this program are to mortgage originators that seek funding to facilitate the origination of residential mortgage loans for sale in the secondary market and are generally held for less than 30 days. We sub-participate in this lending program with a national bank (the participating bank), which has experienced negligible losses from this lending activity.

Although we use various data and information sources to establish our allowance for loan and lease losses, future adjustments to our allowance for loan and lease losses may be necessary, if conditions, circumstances or events are substantially different from the assumptions used in making the assessments. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan and lease losses. Such agencies may require us to recognize additions or reductions to the allowance for loan and lease losses based on their judgments of information available to them at the time of their examination.

The following table presents the allowance for loan and losses by loan type and the percent of loans in each category to total loans as of the dates stated:

	September 30, 2014					December 31, 2013
	Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans
Balance at end of period applicable to:
Commercial and industrial	$	2,006		45.73	%	$	2,148		46.08	%
Commercial real estate		3,309		35.12	%		2,756		31.88	%
Residential real estate		187		5.74	%		194		4.06	%
Consumer		12		1.33	%		12		0.59	%
Guaranteed student loans		55		12.08	%		195		17.36	%
Total allowance for loan and lease losses	$	5,569		100.00	%	$	5,305		100.00	%

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The following tables present the activity in the allowance for loan and lease losses for the dates stated:

	For the Three Months Ended September 30,
	2014			2013
Balance at beginning of period	$	6,016		$	4,882
Charge-offs:
Commercial and industrial		30			50
Commercial real estate		—			136
Residential real estate		136			14
Consumer		—			—
Guaranteed student loans		1,741			—
Overdrafts		6			4
Total charge-offs		1,913			204
Recoveries:
Commercial and industrial		2			—
Commercial real estate		—			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		3			—
Total recoveries		5			—
Net charge-offs		1,908			204
Provision for loan and lease losses		1,560			497
Amount for unfunded commitments		(108	)		(46	)
Other (1)		9			—
Balance at end of period	$	5,569		$	5,129

(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

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	For the Nine Months Ended September 30,
	2014			2013
Balance at beginning of period	$	5,305		$	4,875
Charge-offs:
Commercial and industrial		30			51
Commercial real estate		—			506
Residential real estate		171			39
Consumer		—			—
Guaranteed student loans		1,741			—
Overdrafts		20			6
Total charge-offs		1,962			602
Recoveries:
Commercial and industrial		3			—
Commercial real estate		4			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		4			1
Total recoveries		11			1
Net charge-offs		1,951			601
Provision for loan and lease losses		2,390			913
Amount for unfunded commitments		(118	)		(58	)
Other (1)		(57	)		—
Balance at end of period	$	5,569		$	5,129

(1) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

During the third quarter of 2014 and as a result of a comment received in our most recent regulatory examination, we charged off that portion of our guaranteed student loans that was (1) not subject to federal government guaranty and (2) greater than 120 days past due and has a high probability of default. Probability of default was determined by recent loss migration analysis. Loans greater than 120 days past due continue to accrue interest as interest receivable is guaranteed until a claim against the guaranty, if any, is satisfied.

Acquired Loans

Acquired loans are initially recorded at estimated fair value as of the date of acquisition; therefore, any related allowance for loan and lease losses is not carried over or established at acquisition. The difference between contractually required amounts receivable and the acquisition date fair value of loans that are not deemed credit-impaired at acquisition is accreted (recognized) into income over the life of the loan either on a straight-line basis or based on the underlying principal payments on the loan. Any change in credit quality subsequent to acquisition for these loans is reflected in our allowance for loan and lease losses.

Pursuant to the merger with First Bankshares, the acquired loans were adjusted to estimated fair value with a discount of $7.6 million. The loans acquired in the Paragon Transaction and the VBB Acquisition were also adjusted to estimated fair value by recording a discount of $1.8 million and $14.0 million, respectively. As of September 30, 2014, we recorded a $3.0 million estimated fair value adjustment, for credit and interest rates, on the loans acquired in the CVB Acquisition.

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC 310-30. We concluded that a portion of the loans acquired in the VBB Acquisition and the CVB Acquisition are credit-impaired loans qualifying for accounting under ASC 310-30.

