Xenith Bankshares (XBKS) 10-Q 2016 Q1 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 March 31, 2016

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 May 2, 2016 was 13,129,725.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION
Item 1 Financial Statements			3
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3 Quantitative and Qualitative Disclosures About Market Risk			47
Item 4 Controls and Procedures			47
	PART II - OTHER INFORMATION
Item 1 Legal Proceedings			48
Item 1A Risk Factors			48
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 6 Exhibits			49
SIGNATURES

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF MARCH 31, 2016 AND DECEMBER 31, 2015

(in thousands, except share data)	(Unaudited) March 31, 2016		December 31, 2015
Assets
Cash and cash equivalents
Cash and due from banks	$	27,608	$	40,242
Federal funds sold		13,457		21,703
Total cash and cash equivalents		41,065		61,945
Securities available for sale, at fair value		133,568		130,863
Securities held to maturity, at amortized cost (fair value: 2016 - $10,071; 2015 - $9,769)		9,268		9,270
Loans, net of allowance for loan and lease losses, 2016 - $7,072; 2015 - $7,350		772,044		772,178
Premises and equipment, net		7,602		7,544
Other real estate owned, net		632		533
Goodwill		12,989		12,989
Other intangible assets, net		2,582		2,697
Accrued interest receivable		4,236		4,430
Deferred tax asset		5,538		6,260
Bank owned life insurance		19,739		19,603
Other assets		11,779		11,184
Total assets	$	1,021,042	$	1,039,496
Liabilities and Shareholders’ Equity
Deposits
Demand and money market	$	567,868	$	568,366
Savings		11,617		10,564
Time		292,776		310,100
Total deposits		872,261		889,030
Accrued interest payable		282		426
Borrowed funds		36,576		36,861
Supplemental executive retirement plan		2,194		2,217
Other liabilities		4,237		8,273
Total liabilities		915,550		936,807
Shareholders’ equity
Common stock, $1.00 par value, 100,000,000 shares authorized as of March 31, 2016 and December 31, 2015; 13,129,239 shares issued and outstanding as of March 31, 2016 and 12,996,622 shares issued and outstanding as of December 31, 2015		13,129		12,997
Additional paid-in capital		86,968		86,684
Retained earnings		3,948		3,581
Accumulated other comprehensive income (loss), net of tax		1,447		(573	)
Total shareholders’ equity		105,492		102,689
Total liabilities and shareholders’ equity	$	1,021,042	$	1,039,496

See notes to unaudited consolidated financial statements.

3

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

(in thousands, except per share data)	March 31, 2016		March 31, 2015
Interest income
Interest and fees on loans	$	8,477	$	8,206
Interest on securities		965		446
Interest on federal funds sold and deposits in other banks		132		86
Total interest income		9,574		8,738
Interest expense
Interest on deposits		1,505		1,266
Interest on federal funds purchased and borrowed funds		349		210
Total interest expense		1,854		1,476
Net interest income		7,720		7,262
Provision for loan and lease losses		190		565
Net interest income after provision for loan and lease losses		7,530		6,697
Noninterest income
Service charges on deposit accounts		153		163
Gain on sales of securities		—		67
Increase in cash surrender value of bank owned life insurance		136		97
Other income		76		85
Total noninterest income		365		412
Noninterest expense
Compensation and benefits		3,517		3,282
Occupancy		402		418
FDIC insurance		186		177
Bank franchise taxes		270		246
Technology		514		535
Communications		99		102
Insurance		82		93
Professional fees		271		275
Amortization of intangible assets		114		114
Guaranteed student loan servicing		92		123
Merger-related expenses		1,008		—
Other		445		447
Total noninterest expense		7,000		5,812
Income before income tax		895		1,297
Income tax expense		528		376
Net income		367		921
Preferred stock dividend		—		(21	)
Net income available to common shareholders	$	367	$	900
Earnings per common share (basic and diluted):	$	0.03	$	0.07

See notes to unaudited consolidated financial statements.

4

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

	For the Three Months Ended March 31,
(in thousands)	2016			2015
Net income	$	367		$	921
Other comprehensive income (loss), before taxes:
Securities available for sale:
Unrealized gain (loss) arising during the period		3,383			(9	)
Reclassification adjustment for gains included in net income		—			(67	)
Unrealized gain (loss) on available-for-sale securities		3,383			(76	)
Securities held to maturity:
Amortization of unrealized loss transferred from available for sale		14			14
Unrealized loss on held-to-maturity securities		14			14
Unrealized loss on derivative:
Unrealized loss arising during the period		(417	)		(303	)
Reclassification adjustment for losses included in net income		80			35
Unrealized loss on derivative		(337	)		(268	)
Other comprehensive income (loss), before taxes		3,060			(330	)
Income tax (expense) benefit related to other comprehensive income (loss)		(1,040	)		112
Comprehensive income	$	2,387		$	703

See notes to unaudited consolidated financial statements.

5

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

(Unaudited)

(in thousands)	March 31, 2016			March 31, 2015
Cash flows from operating activities
Net income	$	367		$	921
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan and lease losses		190			565
Depreciation and amortization		269			298
Net amortization of securities		324			201
Accretion of acquisition accounting adjustments		(445	)		(502	)
Deferred tax benefit		(318	)		(127	)
Gain on sales of securities		—			(67	)
Share-based compensation expense		165			186
Increase in cash surrender value of bank owned life insurance		(136	)		(97	)
Change in operating assets and liabilities:
Accrued interest receivable		194			(485	)
Other assets		(483	)		(852	)
Accrued interest payable		(144	)		3
Other liabilities		(4,432	)		3,127
Net cash (used in) provided by operating activities		(4,449	)		3,171
Cash flows from investing activities
Proceeds from sales, maturities and calls of securities		370			5,076
Purchases of securities		—			(13,927	)
Net decrease (increase) in loans		327			(6,418	)
Net purchase of premises and equipment		(212	)		(117	)
Purchase of FRB and FHLB stock		(113	)		(129	)
Net cash provided by (used in) investing activities		372			(15,515	)
Cash flows from financing activities
Net increase in demand and savings deposits		555			35,429
Net (decrease) increase in time deposits		(17,324	)		35,078
Net decrease in borrowed funds		(285	)		(75	)
Issuance of common stock, net of issuance costs		251			6
Preferred stock dividend		—			(21	)
Net cash (used in) provided by financing activities		(16,803	)		70,417
Net (decrease) increase in cash and cash equivalents		(20,880	)		58,073
Cash and cash equivalents
Beginning of period		61,945			39,199
End of period	$	41,065		$	97,272
Supplementary disclosure of cash flow information
Cash payments for:
Interest	$	1,998		$	1,492
Income taxes	$	—		$	300
Transfer of loans to foreclosed assets	$	99		$	—

See notes to unaudited consolidated financial statements.

6

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

March 31, 2016

Note 1. Organization

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 March 31, 2016, the company, through the Bank, operates eight full-service branches: one branch in Herndon, Virginia, two branches in Richmond, Virginia, three branches in Suffolk, Virginia, and two branches in Gloucester, Virginia. Additionally, the Bank operates one loan production office in Newport News, Virginia.

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 “First Bankshares Merger”), with First Bankshares being the surviving entity in the First Bankshares Merger. At the effective time of the First Bankshares 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 First Bankshares Merger, SuffolkFirst Bank changed its name to Xenith Bank. Although the First Bankshares 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 (the “Paragon Transaction”), and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the branch office.

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 Colonial Virginia Bank (“CVB”) with and into the Bank, with the Bank being the surviving bank (the “CVB Acquisition”). In the CVB Acquisition, 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 amount for taxes. As a result the company issued an aggregate of 1,618,186 shares of its common stock to the former shareholders of CVB in exchange for their shares of CVB common stock. Pursuant to the CVB Acquisition, the company acquired $114.4 million of assets, including $70.1 million in loans and assumed $103.9 million in liabilities, including $101.0 million of deposits.

In September 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.

On June 30, 2015, the company completed the redemption of all of the outstanding 8,381 shares of its senior non-cumulative perpetual preferred stock, Series A, that the company had issued and sold to the U.S. Treasury pursuant to the Small Business Lending Fund program (the “SBLF Preferred Stock”), at an aggregate redemption price of $8.4 million, including accrued but unpaid dividends. There was no SBLF Preferred Stock outstanding as of March 31, 2016.

On June 26, 2015, the company issued and sold $8.5 million in aggregate principal amount of its 6.75% subordinated notes due 2025 (the “Subordinated Notes”). See Note 12 – Borrowings for more information on the Subordinated Notes. Substantially all of the net proceeds from the issuance and sale of the Subordinated Notes were used to fund the redemption of the company’s SBLF Preferred Stock.

On February 10, 2016, Xenith Bankshares announced, in a joint release with Hampton Roads Bankshares, Inc. (“Hampton Roads Bankshares”), that the companies had reached a definitive agreement to merge (the “HRB Merger”). Under the terms of the agreement, the company’s shareholders will receive 4.4 shares of Hampton Roads Bankshares’ common stock for each share of the company’s common stock. Immediately following the completion of the HRB Merger, the Bank will merge with and into Hampton Roads Bankshares’ wholly-owned subsidiary, Bank of Hampton Roads. The combined company will adopt the name Xenith Bankshares, Inc. for the holding company and the name Xenith Bank for the combined bank and will be headquartered in Richmond, Virginia. The completion of the HRB Merger, which is expected to occur in the third quarter of 2016, is subject to regulatory approvals and the approval of the shareholders of both companies, as well as customary closing conditions.

7

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 position at March 31, 2016 and December 31, 2015, the results of operations and comprehensive income for the three months ended March 31, 2016 and 2015, and the statements of cash flows for the three months ended March 31, 2016 and 2015. The results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016. 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, 2015.

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

Note 3. 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 March 31, 2016 and December 31, 2015 was $14.8 million and $12.5 million, respectively.

