EASTERN VIRGINIA BANKSHARES INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - EASTERN VIRGINIA BANKSHARES INC	v437355_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - EASTERN VIRGINIA BANKSHARES INC	v437355_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - EASTERN VIRGINIA BANKSHARES INC	v437355_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - EASTERN VIRGINIA BANKSHARES INC	v437355_ex32-1.htm
EX-10.19 - EXHIBIT 10.19 - EASTERN VIRGINIA BANKSHARES INC	v437355_ex10-19.htm
EX-10.18 - EXHIBIT 10.18 - EASTERN VIRGINIA BANKSHARES INC	v437355_ex10-18.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

¨ 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: 000-23565

EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA	54-1866052
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

330 Hospital Road, Tappahannock, Virginia	22560
(Address of principal executive office)	(Zip Code)

(804) 443-8400

(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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive 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 x
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company ¨

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

The number of shares of the registrant’s Common Stock outstanding as of May 6, 2016 was 13,099,635.

EASTERN VIRGINIA BANKSHARES, INC.

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2016 (unaudited) and December 31, 2015	2

	Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2016 and March 31, 2015	3

	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2016 and March 31, 2015	4

	Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2016 and March 31, 2015	5

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2016 and March 31, 2015	6

	Notes to the Interim Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	60

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61

Item 3.	Defaults Upon Senior Securities	61

Item 4.	Mine Safety Disclosures	61

Item 5.	Other Information	61

Item 6.	Exhibits	62

	SIGNATURES	63

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)

	March 31, 2016			December 31, 2015*
	(unaudited)
Assets:
Cash and due from banks	$	12,333		$	13,451
Interest bearing deposits with banks		3,067			18,304
Federal funds sold		-			200
Securities available for sale, at fair value		236,496			230,943
Securities held to maturity, at carrying value (fair value of $30,564 and $30,575, respectively)		29,472			29,698
Restricted securities, at cost		9,045			8,959
Loans, net of allowance for loan losses of $10,936 and $11,327, respectively		898,014			869,451
Deferred income taxes, net		12,959			15,060
Bank premises and equipment, net		27,773			27,836
Accrued interest receivable		4,490			4,059
Other real estate owned, net of valuation allowance of $2 and $2, respectively		898			520
Goodwill		17,085			17,085
Bank owned life insurance		25,258			25,099
Other assets		9,295			9,719
Total assets	$	1,286,185		$	1,270,384

Liabilities and Shareholders' Equity:
Liabilities
Noninterest-bearing demand accounts	$	189,069		$	174,071
Interest-bearing deposits		809,811			814,648
Total deposits		998,880			988,719
Federal funds purchased and repurchase agreements		6,009			5,015
Short-term borrowings		114,560			114,413
Junior subordinated debt		10,310			10,310
Senior subordinated debt		19,046			19,022
Accrued interest payable		916			590
Other liabilities		5,950			6,040
Total liabilities		1,155,671			1,144,109

Shareholders' Equity
Preferred stock, $2 par value per share, authorized 10,000,000 shares, issued and outstanding:
Series B; 5,240,192 shares non-voting mandatorily convertible non-cumulative preferred		10,480			10,480
Common stock, $2 par value per share, authorized 50,000,000 shares, issued and outstanding 13,093,135 and 13,029,550 including 177,521 and 121,271 nonvested shares in 2016 and 2015, respectively		25,832			25,817
Surplus		48,960			48,923
Retained earnings		46,803			44,941
Accumulated other comprehensive loss, net		(1,561	)		(3,886	)
Total shareholders' equity		130,514			126,275
Total liabilities and shareholders' equity	$	1,286,185		$	1,270,384

*Derived from audited consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended
	March 31,
	2016			2015
Interest and Dividend Income
Interest and fees on loans	$	10,953		$	10,191
Interest on investments:
Taxable interest income		1,506			1,202
Tax exempt interest income		70			260
Dividends		115			108
Interest on deposits with banks		10			4
Total interest and dividend income		12,654			11,765