In applying ASC 310-30 to acquired loans, we must estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including estimated default rates and the amount and timing of prepayments, in addition to other factors. ASC 310-30 allows the purchaser to estimate cash flows on credit-impaired loans on a loan-by-loan basis or aggregate credit-impaired loans into one or more pools if the loans have common risk characteristics. We have estimated cash flows expected to be collected on a loan-by-loan basis.

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The excess of cash flows expected to be collected over the estimated fair value of purchased credit-impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the period of expected cash flows from the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference. As of June 30, 2014, the date of the CVB Acquisition, we had $1.6 million of nonaccretable difference related to the credit-impaired loans acquired in the CVB Acquisition.

The following table presents our accretion activity for the periods presented. Additions in the period ended September 30, 2014 relate to the CVB Acquisition.

	September 30, 2014			December 31, 2013
Balance at beginning of period	$	4,441		$	8,133
Additions		3,046			—
Accretion (1)		(1,530	)		(2,644	)
Disposals (2)		(51	)		(1,048	)
Other (3)		66			—
Balance at end of period	$	5,972		$	4,441

(1) Accretion amounts are reported in interest income.

(2) Disposals represent the reduction of purchase accounting discounts due to the resolution of acquired loans at amounts less than the contractually-owed receivable.

(3) Represents the recovery of a credit-impaired loan’s prior period allowance through accretion income.

Nonperforming Assets

It is our policy to discontinue the accrual of interest income on nonperforming loans. We consider a loan as nonperforming when it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of September 30, 2014 and December 31, 2013, there were no loans, other than guaranteed student loans, 90 days or greater past due with respect to principal and interest for which interest was accruing. The federal guaranty on our guaranteed student loans covers both principal and interest accrued to the date a claim is paid under the guaranty.

As of September 30, 2014 and December 31, 2013, we had $1.3 million and $199 thousand, respectively, in OREO. We acquired $1.2 million of OREO in the CVB Acquisition. OREO valuations are evaluated periodically, and any necessary valuation allowance to carry the asset at its fair value is recorded as a charge to net income. In the nine months ended September 30, 2014, we recorded a $39 thousand valuation allowance and charge to income for two properties to reflect their net carrying values at estimated fair value.

The following table presents our nonperforming assets, including those acquired in the CVB Acquisition, and various performance ratios for the periods and as of the dates stated:

	September 30, 2014			December 31, 2013
Nonaccrual loans	$	6,929		$	3,822
Other real estate owned		1,283			199
Total nonperforming assets	$	8,212		$	4,021
Nonperforming assets as a percentage of total loans		1.10	%		0.74	%
Nonperforming assets as a percentage of total assets		0.90	%		0.59	%
Net charge-offs as a percentage of average loans		0.32	%		0.20	%
Allowance for loan and lease losses as a percentage of total loans		0.75	%		0.98	%
Allowance for loan and lease losses to nonaccrual loans		80.37	%		138.78	%

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Deposits

Deposits represent our primary source of funds and are comprised of demand deposits, savings deposits and time deposits. Deposits as of September 30, 2014 totaled $766.5 million compared to deposits of $569.2 million at December 31, 2013. Demand deposits, including money market accounts, as of September 30, 2014, increased $97.7 million from balances at December 31, 2013, while time deposits increased $94.4 million over this period. We assumed $49.9 million of demand and money market accounts and $43.6 million of time deposits in the CVB Acquisition. As of September 30, 2014, $92.1 million of our deposits were in Insured Cash Sweep (“ICS”) accounts, Certificate of Deposit Account Registry Service accounts, and brokered time deposits, which we collectively refer to as brokered deposits. As of December 31, 2013, $71.3 million of our deposits were in ICS accounts and brokered time deposits.