Note 4. Securities

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

	March 31, 2016
			Gross Unrealized
	Amortized Cost		Gains		(Losses)			Fair Value
Securities available for sale:
Mortgage-backed securities - fixed rate	$	7,968	$	97	$	—		$	8,065
Municipals - fixed rate
- Tax exempt		67,791		2,226		—			70,017
- Taxable		10,085		353		—			10,438
Collateralized mortgage obligations - fixed rate		7,532		126		(21	)		7,637
Commercial mortgage-backed securities - fixed rate		36,653		758		—			37,411
Total securities available for sale		130,029		3,560		(21	)		133,568
Securities held to maturity:
Municipals - fixed rate - taxable		9,268		803		—			10,071
Total securities held to maturity		9,268		803		—			10,071
Total securities	$	139,297	$	4,363	$	(21	)	$	143,639
	December 31, 2015
			Gross Unrealized
	Amortized Cost		Gains		(Losses)			Fair Value
Securities available for sale:
Mortgage-backed securities - fixed rate	$	8,026	$	11	$	(90	)	$	7,947
Municipals - fixed rate
- Tax exempt		68,025		1,035		(6	)		69,054
- Taxable		10,071		61		(130	)		10,002
Collateralized mortgage obligations - fixed rate		7,872		43		(85	)		7,830
Commercial mortgage-backed securities - fixed rate		36,712		—		(682	)		36,030
Total securities available for sale		130,706		1,150		(993	)		130,863
Securities held to maturity:
Municipals - fixed rate - taxable		9,270		499		—			9,769
Total securities held to maturity		9,270		499		—			9,769
Total securities	$	139,976	$	1,649	$	(993	)	$	140,632

8

As of March 31, 2016 and December 31, 2015, the company had securities with a fair value of $8.2 million and $8.1 million, respectively, pledged as collateral for public deposits.

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

	March 31, 2016
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	—	$	—	$	—	$	—
Due after one year through five years		6,643		6,783		—		—
Due after five years through ten years		50,444		51,690		9,268		10,071
Due after ten years		72,942		75,095		—		—
Total securities	$	130,029	$	133,568	$	9,268	$	10,071

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.

	March 31, 2016
			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:
Collateralized mortgage obligations - fixed rate		2	$	—	$	—		$	2,904	$	(21	)	$	2,904	$	(21	)
Total securities available for sale		2		—		—			2,904		(21	)		2,904		(21	)
Total securities		2	$	—	$	—		$	2,904	$	(21	)	$	2,904	$	(21	)
	December 31, 2015
			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		3	$	6,956	$	(90	)	$	—	$	—		$	6,956	$	(90	)
Municipals - fixed rate
- Tax exempt		3		4,391		(6	)		—		—			4,391		(6	)
- Taxable		2		5,024		(130	)		—		—			5,024		(130	)
Collateralized mortgage obligations - fixed rate		2		—		—			2,988		(85	)		2,988		(85	)
Commercial mortgage-backed securities - fixed rate		14		36,032		(682	)		—		—			36,032		(682	)
Total securities available for sale		24		52,403		(908	)		2,988		(85	)		55,391		(993	)
Total securities		24	$	52,403	$	(908	)	$	2,988	$	(85	)	$	55,391	$	(993	)

9

All securities held as of March 31, 2016 were investment grade. The unrealized loss positions at March 31, 2016 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 March 31, 2016, 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 March 31, 2016; therefore, no other-than-temporary impairment has been recognized in net income.

Note 5. 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:

	March 31, 2016						December 31, 2015
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	365,766			46.9	%	$	370,612			47.6	%
Commercial real estate		311,588			40.0	%		302,814			38.8	%
Residential real estate		35,832			4.6	%		36,190			4.6	%
Consumer		12,225			1.6	%		12,577			1.6	%
Guaranteed student loans		53,674			6.9	%		57,308			7.4	%
Overdrafts		31			0.0	%		27			0.0	%
Total loans		779,116			100.0	%		779,528			100.0	%
Allowance for loan and lease losses		(7,072	)					(7,350	)
Total loans, net of allowance	$	772,044					$	772,178

Loans, excluding guaranteed student loans, include unearned fees net of capitalized origination costs, of $436 thousand and $358 thousand, as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, $294.7 million of loans were pledged to the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank as collateral for borrowing capacity.

As of March 31, 2016, the company had $53.7 million of guaranteed student loans, including premium and acquisition costs of $1.4 million and $780 thousand, respectively, which are amortized into interest income on the effective interest method. The guaranteed student 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, 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, pursuant to 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. The student loans carry an approximate 98% federal government guarantee as to the payment of principal and accrued interest.

10

The following tables present 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 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.

	March 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Purchased credit-impaired loans:
Commercial and industrial	$	595	$	—	$	207	$	—	$	802
Commercial real estate		1,926		1,502		940		—		4,368
Residential real estate		191		—		573		—		764
Consumer		50		—		36		—		86
Total purchased credit-impaired loans		2,762		1,502		1,756		—		6,020
Originated and other purchased loans:
Commercial and industrial		360,860		2,956		1,148		—		364,964
Commercial real estate		298,203		2,820		6,197		—		307,220
Residential real estate		33,636		236		1,196		—		35,068
Consumer		12,000		10		160		—		12,170
Guaranteed student loans		53,674		—		—		—		53,674
Total originated and other purchased loans		758,373		6,022		8,701		—		773,096
Total loans	$	761,135	$	7,524	$	10,457	$	—	$	779,116
	December 31, 2015
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Purchased credit-impaired loans:
Commercial and industrial	$	616	$	—	$	209	$	—	$	825
Commercial real estate		3,057		371		949		—		4,377
Residential real estate		72		—		705		—		777
Consumer		27		—		61		—		88
Total purchased credit-impaired loans		3,772		371		1,924		—		6,067
Originated and other purchased loans:
Commercial and industrial		365,430		2,353		2,004		—		369,787
Commercial real estate		289,338		2,861		6,238		—		298,437
Residential real estate		33,894		259		1,260		—		35,413
Consumer		12,343		12		161		—		12,516
Guaranteed student loans		57,308		—		—		—		57,308
Total originated and other purchased loans		758,313		5,485		9,663		—		773,461
Total loans	$	762,085	$	5,856	$	11,587	$	—	$	779,528

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

11

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 income. 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 the loans applied to the portion of carrying value in these loans that is not subject to federal guarantee. The company charges off that portion of its guaranteed student loans that are (1) not subject to federal government guarantee and (2) greater than 120 days past due and have a high probability of default. Probability of default is determined by a loss migration analysis.

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

	Three Months Ended March 31,
	2016			2015
Balance at beginning of period	$	7,350		$	6,247
Charge-offs:
Commercial and industrial		291			2
Commercial real estate		—			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		139			321
Overdrafts		3			4
Total charge-offs		433			327
Recoveries:
Commercial and industrial		—			—
Commercial real estate		—			1
Residential real estate		—			—
Consumer		—			1
Guaranteed student loans		—			—
Overdrafts		2			2
Total recoveries		2			4
Net charge-offs		431			323
Provision for loan and lease losses		190			565
Amount for unfunded commitments		(37	)		—
Other (1)		—			(46	)
Balance at end of period	$	7,072		$	6,443

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

12

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:

	March 31, 2016
	Total Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses applicable to:
Purchased credit-impaired loans
Commercial and industrial	$	52	$	52	$	—
Commercial real estate		276		276		—
Residential real estate		38		38		—
Consumer		—		—		—
Total purchased credit-impaired loans		366		366		—
Originated and other purchased loans
Commercial and industrial		1,557		—		1,557
Commercial real estate		4,907		717		4,190
Residential real estate		161		9		152
Consumer		—		—		—
Guaranteed student loans		81		—		81
Total originated and other purchased loans		6,706		726		5,980
Total allowance for loan and lease losses	$	7,072	$	1,092	$	5,980
Loan balances applicable to:
Purchased credit-impaired loans
Commercial and industrial	$	802	$	776	$	26
Commercial real estate		4,368		2,638		1,730
Residential real estate		764		296		468
Consumer		86		—		86
Total purchased credit-impaired loans		6,020		3,710		2,310
Originated and other purchased loans
Commercial and industrial		364,964		840		364,124
Commercial real estate		307,220		5,513		301,707
Residential real estate		35,068		616		34,452
Consumer		12,170		543		11,627
Guaranteed student loans		53,674		—		53,674
Total originated and other purchased loans		773,096		7,512		765,584
Total loans	$	779,116	$	11,222	$	767,894

13

	December 31, 2015
	Total Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses applicable to:
Purchased credit-impaired loans
Commercial and industrial	$	52	$	52	$	—
Commercial real estate		276		276		—
Residential real estate		38		38		—
Consumer		—		—		—
Total purchased credit-impaired loans		366		366		—
Originated and other purchased loans
Commercial and industrial		2,043		452		1,591
Commercial real estate		4,715		466		4,249
Residential real estate		167		11		156
Consumer		—		—		—
Guaranteed student loans		59		—		59
Total originated and other purchased loans		6,984		929		6,055
Total allowance for loan and lease losses	$	7,350	$	1,295	$	6,055
Loan balances applicable to:
Purchased credit-impaired loans
Commercial and industrial	$	825	$	802	$	23
Commercial real estate		4,377		2,646		1,731
Residential real estate		777		302		475
Consumer		88		—		88
Total purchased credit-impaired loans		6,067		3,750		2,317
Originated and other purchased loans
Commercial and industrial		369,787		1,745		368,042
Commercial real estate		298,437		5,533		292,904
Residential real estate		35,413		618		34,795
Consumer		12,516		516		12,000
Guaranteed student loans		57,308		—		57,308
Total originated and other purchased loans		773,461		8,412		765,049
Total loans	$	779,528	$	12,162	$	767,366

14

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:

	March 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Purchased credit-impaired loans
Commercial and industrial	$	142	$	256	$	—
Commercial real estate		368		507		—
Residential real estate		222		256		—
Consumer		—		—		—
Originated and other purchased loans
Commercial and industrial		840		840		—
Commercial real estate		2,966		3,531		—
Residential real estate		393		398		—
Consumer		543		601		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial and industrial		634		624		52
Commercial real estate		2,270		2,324		276
Residential real estate		74		79		38
Consumer		—		—		—
Originated and other purchased loans
Commercial and industrial		—		—		—
Commercial real estate		2,547		2,553		717
Residential real estate		223		223		9
Consumer		—		—		—
Total loans individually evaluated for impairment	$	11,222	$	12,192	$	1,092
	December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Purchased credit-impaired loans
Commercial and industrial	$	145	$	259	$	—
Commercial real estate		379		516		—
Residential real estate		226		260		—
Consumer		—		—		—
Originated and other purchased loans
Commercial and industrial		633		633		—
Commercial real estate		3,301		3,870		—
Residential real estate		536		543		—
Consumer		516		577		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial and industrial		657		646		52
Commercial real estate		2,267		2,349		276
Residential real estate		76		82		38
Consumer		—		—		—
Originated and other purchased loans
Commercial and industrial		1,112		1,112		452
Commercial real estate		2,232		2,240		466
Residential real estate		82		82		11
Consumer		—		—		—
Total loans individually evaluated for impairment	$	12,162	$	13,169	$	1,295

15

	Three Months Ended March 31,
	2016				2015
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Purchased credit-impaired loans
Commercial and industrial	$	144	$	—	$	326	$	—
Commercial real estate		374		—		517		—
Residential real estate		222		1		343		—
Consumer		—		—		—		—
Originated and other purchased loans
Commercial and industrial		847		2		1,072		—
Commercial real estate		2,971		23		3,213		23
Residential real estate		393		4		313		2
Consumer		544		—		—		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial and industrial		646		8		634		10
Commercial real estate		2,280		36		1,862		31
Residential real estate		75		—		211		—
Consumer		—		—		—		—
Originated and other purchased loans
Commercial and industrial		—		—		1,181		—
Commercial real estate		2,553		—		192		—
Residential real estate		224		1		211		—
Consumer		—		—		—		—
Total loans individually evaluated for impairment	$	11,273	$	75	$	10,075	$	66

Pursuant to the First Bankshares Merger, the Paragon Transaction, the VBB Acquisition and the CVB Acquisition, the acquired loans were adjusted to estimated fair value. The allowance for loan and lease losses does not include the remaining fair value adjustments (discounts) recorded as a result of these acquisitions.

Of the $14.0 million discount recorded on the VBB Acquisition, $12.7 million was related to $40.2 million of purchased credit-impaired loans. Of the $3.0 million discount recorded on the CVB Acquisition, $1.1 million was related to $4.6 million of purchased credit-impaired loans. The remaining fair value adjustment on the VBB and CVB purchased credit-impaired loans, as of March 31, 2016, was $229 thousand and $534 thousand, respectively. The carrying value of the VBB and CVB purchased credit-impaired loans, as of March 31, 2016, was approximately $3.8 million and $1.9 million, respectively, 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.

The following table presents accretion activity related to acquired loans for the dates stated:

	Three Months Ended March 31,
	2016			2015
Balance at beginning of period	$	3,362		$	5,580
Accretion (1)		(445	)		(483	)
Disposals (2)		(135	)		—
Other (3)		—			46
Balance at end of period	$	2,782		$	5,143

(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.

16

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

	March 31, 2016
	Current		30-89 days Past Due		90+ days Past Due		Total Past Due		Total Loans
Purchased credit-impaired loans:
Commercial and industrial	$	417	$	40	$	345	$	385	$	802
Commercial real estate		4,107		—		261		261		4,368
Residential real estate		562		76		126		202		764
Consumer		86		—		—		—		86
Total purchased credit-impaired loans		5,172		116		732		848		6,020
Originated and other purchased loans:
Commercial and industrial		364,807		149		8		157		364,964
Commercial real estate		303,353		2,790		1,077		3,867		307,220
Residential real estate		34,310		366		392		758		35,068
Consumer		11,716		11		443		454		12,170
Guaranteed student loans		38,585		5,567		9,522		15,089		53,674
Total originated and other purchased loans		752,771		8,883		11,442		20,325		773,096
Total loans	$	757,943	$	8,999	$	12,174	$	21,173	$	779,116
	December 31, 2015
	Current		30-89 days Past Due		90+ days Past Due		Total Past Due		Total Loans
Purchased credit-impaired loans:
Commercial and industrial	$	156	$	161	$	508	$	669	$	825
Commercial real estate		4,187		10		180		190		4,377
Residential real estate		572		96		109		205		777
Consumer		88		—		—		—		88
Total purchased credit-impaired loans		5,003		267		797		1,064		6,067
Originated and other purchased loans:
Commercial and industrial		368,759		36		992		1,028		369,787
Commercial real estate		296,148		1,166		1,123		2,289		298,437
Residential real estate		34,437		377		599		976		35,413
Consumer		11,983		47		486		533		12,516
Guaranteed student loans		38,811		8,248		10,249		18,497		57,308
Total originated and other purchased loans		750,138		9,874		13,449		23,323		773,461
Total loans	$	755,141	$	10,141	$	14,426	$	24,387	$	779,528

Guaranteed student loans comprised $5.6 million of the total amounts that were past due 30-89 days and $9.5 million of the total amounts that were past due 90 days or greater as of March 31, 2016. These loans are nearly 98% guaranteed as to principal and accrued interest. Pursuant to the guarantee, the company may make a claim for payment on a loan after a period of 270 days during which no payment has been made on the loan.

17

The following table presents nonaccrual loans and other real estate owned (“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 March 31, 2016, there were no loans, other than guaranteed student loans, past due 90 days or greater for which interest was accruing. Accrued interest on the guaranteed portion of student loans is subject to the guarantee and is payable under the claim, if any, to the time the claim is satisfied.

	March 31, 2016		December 31, 2015
Purchased credit-impaired loans:
Commercial and industrial	$	246	$	155
Commercial real estate		414		518
Residential real estate		552		413
Consumer		6		7
Total purchased credit-impaired loans		1,218		1,093
Originated and other purchased loans:
Commercial and industrial		665		2,004
Commercial real estate		4,897		4,129
Residential real estate		785		898
Consumer		443		150
Total originated and other purchased loans		6,790		7,181
Total nonaccrual loans		8,008		8,274
Other real estate owned		632		533
Total nonperforming assets	$	8,640	$	8,807

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:

	March 31, 2016		December 31, 2015
Performing TDRs:
Commercial and industrial	$	1,468	$	1,467
Commercial real estate		2,315		2,343
Residential real estate		147		2,072
Consumer		—		—
Total performing TDRs		3,930		5,882
Nonperforming TDRs:
Commercial and industrial		27		750
Commercial real estate		1,860		74
Residential real estate		116		116
Consumer		—		—
Total nonperforming TDRs		2,003		940
Total TDRs	$	5,933	$	6,822

18

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

	March 31, 2016
	Number of Loans Modified		Rate Modification		Term Extension and/or Other Concessions		Total
Commercial and industrial		5	$	434	$	1,061	$	1,495
Commercial real estate		8		320		3,855		4,175
Residential real estate		3		116		147		263
Consumer		—		—		—		—
Total TDRs		16	$	870	$	5,063	$	5,933
	December 31, 2015
	Number of Loans Modified		Rate Modification		Term Extension and/or Other Concessions		Total
Commercial and industrial		8	$	601	$	1,616	$	2,217
Commercial real estate		7		325		2,092		2,417
Residential real estate		5		237		1,951		2,188
Consumer		—		—		—		—
Total TDRs		20	$	1,163	$	5,659	$	6,822

During the three months ended March 31, 2016, there were no loans identified as TDRs.

Note 6. Goodwill and Other Intangible Assets

The following table presents goodwill and other intangible assets, which are core deposit intangibles, as of the dates stated:

	March 31, 2016			December 31, 2015
Amortizable core deposit intangibles:
Gross carrying value	$	4,640		$	4,640
Accumulated amortization		(2,058	)		(1,943	)
Net core deposit intangibles		2,582			2,697
Goodwill		12,989			12,989
Total goodwill and other intangible assets, net	$	15,571		$	15,686

Note 7. Deposits

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

	March 31, 2016		December 31, 2015
Noninterest-bearing demand deposits	$	161,971	$	182,008
Interest-bearing:
Demand and money market		405,897		386,358
Savings deposits		11,617		10,564
Time deposits greater than $250,000		74,827		76,178
Other time deposits		217,949		233,922
Total deposits	$	872,261	$	889,030

19

Note 8. Derivatives

Cash Flow Hedges

The company uses interest rate derivatives to manage its exposure to interest rate movements. As of March 31, 2016, the company was a party to two interest rate swap agreements designated as cash flow hedges in accordance with FASB ASC Topic 815, “Derivatives and Hedging.” Pursuant to these agreements, the company has minimized its exposure to interest rate movements by exchanging variable for fixed interest payments beginning September 28, 2015, without exchange of underlying notional amounts totaling $17.5 million. Prior to September 28, 2015, the company had an interest rate swap agreement whereby it exchanged variable for fixed interest payments related to a $20.0 million borrowing, without exchange of the underlying notional amount. The swap expired upon the maturity of the $20.0 million borrowing, which was September 28, 2015.

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 net income. The ineffective portion of the change in fair value of the derivatives is recognized directly in net income. For the three months ended March 31, 2016 and 2015, the ineffective portion was insignificant. The amount reported in AOCI as of March 31, 2016 was a loss of $948 thousand, net of a tax benefit of $322 thousand. As of March 31, 2016, a liability of $965 thousand was recorded in other liabilities on the consolidated balance sheet related to these cash flow hedges.

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 (interest rate swaps) 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 net income. As of March 31, 2016, $811 thousand was recorded in other assets and $861 thousand was recorded in other liabilities related to non-designated hedges. For the three months ended March 31, 2016 and 2015, $22 thousand of loss and $26 thousand of income, respectively, was recorded in net income related to non-designated hedges.