Interest Expense
Deposits		1,071			1,051
Federal funds purchased and repurchase agreements		7			18
Short-term borrowings		122			42
Junior subordinated debt		88			80
Senior subordinated debt		351			-
Total interest expense		1,639			1,191
Net interest income		11,015			10,574
Provision for Loan Losses		17			-
Net interest income after provision for loan losses		10,998			10,574
Noninterest Income
Service charges and fees on deposit accounts		739			663
Debit card/ATM fees		397			363
Gain on sale of available for sale securities, net		65			25
(Loss) gain on sale of bank premises and equipment		(4	)		3
Earnings on bank owned life insurance policies		159			155
Other operating income		195			310
Total noninterest income		1,551			1,519
Noninterest Expenses
Salaries and employee benefits		5,248			5,488
Occupancy and equipment expenses		1,430			1,514
Telephone		208			197
FDIC expense		203			172
Consultant fees		222			343
Collection, repossession and other real estate owned		165			89
Marketing and advertising		461			317
Loss on sale of other real estate owned		1			32
Impairment losses on other real estate owned		-			5
Merger and merger related expenses		-			221
Other operating expenses		1,481			1,589
Total noninterest expenses		9,419			9,967
Income before income taxes		3,130			2,126
Income Tax Expense		903			517
Net Income	$	2,227		$	1,609
Effective dividend on Series A Preferred Stock		-			220
Net income available to common shareholders	$	2,227		$	1,389

Net income per common share: basic and diluted	$	0.12		$	0.08

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

	Three Months Ended
	March 31,
	2016			2015
Net income	$	2,227		$	1,609
Other comprehensive income, net of tax:
Unrealized securities gains arising during period (net of tax, $1,210 and $758, respectively)		2,350			1,473
Amortization of unrealized losses on securities transferred from available for sale to held to maturity (net of tax, $10 and $14, respectively)		18			26
Less: reclassification adjustment for securities gains included in net income (net of tax, $22 and $9, respectively)		(43	)		(16	)
Other comprehensive income		2,325			1,483
Comprehensive income	$	4,552		$	3,092

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Three Months Ended March 31, 2016 and 2015

(dollars in thousands)

															Accumulated
				Preferred			Preferred								Other
	Common			Stock			Stock					Retained			Comprehensive
	Stock			Series A *			Series B		Surplus			Earnings			(Loss) Income			Total
Balance, December 31, 2014	$	25,750		$	15,481		$	10,480	$	47,339		$	39,290		$	(4,066	)	$	134,274
Net income		-			-			-		-			1,609			-			1,609
Other comprehensive income		-			-			-		-			-			1,483			1,483
Cash dividends - preferred stock, Series A		-			-			-		-			(277	)		-			(277	)
Cash dividends - preferred stock, Series B		-			-			-		-			(52	)		-			(52	)
Cash dividends - common stock ($0.01 per share)		-			-			-		-			(130	)		-			(130	)
Repurchase of preferred stock, Series A		-			(5,000	)		-		-			-			-			(5,000	)
Repurchase of common stock		(1	)		-			-		-			-			-			(1	)
Stock based compensation		-			-			-		52			-			-			52
Restricted common stock vested		8			-			-		(8	)		-			-			-
Balance, March 31, 2015	$	25,757		$	10,481		$	10,480	$	47,383		$	40,440		$	(2,583	)	$	131,958

Balance, December 31, 2015	$	25,817		$	-		$	10,480	$	48,923		$	44,941		$	(3,886	)	$	126,275
Net income		-			-			-		-			2,227			-			2,227
Other comprehensive income		-			-			-		-			-			2,325			2,325
Cash dividends - preferred stock, Series B		-			-			-		-			(105	)		-			(105	)
Cash dividends - common stock ($0.02 per share)		-			-			-		-			(260	)		-			(260	)
Repurchase of common stock		(3	)		-			-		(6	)		-			-			(9	)
Stock based compensation		-			-			-		61			-			-			61
Restricted common stock vested		18			-			-		(18	)		-			-			-
Balance, March 31, 2016	$	25,832		$	-		$	10,480	$	48,960		$	46,803		$	(1,561	)	$	130,514

*For the purposes of this table, Preferred Stock Series A includes the effect of the Warrant (prior to its repurchase by the Company during the second quarter of 2015) issued in connection with the sale of the Preferred Stock, Series A and the discount on such preferred stock.