The following table presents average balances and rates paid, by deposit category, as of the dates stated:

	September 30, 2014					December 31, 2013
	Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	110,521		—		$	88,254		—
Interest-bearing deposits:
Demand and money market		275,081		0.57	%		251,110		0.54	%
Savings accounts		7,639		0.24	%		4,535		0.29	%
Time deposits $100,000 or greater		189,895		0.74	%		95,490		1.01	%
Time deposits less than $100,000		66,313		1.18	%		57,374		1.36	%
Total interest-bearing deposits		538,928		0.70	%		408,509		0.76	%
Total average deposits	$	649,449		0.58	%	$	496,763		0.63	%

The following table presents maturities of large denomination time deposits (equal to or greater than $100,000) as of September 30, 2014:

	Within 3 Months		3-6 Months		6-12 Months		Over 12 Months		Total		Percent of Total Deposits
Time deposits	$	51,965	$	27,483	$	65,017	$	69,600	$	214,065		27.93	%

Borrowings

The following table summarizes the period-end balance, highest month-end balance, average balance, and weighted average rate of short-term borrowings for each of the periods stated:

	September 30, 2014									December 31, 2013
	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate			Year-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
Federal funds purchased	$	—	$	6,367	$	930		0.63	%	$	—	$	—	$	247		0.58	%
Other borrowings		—		16,000		3,668		0.39	%		—		5,000		805		0.31	%
Total short-term borrowings	$	—	$	22,367	$	4,598		0.44	%	$	—	$	5,000	$	1,052		0.37	%

We have one secured long-term borrowing with the FHLB in the amount of $20 million, which matures on September 28, 2015. The borrowing is a nonamortizing term loan and bears interest at a rate of 20 basis points over LIBOR, which resets quarterly. The borrowing was a modification of a then-existing borrowing, and in connection with the modification in September 2011, we paid a fee of $533 thousand that is being recognized as interest expense over the remaining term of the borrowing.

At the time we modified the FHLB borrowing, we entered into a derivative (interest rate swap) whereby we pay fixed amounts to a counterparty in exchange for receiving LIBOR-based variable payments over the life of the agreement without the exchange of the underlying notional amount, which is $20 million. Our objective in using interest rate derivatives is to manage our exposure to interest rate movements. During the second quarter of 2013 and the first quarter of 2014, we entered into forward-starting swaps for notional amounts totaling $17.5 million, whereby upon the renewal of the FHLB borrowing for a specified period we pay fixed

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amounts and receive variable payments on a portion of the underlying notional amount of the borrowings. The derivatives are designated as cash flow hedges, whereby the effective portion of the hedges is recorded in accumulated other comprehensive (loss) income. The amount reported in accumulated other comprehensive (loss) income as of September 30, 2014, related to these derivatives was an unrealized loss of $97 thousand, net of a tax benefit of $50 thousand. As of September 30, 2014, the ineffective portion of the derivatives was insignificant.

We have agreements with the counterparties to both our cash flow hedge and our non-hedge derivatives that contain a provision whereby, if we fail to maintain our status as a well/an adequate capitalized institution, we could be required to terminate or fully collateralize the derivative contracts. Additionally, if we default on any of our indebtedness, including default where repayment has not been accelerated by the lender, we could also be in default on our derivative obligations. We have minimum collateral requirements with our counterparties and, as of September 30, 2014, $1.1 million had been pledged as collateral under the agreements, as the valuation of these derivatives had surpassed the contractually specified minimum transfer amount of $250 thousand. If we are not in compliance with the terms of the derivative agreements, we could be required to settle obligations under the agreements at termination value. As of September 30, 2014, a hedge liability of $165 thousand was recorded in other liabilities on our consolidated balance sheet related to the cash flow hedge derivatives.

For the nine-month period ended September 30, 2014, our effective interest rate on the $20 million FHLB borrowing, including the effect of the modification fee and cash flow hedge, was 1.82%.

On September 30, 2014, we borrowed $12 million upon the closing of the Credit Agreement. Pursuant to the Credit Agreement, we have the right to borrow up to an additional $3 million under a delayed-draw term loan commitment, subject to customary conditions, on or before September 30, 2015. The term loans are repayable in monthly payments of accrued interest only for the first six months and then, beginning on March 31, 2015, the term loans are repayable in quarterly installments of principal, based on a 10-year amortization schedule, plus accrued interest. Unless extended or earlier prepaid, the maturity date of all term loans made under the Credit Agreement is September 30, 2019, at which time all unpaid principal, with accrued interest thereon, will become due and payable in full. All borrowings under the Credit Agreement bear interest at the 30-day LIBOR in effect from time to time, plus 3.5% per annum. The Credit Agreement is unsecured but the lender has the benefit of a negative pledge on all of the outstanding capital stock of the company’s wholly-owned subsidiary, Xenith Bank.