The company has minimum collateral requirements with its counterparties for both cash flow hedges and non-hedge derivatives that contain provisions, whereby if the company fails to maintain its status as a well or an adequately capitalized institution, the company could be required to terminate or fully collateralize the derivative contract. Additionally, if the company defaults on any of its indebtedness, including default where repayment has not been accelerated by the lender, the company could also be in default on its derivative obligations. As of March 31, 2016, the valuation of these derivatives had surpassed the contractually specified minimum transfer amounts of $250 thousand, and $2.0 million had been pledged as collateral under the agreements. 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 9. Income Taxes

Net deferred tax assets as of March 31, 2016 and December 31, 2015 were $5.5 million and $6.3 million, respectively. The following table presents the statutory tax rate reconciled to the company’s effective tax rate for the dates stated:

	For the Three Months Ended
	March 31, 2016						March 31, 2015
	Tax			Rate			Tax			Rate
Income tax expense at statutory rate	$	304			34.00	%	$	441			34.00	%
Non-deductible expenses		2			0.22	%		2			0.16	%
Share-based compensation		—			0.00	%		14			1.07	%
Transaction-related expenses		326			36.46	%		—			0.00	%
Tax exempt income		(155	)		-17.34	%		(92	)		-7.13	%
Other		51			5.66	%		11			0.90	%
Income tax expense reported	$	528			59.00	%	$	376			29.00	%

20

Note 10. Earnings per Common Share

The following table summarizes 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. Excluded from the computation of diluted earnings per common share were 227,070 and 245,005 shares related to options, for the three months ended March 31, 2016 and 2015, respectively, because their inclusion in the calculation would be anti-dilutive. The number of shares in the following table is in thousands.

	For the Three Months Ended March 31,
	2016		2015
Net income	$	367	$	921
Preferred stock dividend		—		(21	)
Net income available to common shareholders	$	367	$	900
Weighted average shares outstanding, basic		13,209		13,082
Dilutive shares		234		186
Weighted average shares outstanding, diluted		13,443		13,268
Earnings per common share, basic	$	0.03	$	0.07
Earnings per common share, diluted	$	0.03	$	0.07

Note 11. 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. All benefits to the employees are fully vested and payments may begin six months following the employee’s termination, as defined by the SERP. As of March 31, 2016, two former CVB employees were receiving payments under the SERP. For the three months ended March 31, 2016 and 2015, the company paid $45 and $23 thousand, respectively, of benefits under the SERP. The company expects to pay $134 thousand to the former employees for the remainder of 2016. As of March 31, 2016, a $2.2 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 company also has a grantor trust (rabbi trust) established as a source of funds to pay benefits under the SERP. As of March 31, 2016 $1.8 million in cash and investment securities were held in the rabbi trust which 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 12. Borrowings

The Bank has secured borrowing facilities with the FHLB and the Federal Reserve Bank (“FRB”) . Total credit availability as of March 31, 2016 under the FHLB facility was $294.1 million, which is equal to 30% of total assets as of the most recent prior quarter-end, and with a pledged, lendable collateral value of $54.4 million. Under this facility, as of March 31, 2016, there was one short-term, non-amortizing loan outstanding for $17.5 million, which matures June 28, 2016. Credit availability under the FRB facility, as of March 31, 2016, was $156.8 million, which is also based on pledged collateral. As of March 31, 2016, the Bank had no federal funds purchased or long-term borrowings under this facility.

On June 26, 2015, the company issued and sold $8.5 million in aggregate principal amount of its 6.75% subordinated notes due 2025 pursuant to a Subordinated Note Purchase Agreement. The Subordinated Notes bear interest at an annual rate of 6.75%, which is payable quarterly in arrears on March 31, June 30, September 30 and December 31. The Subordinated Notes qualify as Tier 2 capital for the company. As of March 31, 2016, the outstanding balance of the Subordinated Notes, net of capitalized loan origination costs, was $8.4 million. For the three months ended March 31, 2016, the effective interest rate, including the amortization of loan origination costs, on the Subordinated Notes was 7.40%.

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 Credit Agreement was subsequently amended on September 24, 2015 and matures September 30, 2019. Borrowings under the Credit Agreement bear interest at the 30-day LIBOR in effect from time to time, plus 2.75% 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 Bank. As of March 31, 2016, the outstanding balance borrowed under the Credit Agreement, net of capitalized loan origination costs, was $10.7 million. For the three months ended March 31, 2016 and 2015, the effective interest rate, including the amortization of loan origination costs, on the unsecured senior term loan was 3.33% and 3.92%, respectively.

As of March 31, 2016, the company and the Bank, as applicable, were in compliance with all covenants of the Subordinated Notes and the Credit Agreement.

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Note 13. Senior Non-Cumulative Perpetual Preferred Stock

On June 30, 2015, the company completed the redemption of all of the outstanding 8,381 shares ($8.4 million) of the SBLF Preferred Stock. Substantially all of the net proceeds from the issuance and sale of the Subordinated Notes were used to fund the redemption. For the three months ended March 31, 2016, the company’s dividend on the SBLF Preferred Stock was $21 thousand. The effective dividend rate was 1% for all periods for which a dividend was paid.

Note 14. Commitments and Contingencies

In the normal course of business, the Bank has commitments under credit agreements to lend to customers provided that 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:

	March 31, 2016		December 31, 2015
Commercial lines of credit	$	202,472	$	177,846
Commercial real estate		68,848		60,380
Residential real estate		11,135		12,104
Consumer		4,645		2,982
Letters of credit		7,548		7,679
Total commitments	$	294,648	$	260,991

The Bank has a commitment to invest in a limited partnership that operates as a small business investment company. As of March 31, 2016, the Bank had invested $900 thousand; an additional $100 thousand will be funded at the request of the general partner of the partnership. Additionally, the Bank has a $1.0 million commitment to invest in a Virginia limited liability company, the purpose of which is to invest in low-income residential rental and/or historic properties.

Note 15. 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.

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.

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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.

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. OREO is classified as nonrecurring Level 3.

Impaired loans:

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 March 31, 2016, 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.

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 March 31, 2016 and December 31, 2015, 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.

Other assets:

Assets held in the company’s rabbi trust consist of cash and marketable securities. The carrying value for cash and cash equivalents approximates fair value. Securities include those traded on nationally recognized securities exchanges. Other assets are classified as recurring Level 1.

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.

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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.

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. The carrying amount of borrowings for which interest rates reset quarterly or less approximates its fair value. Fair values of other borrowings are estimated using discounted cash flow analyses at the company’s current incremental borrowing rates for similar types of borrowing arrangements.

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 March 31, 2016 Using
	March 31, 2016 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	$	8,065		$	—	$	8,065		$	—
Commercial mortgage-backed securities - fixed rate		37,411			—		37,411			—
Municipals		80,455			—		80,455			—
Collateralized mortgage obligations		7,637			—		7,637			—
Cash flow hedge - liability		(965	)		—		(965	)		—
Interest rate derivative - asset		811			—		811			—
Interest rate derivative - liability		(861	)		—		(861	)		—
Other assets		1,824			1,824		—			—
Assets measured on a nonrecurring basis:
Impaired loans	$	11,222		$	—	$	—		$	11,222
Other real estate owned		632			—		—			632
				Fair Value Measurements as of December 31, 2015 Using
	December 31, 2015 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	$	7,947		$	—	$	7,947		$	—
Commercial mortgage-backed securities - fixed rate		36,030			—		36,030			—
Municipals		79,056			—		79,056			—
Collateralized mortgage obligations		7,830			—		7,830			—
Cash flow hedge - liability		(629	)		—		(629	)		—
Interest rate derivative - asset		532			—		532			—
Interest rate derivative - liability		(560	)		—		(560	)		—
Other assets		1,846			1,846		—			—
Assets measured on a nonrecurring basis:
Impaired loans	$	12,162		$	—	$	—		$	12,162
Other real estate owned		533			—		—			533

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The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis, for which the company has utilized Level 3 inputs to determine fair value, as of the dates stated:

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at March 31, 2016		Valuation Techniques	Unobservable Input	Range
Impaired Loans	$	11,222	Collateral value, market value of similar debt, enterprise value, liquidation value and/or discounted cash flows	Yield	0-29%
Other real estate owned (1)		632	Market analysis or recent appraisals	Disposal costs	N/A

(1) The fair value of these assets is determined based on appraisal value or sales price less estimated disposal costs, if applicable, the range of which is not meaningful to disclose.

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at December 31, 2015		Valuation Techniques	Unobservable Input	Range
Impaired Loans	$	12,162	Collateral value, market value of similar debt, enterprise value, liquidation value and/or discounted cash flows	Yield	0-29%
Other real estate owned (1)		533	Market analysis or recent appraisals	Disposal costs	N/A

(1) The fair value of these assets is determined based on appraisal value or sales price less estimated disposal costs, if applicable, the range of which is not meaningful to disclose.

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

	March 31, 2016				Fair Value Measurements as of March 31, 2016 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	$	27,608	$	27,608	$	27,608	$	—	$	—
Federal funds sold		13,457		13,457		—		13,457		—
Securities available for sale		133,568		133,568		—		133,568		—
Securities held to maturity		9,268		10,071		—		10,071		—
Loans, net		772,044		781,466		—		—		781,466
Interest rate derivative		811		811		—		811		—
Accrued interest receivable		4,236		4,236		—		4,236		—
Other assets		1,824		1,824		1,824		—		—
Financial liabilities:
Cash flow hedge	$	965	$	965	$	—	$	965	$	—
Interest rate derivative		861		861		—		861		—
Borrowings		36,576		37,300		—		37,300		—
Deposits		872,261		872,985		—		872,985		—
Accrued interest payable		282		282		—		282		—

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	December 31, 2015				Fair Value Measurements as of December 31, 2015 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	$	40,242	$	40,242	$	40,242	$	—	$	—
Federal funds sold		21,703		21,703		—		21,703		—
Securities available for sale		130,863		130,863		—		130,863		—
Securities held to maturity		9,270		9,769		—		9,769		—
Loans, net		772,178		772,276		—		—		772,276
Interest rate derivative		532		532		—		532		—
Accrued interest receivable		4,430		4,430		—		4,430		—
Other assets		1,846		1,846		1,846		—		—
Financial liabilities:
Cash flow hedge	$	629	$	629	$	—	$	629	$	—
Interest rate derivative		560		560		—		560		—
Borrowings		36,861		36,861		—		36,861		—
Deposits		889,030		879,700		—		879,700		—
Accrued interest payable		426		426		—		426		—

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 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 16. 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 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 did not repurchase any of its shares during the first quarter of 2016.