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

	Three Months Ended
	March 31,
	2016			2015
Operating Activities:
Net income	$	2,227		$	1,609
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		17			-
Depreciation and amortization		633			631
Stock based compensation		61			52
Deferred taxes		913			501
Amortization of debt issuance costs		26			-
Net accretion of certain acquisition related fair value adjustments		(56	)		(178	)
Net amortization of premiums and accretion of discounts on investment securities, net		636			716
(Gain) on sale of available for sale securities, net		(65	)		(25	)
Loss (gain) on sale of bank premises and equipment		4			(3	)
Loss on sale of other real estate owned		1			32
Impairment losses on other real estate owned		-			5
Loss on LLC investments		24			28
Earnings on bank owned life insurance policies		(159	)		(155	)
Net change in:
Accrued interest receivable		(431	)		(216	)
Other assets		343			243
Accrued interest payable		326			(23	)
Other liabilities		(90	)		(87	)
Net cash provided by operating activities		4,410			3,130
Investing Activities:
Purchase of securities available for sale		(22,238	)		(19,583	)
Purchase of securities held to maturity		-			(22	)
Purchase of restricted securities		(3,128	)		(1,038	)
Purchases of bank premises and equipment		(574	)		(749	)
Purchases of loans		(5,372	)		-
Improvements to other real estate owned		-			(1	)
Net change in loans		(23,551	)		3,893
Proceeds from:
Maturities, calls, and paydowns of securities available for sale		6,776			5,038
Maturities, calls, and paydowns of securities held to maturity		146			613
Sale of securities available for sale		12,931			4,390
Sale of restricted securities		3,042			1,156
Sale of bank premises and equipment		-			3
Sale of other real estate owned		87			431
Net cash (used in) investing activities		(31,881	)		(5,869	)
Financing Activities:
Net change in:
Demand, interest-bearing demand and savings deposits		6,773			26,075
Time deposits		3,378			(7,206	)
Federal funds purchased and repurchase agreements		994			(3,563	)
Short-term borrowings		147			(728	)
Debt issuance costs		(2	)		-
Repurchase of preferred stock, Series A		-			(5,000	)
Repurchase of common stock		(9	)		(1	)
Dividends paid - preferred stock, Series A		-			(277	)
Dividends paid - preferred stock, Series B		(105	)		(52	)
Dividends paid - common stock		(260	)		(130	)
Net cash provided by financing activities		10,916			9,118
Net (decrease) increase in cash and cash equivalents		(16,555	)		6,379
Cash and cash equivalents, December 31		31,955			19,630
Cash and cash equivalents, March 31	$	15,400		$	26,009
Supplemental disclosure:
Interest paid	$	1,313		$	1,214
Supplemental disclosure of noncash investing and financing activities:
Unrealized gains on securities available for sale	$	3,495		$	2,206
Loans transferred to other real estate owned	$	(466	)	$	(384	)

The accompanying notes are an integral part of the consolidated financial statements.

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

Notes to the Interim Consolidated Financial Statements

(unaudited)

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements of Eastern Virginia Bankshares, Inc. (the “Company”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), which is unconsolidated, and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”).

The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to the Trust is reported as a liability of the Company.