The Credit Agreement contains financial covenants that require (1) the company to be, and to cause the Bank to be, “well capitalized” as defined in federal banking regulations, at all times, (2) the Bank’s total risk-based capital ratio to be at least equal to 11.5% as of the last day of each fiscal quarter, (3) the Bank’s ratio of nonperforming assets to tangible primary capital to be no more than 30% as of the last day of each fiscal quarter, (4) the Bank’s ratio of loan loss reserves, including loans discounts relating to acquired loans, to nonperforming loans to be at least equal to 70% at all times and (5) the company’s fixed charge coverage ratio, determined on a consolidated basis, to be at least 1.25 to 1.0 at the end of each fiscal quarter for the trailing four fiscal quarters. As of September 30, 2014, the company and the Bank, as applicable, were in compliance with these financial covenants.

LIQUIDITY AND CAPITAL RESOURCES

In the nine-month period ended September 30, 2014, cash and cash equivalents increased $3.2 million compared to an increase of $12.2 million in the same period in 2013. Net cash used in operating activities was $90 thousand for the nine-month period ended September 30, 2014 compared to net cash provided by operating activities of $2.9 million for the same period in 2013. Net cash used in operating activities in the 2014 period was driven primarily by increases in accrued interest receivable and other assets, which include additional balances in collateral deposits and other investments and changes in customer derivative values. Net cash used in investing activities was $116.7 million for the nine-month period ended September 30, 2014 compared to $33.1 million for the same period in 2013. Cash used in investing activities in the 2014 period reflected a net increase in loans of $133.0 million (which excludes acquired CVB loans), partially offset by $12.6 million of cash and cash equivalents acquired in the CVB Acquisition and $3.8 million of proceeds from the sale net of purchases of securities. Net cash used in investing activities in the nine-month period ended September 30, 2013 reflected a net increase in loans of $5.4 million and purchases of securities of $18.2 million, net of proceeds from the sale of securities. The reclassification of the warehouse lending program from loans held for sale to loans held for investment resulted in a $46.6 million decrease in both net cash provided by operating activities and net cash used in investing activities in the 2013 period as increases and decreases in loans held for investment are reported as cash flows from investing activities. Net cash provided by financing activities in the nine-month period ended September 30, 2014 was $113.6 million compared to $42.4 million for the same period of 2013. Cash provided by financing activities in the 2014 period reflected an increase in deposits of $96.4 million (which excludes assumed CVB deposits), $12.0 million of proceeds from the senior term loan, and $5.6 million from the issuance of common stock, net of stock issuance costs. Cash provided by financing activities in the 2013 period was primarily due to the increase in deposits. In the third quarter of 2013, we began our share repurchase program and used $265 thousand to repurchase shares of our common stock in the nine-month period ended September 30, 2014.

Liquidity

Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate deposit withdrawals, payments of debt and operating expenses and increased loan demand, and to achieve stated objectives (including

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working capital requirements.) These events may occur daily or in other short-term intervals in the normal operation of business. Historical trends may help management predict the amount of cash required. In assessing liquidity, management gives consideration to various factors, including stability of deposits, maturity of time deposits, quality, volume and maturity of assets, sources and costs of borrowings, concentrations of business and industry, competition, and our overall financial condition and cash flows.

Our primary sources of liquidity are cash, due from banks, federal funds sold, and securities in our available-for-sale securities portfolio. We have access to a credit line from our primary correspondent bank in the amount of $25.0 million. This line is for short-term liquidity needs, is subject to the prevailing federal funds interest rate, and can be terminated at any time.

In addition, we have secured borrowing facilities with the FHLB and the Federal Reserve Bank (“FRB”), both of which are secured with certain of our loans. The total credit availability under the FHLB facility is equal to 30% of our total assets, which as of September 30, 2014 was $230.4 million, based on our June 30, 2014 balance sheet (excluding the CVB Acquisition). Pledged collateral for this facility as of September 30, 2014 was $39.7 million. Under this facility, as of September 30, 2014, we had one nonamortizing term loan for $20 million borrowing outstanding. Credit availability under the FRB facility was $118.5 million as of September 30, 2014, which is also based on pledged collateral. Borrowings under the FRB facility bear the prevailing current rate for primary credit. There were no amounts outstanding under the FRB facility as of September 30, 2014.