Note 17. Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). 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. ASU 2014-09 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

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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. ASU 2014-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, with early adoption permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year. The company is evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest: Simplifying the Presentation of Debt IssuanceCosts”(“ASU 2015-03”). The amendments in this ASU require that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Further, the ASU requires the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. The adoption of this standard did not have a significant impact on the company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The amendments in this ASU affect the recognition, measurement, presentation and disclosure of financial instruments. It requires an entity to (1) measure equity investments at fair value through net income, with certain exceptions; (2) present in other comprehensive income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (3) present financial assets and financial liabilities by measurement category and form of financial asset; (4) calculate the fair value of financial instruments for disclosure purposes based on an exit price; and (5) assess a valuation allowance on deferred tax assets related to unrealized losses on available-for-sale securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within 2017, with certain provisions of the ASU eligible for early adoption. The company is evaluating the impact ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”). The amendments in this ASU modify the guidance companies use to account for leases by increasing the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The company is evaluating the impact ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The amendments in this ASU are intended to simplify certain aspects of accounting for stock compensation, particularly the tax implications of employee share-based payments. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods with 2016. The company is evaluating the impact ASU 2016-09 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, 2015 (“2015 Form 10-K”). The data presented as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 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, 2015 is derived from our audited financial statements as of and for the year ended December 31, 2015, which is included in the 2015 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 primarily 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, D.C., 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 Herndon, 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 Newport News, Virginia. As of March 31, 2016, we had total assets of $1.0 billion, total loans, net of our allowance for loan and lease losses, of $772.0 million, total deposits of $872.3 million, and shareholders’ equity of $105.5 million.

On February 10, 2016, we announced, in a joint press release with Hampton Roads Bankshares, Inc. (“Hampton Roads Bankshares”), that the companies reached a definitive agreement (the “HRB Merger Agreement”) to merge (the “HRB Merger”). Under the terms of the HRB Merger Agreement, our shareholders will receive 4.4 shares of Hampton Roads Bankshares’ common stock for each share of our common stock. Upon the completion of the HRB Merger, Hampton Roads Bankshares shareholders and our shareholders will own approximately 74% and 26%, respectively, of the shares in the combined company, and its board of directors will consist of 13 persons, eight from Hampton Roads Bankshares and five from Xenith Bankshares. The combined company will adopt the Xenith Bankshares name for the holding company and the Xenith Bank name for the combined bank and will be headquartered in Richmond, Virginia. T. Gaylon Layfield, III, our current President and Chief Executive Officer, will become Chief Executive Officer of the combined company. The completion of the HRB Merger is expected to occur in the third quarter of 2016 and is subject to regulatory approvals, including the approval of the Federal Reserve Board and the Bureau of Financial Institutions of the Commonwealth of Virginia, and the approval of the shareholders of both companies, as well as customary closing conditions. Immediately following the completion of the HRB Merger, the Bank will merge with and into Hampton Roads Bankshares’ wholly-owned subsidiary bank, Bank of Hampton Roads. The combined company, will have pro forma assets of approximately $3.0 billion and combined deposits of approximately $2.5 billion as of December 31, 2015.

On June 26, 2015, we issued and sold $8.5 million in aggregate principal amount of our 6.75% subordinated notes due 2025 (the “Subordinated Notes”). The Subordinated Notes qualify as Tier 2 Capital for the company and are redeemable by us no earlier than June 26, 2020, except upon the occurrence of certain events, including their disqualification as Tier 2 Capital, as a result of a change in interpretation or application of law or regulation.

On June 30, 2015, we completed the redemption of all of the outstanding 8,381 shares of our senior non-cumulative perpetual preferred stock, Series A, that we had issued and sold to the U.S. Treasury pursuant to the Small Business Lending Fund program (“SBLF Preferred Stock”), at an aggregate redemption price of $8.4 million, including accrued but unpaid dividends. Substantially all of the net proceeds from the issuance and sale of the Subordinated Notes were used to fund the redemption.

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.

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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, federal funds sold and deposits held at other banks. Interest-bearing liabilities include deposits and borrowings. Sources of noninterest income include service charges on deposit accounts, fees on treasury services, earnings from our investment in bank owned life insurance, gains on the sale of securities and other miscellaneous income. Deposits, Federal Home Loan Bank (“FHLB”) borrowed funds, borrowed funds from other sources 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 common equity (“ROAE”), ratio of average common equity to average assets and efficiency ratio. Such measures are common performance indicators in the banking industry.

The following table presents selected financial performance measures, for the dates stated:

	Three Months Ended March 31,
	2016			2015
Net interest margin (1)		3.15	%		3.38	%
Return on average assets (2)		0.14	%		0.39	%
Return on average common equity (3)		1.41	%		3.73	%
Average common equity to average assets (4)		9.79	%		10.49	%
Efficiency ratio (5)		87	%		76	%

(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) Average common equity to average assets is average common shareholders’ equity divided by average total assets. Average common shareholders’ equity is average total shareholders’ equity less preferred stock. Average total assets are presented within the average balances, income and expenses, yields and rates table below.

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

Industry Conditions

The national unemployment rate, seasonally adjusted, and as published by the Bureau of Labor Statistics, for March 2016 was reported at 5.0%, unchanged from December 2015. In the Fifth District of the Federal Reserve Bank (the “Fifth District”), which includes our target markets, the February 2016 (most recent) unemployment rate was 5.0%, an improvement from 5.2% at the end of 2015. More specifically, the unemployment rate in Virginia in February 2016 was 4.1%, an improvement from 4.2% from year-end 2015, based on data published by the Fifth District. Additionally, as published by the Fifth District, in the twelve months ended February 2016, all industry sectors in the Fifth District expanded, with the exception of information services, which declined 1.0% year-over-year.

The Federal Open Market Committee (the “FOMC”) stated in a March 2016 release that economic activity has expanded moderately in recent months despite global economic and financial developments. The FOMC stated household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have remained soft, while a range of recent indicators, including strong job gains, points to additional strengthening of the labor market. The FOMC further stated that inflation has picked up in recent months; however, it continues to run below the FOMC’s long-run objective of 2% inflation, in part because of earlier declines in energy prices.

The FOMC reaffirmed its view that the current ¹⁄₄ to ¹⁄₂ % target range for the federal funds rate remains appropriate given the current economic conditions. Further, the FOMC stated the stance of current monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2% inflation.

Low interest rates and intense competition 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 have seen a particularly sharp increase in competition in the Richmond, Virginia market over the last few years, as new banks have entered this market. Though our commercial real estate (“CRE”) business continues to show strong growth in both the Greater Washington and Richmond markets, our commercial and industrial (“C&I”) lending business has grown at a slower pace. We anticipate intense competition in our markets until demand and supply are more balanced.

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Outlook

In spite of industry and market conditions, we believe we are well positioned to effectively compete in our target markets. 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, and by executing strategically advantageous combinations.

Intense competition for quality loans, the prolonged low interest rate environment, and increased cost of regulation has put pressure on banks, including the Bank. 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.

Following the completion of the HRB Merger, the combined company will have a pro forma capital base that will allow for lending limits that exceed our current lending limits. We believe that this will allow the combined company to leverage the combined company’s C&I and CRE loan focus in all of its target markets.

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, including 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”), which reflects our estimate of losses in the event of borrower default. 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 2015 Form 10-K. Since December 31, 2015, 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 March 31, 2016, net income was $367 thousand compared to net income of $921 thousand for the three months ended March 31, 2015. Income before income tax expense was $895 thousand for the three months ended March 31, 2016 compared to income before income tax expense of $1.3 million for the same period in 2015. Income before income tax expense in the 2016 period included $1.0 million of expenses related to the HRB Merger.

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

	Three Months Ended March 31,
	2016		2015
Net income	$	367	$	921
Preferred stock dividend		—		(21	)
Net income available to common shareholders	$	367	$	900
Earnings per common share, basic and diluted	$	0.03	$	0.07

Net Interest Income

For the three months ended March 31, 2016, net interest income was $7.7 million compared to $7.3 million for the three months ended March 31, 2015. Interest income from higher average balances of our investment securities and loans held for investment and higher yields on our loans were partially offset by both lower average balances of guaranteed student loans and higher average balances and costs of borrowed funds. Higher average balances and costs of borrowed funds were negatively affected by the issuance and sale of our Subordinated Notes, the funds from which were primarily used to redeem our SBLF Preferred Stock. Average balances of loans held for investment, excluding guaranteed student loans (which decreased $14.0 million), increased $19.2 million for the three months ended March 31, 2016 from the same period of 2015, and this amount also excluding average balances from our participation in a warehouse lending program (which decreased $22.1 million) increased $41.3 million.

As presented in the table below, our net interest margin for the three months ended March 31, 2016 was 3.15%, a 23 basis point decrease from 3.38% for the three months ended March 31, 2015. Excluding the effect of purchase accounting adjustments, net interest margin declined 18 basis points for the three months ended March 31, 2016 compared to the same period of 2015.

Average interest-earning assets increased $124.6 million, while related interest income increased $836 thousand, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Average interest-bearing liabilities increased $98.3 million, while interest expense increased $378 thousand, for the three months ended March 31, 2016 compared to the same period of 2015. Yields on interest-earning assets decreased 16 basis points to 3.89%, and costs of interest-bearing liabilities increased 8 basis points to 0.93%, when comparing the three months ended March 31, 2016 to the same period of 2015. Average interest-earning assets as a percentage of total assets were 93.9% for the three months ended March 31, 2016, an increase from 93.1% for the same period of 2015.

Our loan portfolios acquired in mergers and acquisitions 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. Loan discount accretion was $445 thousand and $483 thousand for the three months ended March 31, 2016 and 2015, respectively.

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

	Three Months Ended March 31,
	2016			2015
Net interest margin		3.15	%		3.38	%
Purchase accounting adjustments impact (1)		0.18	%		0.23	%
Net interest margin excluding the impact of purchase accounting adjustments		2.97	%		3.15	%

(1) Purchase accounting adjustments for the three months ended March 31, 2016 and 2015 include accretion of discounts on acquired loans. Additionally, for the three months ended March 31, 2015, purchase accounting adjustments include an adjustment for interest rates on acquired time deposits.

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The following table provides 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 and yields are reported on a taxable-equivalent basis.

	Average Balances, Income and Expenses, Yields and Rates
	As of and For the Three Months Ended March 31,
																	2016 vs. 2015
	Average Balances (1)						Yield / Rate						Income / Expense (7)(8)(9)				Increase			Change due to (2)
	2016			2015			2016			2015			2016		2015		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	42,526		$	20,243			0.52	%		0.24	%	$	55	$	12	$	43		$	22		$	21
Interest-earning deposits		56,480			24,685			0.55	%		0.25	%		77		16		61			30			31
Investments		146,582			81,167			3.05	%		3.13	%		1,117		636		481			(18	)		499
Guaranteed student loans, gross		55,991			70,031			3.56	%		3.28	%		499		574		(75	)		49			(124	)
Loans held for investment, gross (3)		699,370			680,202			4.56	%		4.49	%		7,978		7,633		345			129			216
Total interest-earning assets		1,000,949			876,328			3.89	%		4.05	%		9,726		8,871		855			212			643
Allowance for loan and lease losses		(7,182	)		(6,404	)
Noninterest-earning assets:
Cash and due from banks		12,785			13,753
Premises and fixed assets		7,624			8,014
Other assets		52,230			49,201
Total noninterest-earning assets		72,639			70,968
Total assets	$	1,066,406		$	940,892
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	96,802		$	68,558			0.52	%		0.54	%	$	127	$	92	$	35		$	(3	)	$	38
Savings and money market deposits		361,293			284,367			0.77	%		0.75	%		691		530		161			12			149
Time deposits		300,408			311,815			0.92	%		0.83	%		687		644		43			65			(22	)
Federal funds purchased and borrowed funds		36,683			32,181			3.81	%		2.61	%		349		210		139			107			32
Total interest-bearing liabilities		795,186			696,921			0.93	%		0.85	%		1,854		1,476		378			181			197
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		158,640			129,458
Other liabilities		8,183			7,469
Total noninterest-bearing liabilities		166,823			136,927
Shareholders’ equity		104,397			107,044
Total liabilities and shareholders’ equity	$	1,066,406		$	940,892
Interest rate spread (4)								2.96	%		3.20	%
Net interest income (5)													$	7,872	$	7,395	$	477		$	31		$	446
Net interest margin (6)								3.15	%		3.38	%

(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.

(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 2016 and 2015 includes $445 thousand and $483 thousand, respectively, in accretion related to acquired loans.

(9) Interest expense on time deposits in 2015 includes a reduction of $19 thousand related to fair value adjustments recorded pursuant to an acquisition.

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Provision for Loan and Lease Losses

	For the three months ended March 31,
(in thousands)	2016		2015		$ Change		% Change
Provision for loan and lease losses	$	190	$	565	$	375		66	%

Lower provision for loan and lease losses in the three month period ended March 31, 2016 compared to the same period of 2015 is primarily due to lower growth in loans held for investment in the 2016 period and lower provision for loan losses for our guaranteed student loan portfolio in the 2016 period.

Noninterest Income

(in thousands)	For the three months ended March 31,
Noninterest income	2016		2015		$ Change			% Change
Service charges on deposit accounts	$	153	$	163	$	(10	)		-6	%
Gain on sales of securities		—		67		(67	)		-100	%
Increase in cash surrender value of bank owned life insurance		136		97		39			-40	%
Other		76		85		(9	)		-11	%
Total noninterest income	$	365	$	412	$	(47	)		-11	%

Lower noninterest income in the three months ended March 31, 2016 compared to the same period of 2015 was primarily due to gains on sales of investment securities in the 2015 period, for which there were none in the 2016 period, and higher earnings from bank owned life insurance (“BOLI”) in the 2016 period, due to additional investment in the second quarter of 2015.

Noninterest Expense

(in thousands)	For the three months ended March 31,
Noninterest expense	2016		2015		$ Change			% Change
Compensation and benefits	$	3,517	$	3,282	$	(235	)		-7	%
Occupancy		402		418		16			4	%
FDIC insurance		186		177		(9	)		-5	%
Bank franchise taxes		270		246		(24	)		-10	%
Technology		514		535		21			4	%
Communications		99		102		3			3	%
Insurance		82		93		11			12	%
Professional fees		271		275		4			1	%
Amortization of intangible assets		114		114		(0	)		0	%
Guaranteed student loan servicing		92		123		31			25	%
Merger-related expenses		1,008		—		(1,008	)		n/m
Other		445		447		2			1	%
Total noninterest expense	$	7,000	$	5,812	$	(1,188	)		-20	%

Noninterest expense in the 2016 period included $1.0 million of expenses related to the HRB Merger. Higher compensation and benefits in the three months ended March 31, 2016 were primarily the result of the addition of relationship managers and supporting personnel, the addition of regulatory compliance personnel, and general increases in compensation and benefit costs.

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Income Taxes

	For the three months ended March 31,
(in thousands)	2016			2015
Income tax expense	$	528		$	376
Effective income tax rate		59.00	%		29.00	%

The higher effective tax rate in the 2016 period reflects the nondeductibility of certain merger-related transaction costs, while the effective rate in the 2015 period reflects the benefits of tax-exempt interest income from municipal securities and earnings on BOLI, which are tax-exempt. Net deferred tax assets as of March 31, 2016 and December 31, 2015 were $5.5 million and $6.3 million, respectively.

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. Yields on tax-exempt securities are calculated on a taxable-equivalent yield basis.

	March 31, 2016
	Amortized Cost		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available for sale:
Mortgage-backed securities - fixed rate	$	7,968	$	8,065		7.38		2.43	%
Municipals - fixed rate
Tax exempt		67,791		70,017		8.76		3.76	%
Taxable		10,085		10,438		6.23		2.90	%
Collateralized mortgage obligations - fixed rate		7,532		7,637		4.75		2.23	%
Commercial mortgage-backed securities - fixed rate		36,653		37,411		6.40		2.27	%
Total securities available for sale		130,029		133,568		7.59		3.11	%
Securities held to maturity:
Municipals - fixed rate		9,268		10,071		6.60		3.39	%
Total securities held to maturity		9,268		10,071		6.60		3.39	%
Total securities	$	139,297	$	143,639		7.45		3.13	%
	December 31, 2015
	Amortized Cost		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available for sale:
Mortgage-backed securities
- Fixed rate	$	8,026	$	7,947		7.75		2.43	%
Municipals - fixed rate
- Tax exempt		68,025		69,054		9.01		3.96	%
- Taxable		10,071		10,002		6.48		2.90	%
Collateralized mortgage obligations - fixed rate		7,872		7,830		4.13		2.32	%
Commercial mortgage-backed securities - fixed rate		36,712		36,030		6.65		2.27	%
Total securities available for sale		130,706		130,863		7.80		3.22	%
Securities held to maturity:
Municipals - fixed rate
- Taxable		9,270		9,769		6.85		3.39	%
Total securities held to maturity		9,270		9,769		6.85		3.39	%
Total securities	$	139,976	$	140,632		7.64		3.21	%

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The following table presents a maturity analysis of our securities portfolio as of the date stated. Weighted average yield calculations are based on the current level of contractual maturities and expected prepayments as of the date stated. Yields on tax-exempt securities are calculated on a taxable-equivalent yield basis.

	March 31, 2016
	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:
Mortgage-backed securities - fixed rate	$	—		—	$	1,007		2.44	%	$	5,369		2.24	%	$	1,689		3.05	%	$	8,065		2.43	%
Commercial mortgage-backed securities - fixed rate		—		—		4,925		2.03	%		32,486		2.31	%		—		—			37,411		2.27	%
Municipals - fixed rate
Taxable		—		—		851		1.85	%		9,587		2.99	%		—		—			10,438		2.90	%
Tax exempt		—		—		—		—			4,248		2.83	%		65,769		3.82	%		70,017		3.76	%
Collateralized mortgage obligations - fixed rate		—		—		—		—			—		—			7,637		2.23	%		7,637		2.23	%
Total securities available for sale	$	—			$	6,783				$	51,690				$	75,095				$	133,568		3.11	%
Securities held to maturity:
Municipals - fixed rate		—		—		—		—			10,071		3.39	%		—		—			10,071		3.39	%
Total securities held to maturity	$	—			$	—				$	10,071				$	—				$	10,071
Total securities	$	—		—	$	6,783		2.07	%	$	61,761		2.62	%	$	75,095		3.64	%	$	143,639		3.13	%

Loans

The following table presents our 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:

	March 31, 2016						December 31, 2015
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	365,766			46.9	%	$	370,612			47.6	%
Commercial real estate		311,588			40.0	%		302,814			38.8	%
Residential real estate		35,832			4.6	%		36,190			4.6	%
Consumer		12,225			1.6	%		12,577			1.6	%
Guaranteed student loans		53,674			6.9	%		57,308			7.4	%
Overdrafts		31			0.0	%		27			0.0	%
Total loans		779,116			100.0	%		779,528			100.0	%
Allowance for loan and lease losses		(7,072	)					(7,350	)
Total loans, net of allowance	$	772,044					$	772,178

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Total loans decreased $412 thousand to $779.1 million as of March 31, 2016 from $779.5 million as of December 31, 2015. As of March 31, 2016, loan balances from our participation in a mortgage warehouse lending program were $52.5 million compared to $51.9 million at December 31, 2015, while our portfolio of guaranteed student loans declined $3.6 million from December 31, 2015. We believe balances in our guaranteed student portfolio will continue to decline at this rate for the remainder of 2016.

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:

	March 31, 2016
			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)	$	164,111	$	111,444	$	24,907	$	136,351	$	42,453	$	21,941	$	64,394	$	364,856
Commercial real estate (2)		84,495		117,229		55,568		172,797		40,667		8,320		48,987		306,279
Residential real estate (3)		2,307		7,771		17,159		24,930		6,271		987		7,258		34,495
Consumer (4)		9,867		880		326		1,206		571		131		702		11,775
Guaranteed student loans		21		980		52,673		53,653		—		—		—		53,674
Overdrafts		31		���		—		—		—		—		—		31
Total loans	$	260,832	$	238,304	$	150,633	$	388,937	$	89,962	$	31,379	$	121,341	$	771,110

(1) Excludes $692 thousand in nonaccrual fixed-rate loans and $219 thousand in nonaccrual variable-rate loans.