We also have three additional uncommitted lines of credit by national banks to borrow federal funds up to $28.0 million in total on an unsecured basis. One line for $5.0 million expires on June 30, 2015. The remainder of the lines of credit can be cancelled at any time. We also have one line of credit for $15.0 million from a correspondent bank, which expires September 2015. As of September 30, 2014, no amounts were outstanding under these uncommitted lines of credit. Borrowings under these arrangements bear interest at the prevailing federal funds rate.

We also have the right to borrow up to an additional $3 million under a delayed-draw term loan commitment pursuant to the Credit Agreement, subject to customary conditions, on or before September 30, 2015.

Capital Adequacy

Capital management in a regulated financial services industry must properly balance return on equity to shareholders, while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Our capital management strategies have been developed to maintain our “well-capitalized” position.

We are subject to various regulatory capital requirements administered by federal and other bank regulators. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on us. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. The phase-in period for this rule is scheduled to begin January 2015.

A significant portion of the proceeds from our third quarter sale of common stock and borrowings under the Credit Agreement was contributed to the Bank as equity that qualified as Tier 1 capital, resulting in regulatory capital and capital ratios for the Bank exceeding those for the consolidated entity.

The following table presents Tier 1 and total risk-based capital and risk-weighted assets for the Bank and Xenith Bankshares as of the dates stated:

	September 30, 2014				December 31, 2013
	Xenith Bank		Xenith Bankshares		Xenith Bank		Xenith Bankshares
Tier 1 capital	$	93,988	$	85,240	$	69,314	$	70,299
Total risk-based capital		100,011		91,263		74,955		75,940
Risk-weighted assets		753,415		753,502		526,841		526,752

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The following table presents capital ratios and minimum capital ratios required by our regulators for the Bank and Xenith Bankshares as of the dates stated:

	September 30, 2014						December 31, 2013
	Xenith Bank			Xenith Bankshares			Xenith Bank			Xenith Bankshares			Regulatory Minimum			Well Capitalized
Tier 1 leverage ratio		10.68	%		9.69	%		10.37	%		10.52	%		4.00	%		> 5.00	%
Tier 1 risk-based capital ratio		12.47	%		11.31	%		13.16	%		13.35	%		4.00	%		> 6.00	%
Total risk-based capital ratio		13.27	%		12.11	%		14.23	%		14.42	%		8.00	%		> 10.00	%

Interest Rate Sensitivity

Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of an organization. Our primary market risk is interest rate risk. Interest rate risk is inherent in banking, because we derive a significant amount of our operating revenue from “purchasing” funds (customer deposits and borrowings) at various terms and rates. These funds are invested in interest-earning assets (e.g., loans and investments) at various terms and rates.

Interest rate risk is the exposure to fluctuations in our future earnings (earnings at risk) and value (market value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that re-price within a specific time period as a result of scheduled maturities and prepayments and contractual interest rate changes.

The balance sheet may be asset or liability sensitive at a given time. We intend to manage the Bank’s asset or liability sensitivity to optimize earnings, to minimize interest rate risk, and to preserve capital within policy limits, while optimizing the return to our shareholders.

Management strives to control the Bank’s exposure to interest rate volatility, and we operate under an asset and liability management policy approved by our board of directors. In accordance with our policy, we emphasize the loan and deposit pricing characteristics that best meet our current view on the future direction of interest rates and use sophisticated analytical tools to support our asset and liability processes.

Gap Analysis

Gap analysis tools monitor the “gap” between interest-sensitive assets and interest-sensitive liabilities. The Bank uses a simulation model to forecast balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, the Bank can position itself to mitigate risks associated with anticipated interest rate movements by understanding the dynamic nature of its balance sheet components. We evaluate our balance sheet components (securities, loan and deposit portfolios) to manage our interest rate risk position.