(2) Excludes $2.6 million in nonaccrual fixed-rate loans and $2.7 million in nonaccrual variable-rate loans.

(3) Excludes $354 thousand in nonaccrual fixed-rate loans and $984 thousand in nonaccrual variable-rate loans.

(4) Excludes $15 thousand in nonaccrual fixed-rate loans and $435 thousand in nonaccrual variable-rate loans.

	December 31, 2015
			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)	$	188,471	$	96,239	$	25,533	$	121,772	$	39,865	$	18,346	$	58,211	$	368,454
Commercial real estate (2)		81,580		112,673		56,183		168,856		41,185		6,546		47,731		298,167
Residential real estate (3)		1,806		8,305		17,064		25,369		6,965		739		7,704		34,879
Consumer (4)		10,143		1,143		326		1,469		676		131		807		12,419
Guaranteed student loans		18		871		56,419		57,290		—		—		—		57,308
Overdrafts		27		—		—		—		—		—		—		27
Total loans	$	282,045	$	219,231	$	155,525	$	374,756	$	88,691	$	25,762	$	114,453	$	771,254

(1) Excludes $1.5 million in nonaccrual fixed-rate loans and $685 thousand in nonaccrual variable-rate loans.

(2) Excludes $1.3 million in nonaccrual fixed-rate loans and $3.3 million in nonaccrual variable-rate loans.

(3) Excludes $168 thousand in nonaccrual fixed-rate loans and $1.1 million in nonaccrual variable-rate loans.

(4) Excludes $140 thousand in nonaccrual fixed-rate loans and $17 thousand in nonaccrual variable-rate loans.

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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 59.2% of our loan portfolio at March 31, 2016 and 58.0% at December 31, 2015. CRE loans are secured by commercial properties. Typically, our maximum 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 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. Qualitative factors include, but are not limited to, general economic conditions, nationally and in our target markets, and 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 income. 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 also reported in our provision for loan and lease losses 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.

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

Our allowance for loan and lease losses does not include amounts for loan losses on loans held pursuant to our participation in a 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), and the participating bank has experienced negligible losses and we have experienced no losses from this lending activity, since we began participating in this program.

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.

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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:

	March 31, 2016					December 31, 2015
	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	$	1,609		47.0	%	$	2,095		47.5	%
Commercial real estate		5,183		40.0	%		4,991		38.8	%
Residential real estate		199		4.6	%		205		4.6	%
Consumer		—		1.6	%		—		1.6	%
Guaranteed student loans		81		6.8	%		59		7.5	%
Total allowance for loan and lease losses	$	7,072		100.0	%	$	7,350		100.0	%

The following table presents the activity in the allowance for loan and lease losses for the periods stated:

	Three Months Ended March 31,
	2016			2015
Balance at beginning of period	$	7,350		$	6,247
Charge-offs:
Commercial and industrial		291			2
Commercial real estate		—			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		139			321
Overdrafts		3			4
Total charge-offs		433			327
Recoveries:
Commercial and industrial		—			—
Commercial real estate		—			1
Residential real estate		—			—
Consumer		—			1
Guaranteed student loans		—			—
Overdrafts		2			2
Total recoveries		2			4
Net charge-offs		431			323
Provision for loan and lease losses		190			565
Amount for unfunded commitments		(37	)		—
Other (1)		—			(46	)
Balance at end of period	$	7,072		$	6,443

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

We charge off that portion of our guaranteed student loans that is (1) not subject to federal government guarantee and (2) greater than 120 days past due and has a high probability of default. Probability of default is determined by a loss migration analysis. Loans greater than 120 days past due continue to accrue interest as interest receivable is guaranteed until a claim against the guarantee, if any, is satisfied. A claim can be made when a loan is past due 270 days, or earlier in certain circumstances.    

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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.

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. 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.

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 following table presents our accretion activity for the periods presented.

	Three Months Ended March 31,
	2016			2015
Balance at beginning of period	$	3,362		$	5,580
Accretion (1)		(445	)		(483	)
Disposals (2)		(135	)		—
Other (3)		—			46
Balance at end of period	$	2,782		$	5,143

(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 March 31, 2016, 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 guarantee on our guaranteed student loans covers both principal and interest accrued to the date a claim, if any, is paid under the guarantee.

As of March 31, 2016 and December 31, 2015, we had $632 thousand and $533 thousand, respectively, in OREO. OREO valuations are evaluated periodically, and any necessary valuation allowance to carry the asset at its fair value, less disposal costs, is recorded as a charge to net income.

The following table presents our nonperforming assets and various performance ratios for the periods and as of the dates stated:

	March 31, 2016			December 31, 2015
Nonaccrual loans	$	8,008		$	8,274
Other real estate owned		632			533
Total nonperforming assets	$	8,640		$	8,807
Nonperforming assets as a percentage of total loans		1.11	%		1.13	%
Nonperforming assets as a percentage of total assets		0.85	%		0.85	%
Net charge-offs as a percentage of average loans		0.06	%		0.18	%
Allowance for loan and lease losses as a percentage of total loans		0.91	%		0.94	%
Allowance for loan and lease losses to nonaccrual loans		88.31	%		88.83	%

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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 March 31, 2016 totaled $872.3 million compared to deposits of $889.0 million at December 31, 2015. Demand deposits, including money market accounts, as of March 31, 2016 decreased slightly from balances at December 31, 2015, while time deposits decreased $17.3 million over this period. As of March 31, 2016, $110.7 million of our deposits were in Insured Cash Sweep (“ICS”) accounts, Certificate of Deposit Account Registry Service (“CDARS”) accounts and brokered time deposits, which we collectively refer to as brokered deposits. As of December 31, 2015, $114.4 million of our deposits were brokered deposits.

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

	March 31, 2016					December 31, 2015
	Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	158,640		—		$	148,640		—
Interest-bearing deposits:
Demand and money market		446,927		0.72	%		372,203		0.71	%
Savings accounts		11,167		0.29	%		10,416		0.29	%
Time deposits $100,000 or greater		225,254		0.87	%		238,999		0.77	%
Time deposits less than $100,000		75,156		1.04	%		81,145		1.02	%
Total interest-bearing deposits		758,504		0.79	%		702,763		0.76	%
Total average deposits	$	917,144		0.66	%	$	851,403		0.63	%

The following table presents maturities of large denomination time deposits (equal to or greater than $100,000) as of March 31, 2016:

	Within 3 Months		3-6 Months		6-12 Months		Over 12 Months		Total		Percent of Total Deposits
Time deposits	$	71,368	$	30,599	$	60,482	$	57,889	$	220,338		25.26	%

Borrowings

We have one secured short-term borrowing with the FHLB in the amount of $17.5 million, which matures on June 28, 2016. For the three month period ended March 31, 2016, our effective interest rate on this borrowing, including the effect of cash flow hedge (interest rate swaps), was 2.30%. In connection with our $17.5 million borrowing, we have two interest rate swaps whereby we pay fixed amounts to a counterparty and receive LIBOR-based variable payments on the full notional amount of this borrowing. Our objective in using interest rate swaps is to manage our exposure to interest rate movements. The interest rate swaps are designated as cash flow hedges, whereby the effective portion of the hedge is recorded in accumulated other comprehensive income (loss). The amount reported in accumulated other comprehensive income (loss) as of March 31, 2016 and December 31, 2015 related to these derivatives was an unrealized loss of $948 thousand (net of a tax benefit of $322 thousand) and $612 thousand (net of a tax benefit of $208 thousand), respectively. As of March 31, 2016, the ineffective portion of the interest rate swaps was insignificant.

We have an agreement with the counterparty to our cash flow hedges that contains a provision whereby if we fail to maintain our status as a well or an adequate capitalized institution, we could be required to terminate or fully collateralize the interest rate swaps. 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 counterparty and, as of March 31, 2016, $1.0 million had been pledged as collateral under the agreement for our cash flow derivatives, as the valuation of the derivatives had surpassed the contractually specified minimum transfer amount. If we are not in compliance with the terms of the derivative agreements, we could be required to settle obligations under the agreement at termination value. As of March 31, 2016, a hedge liability of $965 thousand was recorded in other liabilities on our consolidated balance sheet related to the cash flow hedge derivatives.

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At March 31, 2016, $10.8 million was outstanding under an agreement with a national bank that provides for an unsecured senior term loan credit facility up to $15.0 million (the “Credit Agreement”). Term loans under the Credit Agreement were 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 monthly installments of $100 thousand principal, plus accrued interest, and 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 and accrued interest 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 2.75% per annum. The Credit Agreement is unsecured; however, there is a negative pledge on all of the outstanding capital stock of the Bank. We have the right to borrow up to an additional $5.0 million under the Credit Agreement on or before September 30, 2016. For the three months ended March 31, 2016 and 2015, the effective interest rate, which includes the amortization of loan origination costs, on the borrowings under the senior term loan was 3.33% and 3.92%, respectively.

On June 26, 2015, we issued and sold $8.5 million in aggregate principal amount of the Subordinated Notes. The Subordinated Notes bear interest at an annual rate of 6.75%, which is payable quarterly in arrears on March 31, June 30, September 30 and December 31. The Subordinated Notes qualify as Tier 2 capital for the company. The Subordinated Notes may not be redeemed by the company prior to June 26, 2020, except in the event (i) the Subordinated Notes no longer qualify as Tier 2 Capital as a result of a change in interpretation or application of law or regulation, or (ii) of a “Tax Event” (as defined under the related note purchase agreement). The Subordinated Notes are unsecured and subordinate and junior in right of payments to the company’s secured and general creditors. Interest on the Subordinated Notes is payable quarterly in arrears on March 31, June 30, September 30 and December 31. Additionally, the company is not permitted to declare or pay any dividend or make any distribution on its capital stock or any other of its equity securities of any kind, except for dividends payable solely in shares of the company’s common stock, if the total risk-based capital ratio, Tier 1 risk-based capital ratio, or leverage ratio of the company or the Bank, becomes less than 10.0%, 6.0%, or 5.0%, respectively. As of March 31, 2016, the outstanding balance of the Subordinated Notes, net of capitalized loan origination costs, was $8.4 million. For the three months ended March 31, 2016, the effective interest rate, which includes the amortization of loan origination costs, on the Subordinated Notes was 7.40%.

As of March 31, 2016, the company and the Bank, as applicable, were in compliance with all covenants under both the Credit Agreement and the Subordinated Notes.

LIQUIDITY AND CAPITAL RESOURCES

In the three months ended March 31, 2016, cash and cash equivalents decreased $20.9 million compared to an increase of $58.1 million for the same period in 2015. Net cash used in operating activities was $4.4 million for the three months ended March 31, 2016 compared to net cash provided by operating activities of $3.2 million for the same period in 2015. The primary use of operating funds in the 2016 period was from a decrease in other liabilities. Net cash provided by investing activities was $372 thousand for the three months ended March 31, 2016 compared to net cash used in investing activities of $15.5 million for the same period in 2015. Cash provided by investing activities in the 2016 period reflected a decrease in loans held for investment and cash from the amortization of securities, partially offset by purchases of equipment. Net cash used in financing activities in the three months ended March 31, 2016 was $16.8 million compared to net cash provided by financing activities of $70.4 million for the same period of 2015. Cash used in financing activities in the 2016 period reflected a net decrease in time deposits.

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, fund increased loan demand, and to achieve stated objectives (including 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, repayments and costs of borrowings, concentrations of loans and deposits within certain businesses and industries, expected fundings of loans and collection of deposits, 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 portfolio. We have access to a credit line from our primary correspondent bank in the amount of $30.0 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.

We have six additional uncommitted lines of credit by national banks to borrow federal funds up to $88.0 million in total on an unsecured basis, of which $70.0 million expire as varying dates through September 2016. The remainder of the lines of credit have no stated expiration date. All of the lines of credit can be cancelled at any time by the lender. As of March 31, 2016, there were no amounts outstanding under these uncommitted lines of credit. Borrowings under these arrangements bear interest at the prevailing federal funds rate.

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We have secured borrowing facilities with the FHLB and the Federal Reserve Bank (“FRB”). The total credit availability under the FHLB facility is equal to 30% of our total assets, which as of March 31, 2016 was $294.1 million, based on the most recent prior quarter-end. In addition, based on pledged collateral with the FHLB, we have a $54.4 million secured borrowing facility as of March 31, 2016. Under this facility, we have one non-amortizing term loan outstanding for $17.5 million. Credit availability under the FRB facility was $156.8 million as of March 31, 2016, which is also based on lendable collateral. Borrowings under this facility bear the prevailing current rate for primary credit. There were no amounts outstanding under this facility as of March 31, 2016. Pledged collateral (loans) for both the FHLB and FRB facilities was $294.7 million, as of March 31, 2016.

Additionally, we have $5.0 million of capacity under the Credit Agreement, which may be borrowed on or before September 30, 2016, subject to customary conditions. In management’s opinion, we maintain the ability to generate sufficient amounts of cash to cover normal requirements and any additional needs that may arise, within realistic limitations, for the foreseeable future.

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 classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The rule establishing a new regulatory capital framework for smaller, less complex financial institutions became effective January 1, 2015 and will be phased in over the next five years. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee and certain changes required by the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010, and increases the minimum requirements for both the quantity and quality of capital held by banking organizations. The rule includes 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 Basel III rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, will result in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%; (ii) a Tier 1 risk-based capital ratio of 8.5%; and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirements began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffer ratio.

The following table presents capital and risk-weighted assets for the Bank and Xenith Bankshares as of the dates stated, including the new common equity Tier 1 capital ratio.

	March 31, 2016				December 31, 2015
	Xenith Bank		Xenith Bankshares		Xenith Bank		Xenith Bankshares
Common equity Tier 1 capital	$	107,571		89,763	$	106,966	$	89,372
Tier 1 capital		107,571		89,763		106,966		89,372
Total risk-based capital		115,180		105,764		114,816		105,607
Risk-weighted assets		914,103		914,139		900,956		901,660

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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. Additionally, we have included the regulatory minimum capital with capital buffer ratios for 2016 and ratios once the capital buffer is fully phased in.

	March 31, 2016						December 31, 2015
	Xenith Bank			Xenith Bankshares			Xenith Bank			Xenith Bankshares			Regulatory Minimum			Regulatory Minimum with Capital Buffer			Well Capitalized with Capital Buffer Fully Phased-in
Common equity Tier 1 capital ratio		11.77	%		9.82	%		11.87	%		9.91	%		4.50	%		5.125	%		> 6.50	%
Tier 1 leverage ratio		10.24	%		8.55	%		10.28	%		8.58	%		4.00	%		N/A			> 5.00	%
Tier 1 risk-based capital ratio		11.77	%		9.82	%		11.87	%		9.91	%		6.00	%		6.625	%		> 8.00	%
Total risk-based capital ratio		12.60	%		11.57	%		12.74	%		11.71	%		8.00	%		8.625	%		> 10.00	%

Interest Rate Sensitivity

Interest rate risk management is a central part of our overall asset-liability management process. A primary objective of interest rate risk management is to ensure the stability and quality of our primary earnings component, net interest income. This process involves monitoring the company’s balance sheet in order to determine the potential impact that changes in the interest rate environment may have on net interest income. Interest rate-sensitive assets and liabilities have interest rates that are subject to change within a specific time period, either due to maturity or to contractual agreement that allows the instrument to reprice prior to maturity. Interest rate sensitivity management seeks to ensure that both assets and liabilities react to changes in interest rates within a similar time period, thereby minimizing the risk to net interest income. We use interest rate risk measurement tools (simulation models) to simulate the effect of interest rate movements on our net interest income and the economic value of our equity.

Earnings Simulation Modeling. Net interest income is affected by changes in the level of interest rates, the shape of the yield curve and the general market pressures affecting current market interest rates at the time of simulation. Many interest rate indices do not move uniformly, creating certain disunities between them. For example, the spread between a 30-day prime-based asset and a 30-day FHLB borrowing may not be uniform over time. Earnings simulation modeling projects changes in net interest income caused by the effect of changes in interest rates on interest-earning assets and interest-bearing liabilities. Simulation results are measured as a percentage change in our net interest income compared to the static-rate or “base case” scenario. The model considers decreases in asset and liability volumes based on prepayment assumptions as well as rate changes. Rate changes are modeled instantaneously, referred to as a “rate shock.” The model projects only “sensitivities” to interest income and expense and does not project changes in noninterest income, noninterest expense, provision for loan and lease losses or the impact of changing tax rates.

The following table summarizes the results of our earnings “rate shock” simulation model as of the date stated:

	Annualized Hypothetical Percentage Change in Net Interest Income
Linear Change in Market Rate	March 31, 2016
Up 200 bps		13.25	%
Up 100		9.15	%
Base case - no change		0.00	%
Down 100		-3.14	%

Economic Value of Equity Simulation. Economic Value of Equity (“EVE”) represents the economic value of equity and is equal to the economic value of assets minus the economic value of liabilities, with adjustments made for off-balance sheet items. This simulation assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained increase or decrease in interest rates with no effect given to any actions management might take to counter the effect of that interest rate movement.

The following table summarizes the results of our EVE simulation model as of the date stated:

	Hypothetical Percentage Change in EVE
Linear Change in Market Rate	March 31, 2016
Up 200 bps		59.1	%
Up 100		35.7	%
Base case - no change		0.0	%
Down 100		-54.0	%

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Our balance sheet has been consistently “asset sensitive,” therefore should interest rates change, we expect our assets will reprice faster than our liabilities. An asset-sensitive balance sheet will result in an increase to net interest income in an increasing rate environment and a decrease in net interest income in a declining rate environment.

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:

	March 31, 2016		December 31, 2015
Commercial lines of credit	$	202,472	$	177,846
Commercial real estate		68,848		60,380
Residential real estate		11,135		12,104
Consumer		4,645		2,982
Letters of credit		7,548		7,679
Total commitments	$	294,648	$	260,991

We have a commitment to invest in a limited partnership that operates as a small business investment company. As of March 31, 2016, we had invested $900 thousand; an additional $100 thousand will be funded at the request of the general partner of the partnership. Additionally, we have a $1.0 million commitment to invest in a Virginia limited liability company, the purpose of which is to invest in low-income residential rental and/or historic properties.

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 2015 Form 10-K and the following factors, which are not intended to be exhaustive, that may cause actual results to vary materially from our forward-looking statements:

• the ability to obtain regulatory approvals and meet other closing conditions to the proposed merger with Hampton Roads Bankshares, including approval by Hampton Roads Bankshares’ and Xenith Bankshares’ shareholders, on the expected terms and schedule;

• delay in completing the proposed merger with Hampton Roads Bankshares;

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• difficulties and delays in integrating the Hampton Roads Bankshares and Xenith Bankshares businesses or fully realizing cost savings and other benefits from the proposed merger;

• business disruption following the proposed merger with Hampton Roads Bankshares;

• disruptions due to uncertainty or other factors related to the proposed merger with Hampton Roads Bankshares making it more difficult to maintain relationships with employees, customers, other business partners or governmental entities;

• 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 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;

• failures or breaches to our systems and network security, including “hacking,” ”cyber fraud” or “identity theft” resulting in operating losses or litigation;

• 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 Securities and Exchange Commission (the “SEC”).

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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 March 31, 2016 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 our 2015 Form 10-K 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 our 2015 Form 10-K.

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. 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 program can be discontinued at any time.

We did not purchase any shares during the first quarter of 2016.

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Item 6. Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Reorganization, dated as of February 10, 2016, by and between Hampton Roads Bankshares, Inc. and Xenith Bankshares, Inc. (Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Xenith Bankshares, Inc. agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule upon request.) (incorporated herein by reference to Exhibit 2.1 to Current Report on Form 8-K filed February 16, 2016 (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: May 6, 2016	/s/    T. GAYLON LAYFIELD, III
	T. Gaylon Layfield, III
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: May 6, 2016	/s/    THOMAS. W. OSGOOD
	Thomas W. Osgood
	Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer
	(Principal Financial Officer)