A negative interest-sensitive gap results when interest-sensitive liabilities exceed interest-sensitive assets for a specific re-pricing “time horizon.” The gap is positive when interest-sensitive assets exceed interest-sensitive liabilities for a given time period. For a bank with a positive gap, rising interest rates would be expected to have a positive effect on net interest income, and falling rates would be expected to have a negative effect. The table below reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Variable-rate loans are reflected at the earliest re-pricing interval since they re-price according to their terms. Borrowed funds are reflected in the earliest contractual re-pricing interval. Interest-bearing liabilities, with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected in expected re-pricing intervals. Time deposits and fixed-rate loans are reflected at their respective contractual maturity dates.

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The following table, “Gap Report,” indicates that, on a cumulative basis through the next 12 months, our interest rate-sensitive assets exceed interest rate-sensitive liabilities, resulting in an asset-sensitive position as of September 30, 2014 of $309.3 million. This net asset-sensitive position was a result of $681.4 million in interest rate-sensitive assets being available for re-pricing during the next 12 months and $372.0 million in interest rate-sensitive liabilities being available for re-pricing during the same time period. Our gap position as of September 30, 2014 is considered by management to be favorable in an increasing interest rate environment.

	0-180 Days		181-360 days			1-3 Years			Over 3 Years		Totals
Assets:
Cash and cash due	$	12,043	$	—		$	—		$	—	$	20,665
Fed funds sold		6,826		—			—			—		6,826
Securities		12,171		5,426			17,506			48,795		84,024
Loans		641,715		2,494			39,490			62,588		744,378
Allowance for loan and lease losses		—		—			—			—		(5,569	)
Premises and equipment		—		—			—			—		8,113
Intangibles		—		—			—			—		16,258
OREO		—		—			—			—		1,283
Deferred tax asset		—		—			—			—		6,170
Bank owned life insurance		—		—			—			—		14,002
Other assets		681		—			—			4,570		14,012
Total assets	$	673,436	$	7,920		$	56,996		$	115,953	$	910,162
Liabilities and Equity:
Demand deposits	$	—	$	—		$	—		$	—	$	129,742
Interest-bearing deposits		186,430		165,587			258,565			26,119		636,782
Borrowed funds		—		20,000			—			12,000		32,000
Other liabilities		—		—			—			—		5,954
Shareholders’ equity		—		—			—			—		105,684
Total liabilities and equity	$	186,430	$	185,587		$	258,565		$	38,119	$	910,162
Discrete gap:	$	487,006	$	(177,667	)	$	(201,569	)	$	77,834
Cumulative gap:	$	487,006	$	309,339		$	107,770		$	185,604

Commitments and Contingencies

In the normal course of business, we have commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Additionally, we issue letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

These commitments represent outstanding off-balance sheet commitments. The following table presents unfunded loan commitments outstanding as of the dates stated:

	September 30, 2014		December 31, 2013
Commercial lines of credit	$	121,183	$	74,419
Commercial real estate		67,347		44,324
Residential real estate		11,610		7,183
Consumer		2,315		481
Letters of credit		7,725		6,796
Total commitments	$	210,180	$	133,203

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In addition, the Bank has a commitment to invest in a limited partnership that operates as a small business investment company. As of September 30, 2014, the Bank had invested $650 thousand. An additional $350 thousand will be funded at the request of the general partner of the partnership.

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-Q are “forward-looking statements.” All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our plans, objectives and goals, future events or results, our competitive strengths and business strategies, and the trends in our industry are forward-looking statements. The words “believe,” “will,” “may,” “could,” “estimate,” “project,” “predict,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “future,” “likely,” “probably,” “suggest,” “goal,” “potential” and similar expressions, as they relate to our company, are intended to identify forward-looking statements.

Forward-looking statements made in this Form 10-Q reflect beliefs, assumptions, and expectations of future events or results, taking into account the information currently available to us. These beliefs, assumptions, and expectations may change as a result of many possible events, circumstances or factors, not all of which are currently known to us. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in, or implied by, the forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. You should carefully consider these matters, along with the risks discussed under “Risk Factors” in our proxy statement/prospectus (Registration No. 333-195108) that we filed with the Securities and Exchange Commission (the “SEC”) on April 30, 2014 and the following factors, which are not intended to be exhaustive, that may cause actual results to vary materially from our forward-looking statements:

• general economic conditions nationally, regionally or in our target markets;

• the efforts of government agencies to stabilize the equity and debt markets;

• the adequacy of our allowance for loan and lease losses and the methodology for determining such allowance;

• adverse changes in our loan portfolio and credit risk-related losses and expenses;

• concentrations within our loan portfolio, including exposure to commercial real estate loans, and to our target markets;

• our dependence on our target markets in and around Virginia;

• reduced deposit flows and loan demand as well as increasing default rates;

• changes in interest rates, reducing our margins or the volumes or values of the loans we make and the deposits and investments we hold;

• our ability to generate sufficient taxable income to utilize our deferred tax assets, thus requiring a valuation allowance against this asset;

• business conditions in the financial services industry, including competitive pressures among financial services companies, new service and product offerings by competitors, and similar factors;

• the degree and nature of our competition, with the understanding that competitors may have greater financial resources and access to capital and may offer services that enable those competitors to compete more successfully than we can;

• the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;

• our ability and willingness to pay dividends on our common stock in the future;

• changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

• volatility of the market price of our common stock and capital markets generally;

• changes in our competitive strengths or business or strategies;

• the availability, terms and deployment of debt and equity capital;

• our dependence upon key personnel whose continued service is not guaranteed, and our ability to identify, hire and retain highly qualified personnel in the future;

• our ability to implement our business strategies successfully;

• our ability to integrate CVB as expected and within the expected timeframe;

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• disruptions to customer and employee relationships and business operations caused by the CVB Acquisition;

• our ability to achieve the cost savings and synergies contemplated by the CVB Acquisition within the expected timeframe;

• our ability to maintain regulatory capital levels and adequate sources of funding and liquidity, which could be adversely affected by market conditions and changes in capital requirements made by regulators;

• negative publicity and the impact on our reputation;

• rapidly changing technology;

• war or terrorist activities causing deterioration in the economy;

• other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and

• the risks discussed in our public filings with the SEC.

As a result of these factors, among others, the future events or results that are the subject of our beliefs, assumptions and expectations expressed in, or implied by, our forward-looking statements in this Form 10-Q may not be achieved in any specified time frame, or at all, which could be material. Accordingly and as noted above, you should not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or the persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by applicable law or regulations, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Management evaluated, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective as of the end of the period covered by this Form 10-Q to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in the company’s internal control over financial reporting occurred during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.

Item 1A. Risk Factors

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. “Risk Factors” in the proxy statement/prospectus (Registration No. 333-195108) that we filed with the SEC on April 30, 2014 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in the proxy statement/prospectus.

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

In July 2013, the company’s board of directors approved a share repurchase program under which the company may purchase in the open market or otherwise up to 210,000 shares of its outstanding common stock. There is no guarantee as to the number of shares that will be repurchased by the company, and the program can be discontinued at any time. There were no purchases during the third quarter of 2014.

Item 6. Exhibits

Exhibit Index:

Exhibit Number	Description
10.1	Credit Agreement, dated as of September 30, 2014, between the Company and Raymond James Bank, N.A. (incorporated herein by reference to Exhibit 10.1 to Form 8-K filed on October 1, 2014 (File No. 000-53380))
10.2	Form of Registration Rights Agreement (incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on October 1, 2014 (File No. 000-53380))
31.1	Certification of CEO pursuant to Rule 13a-14(a)
31.2	Certification of CFO pursuant to Rule 13a-14(a)
32.1	CEO Certification pursuant to 18 U.S.C. § 1350
32.2	CFO Certification pursuant to 18 U.S.C. § 1350
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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.

	XENITH BANKSHARES, INC.
Date: November 7, 2014	/S/    T. GAYLON LAYFIELD, III
	T. Gaylon Layfield, III President and Chief Executive Officer (Principal Executive Officer)
Date: November 7, 2014	/S/    THOMAS. W. OSGOOD
	Thomas W. Osgood
	Executive Vice President, Chief Financial Officer,
	Chief Administrative Officer and Treasurer
	(Principal Financial Officer)