Nature of Operations

Eastern Virginia Bankshares, Inc. is a bank holding company headquartered in Tappahannock, Virginia that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. The Company conducts its primary operations through its wholly-owned bank subsidiary, EVB. Two of EVB’s three predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In April 2006, these three banks were merged and the surviving bank was re-branded as EVB. Additionally, the Company acquired Virginia Company Bank (“VCB”) (see Note 2 – Business Combinations) on November 14, 2014 and merged VCB with and into the Bank, with the Bank surviving, thus adding three additional branches to the Bank located in Newport News, Williamsburg, and Hampton, respectively. The Bank provides a full range of banking and related financial services to individuals and businesses through its network of retail branches. With twenty-four retail branches, the Bank serves diverse markets that primarily are in the counties of Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Northumberland, Southampton, Surry, Sussex and the cities of Colonial Heights, Hampton, Newport News, Richmond and Williamsburg. The Bank also operates a loan production office in Chesterfield County, Virginia, that the Bank opened during the second quarter of 2014. The Bank operates under a state bank charter and as such is subject to regulation by the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

The Bank owns EVB Financial Services, Inc., which in turn has a 100% ownership interest in EVB Investments, Inc. EVB Investments, Inc. is a full-service brokerage firm offering a comprehensive range of investment services. On May 15, 2014, the Bank acquired a 4.9% ownership interest in Southern Trust Mortgage, LLC. Pursuant to an independent contractor agreement with Southern Trust Mortgage, LLC, the Company advises and consults with Southern Trust Mortgage, LLC and facilitates the marketing and brand recognition of their mortgage business. In addition, the Company provides Southern Trust Mortgage, LLC with offices at three retail branches in the Company’s market area and access to office equipment at these locations during normal business hours. For its services, the Company receives fixed monthly compensation from Southern Trust Mortgage, LLC in the amount of $2 thousand, which is adjustable on a quarterly basis.

The Bank had a 75% ownership interest in EVB Title, LLC, which primarily sold title insurance to the mortgage loan customers of the Bank and EVB Mortgage, LLC. Effective January 2014, the Bank ceased operations of EVB Title, LLC due to low volume and profitability. On October 1, 2014, the Bank acquired a 6.0% ownership interest in Bankers Title, LLC. Bankers Title, LLC is a multi-bank owned title agency providing a full range of title insurance settlement and related financial services. The Bank has a 2.87% ownership interest in Bankers Insurance, LLC, which primarily sells insurance products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has a 100% ownership interest in Dunston Hall LLC, POS LLC, Tartan Holdings LLC and ECU-RE LLC which were formed to hold the title to real estate acquired by the Bank upon foreclosure on property of real estate secured loans. The financial position and operating results of all of these subsidiaries are not significant to the Company as a whole and are not considered principal activities of the Company at this time. The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “EVBS.”

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of loans, impairment of securities, the valuation of other real estate owned (or “OREO”), the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, goodwill impairment and fair value of financial instruments. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these interim financial statements, have been made. Certain prior year amounts have been reclassified to conform to the 2016 presentation. These reclassifications have no effect on previously reported net income.

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income (loss) at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: a) income tax consequences; b) classification of awards as either equity or liabilities; and c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.

Note 2. Business Combinations

On November 14, 2014, the Company completed its acquisition of VCB. Pursuant to the Agreement and Plan of Reorganization dated May 29, 2014, VCB's common shareholders received for each share of VCB common stock they owned either (i) cash at a rate of $6.25 per share of VCB common stock, or approximately $2.4 million in the aggregate, or (ii) the Company’s common stock at a rate of 0.9259 shares of the Company’s common stock per share of VCB common stock, which totaled approximately $6.7 million based on the Company’s closing common stock price on November 14, 2014 of $6.27 per share. In addition, the Company purchased VCB’s Series A Preferred Stock for $4.3 million. VCB was established in 2005 and was headquartered in Newport News, Virginia. VCB operated three branches, one each in Hampton, Newport News and Williamsburg, Virginia. Additional information regarding this acquisition is included in the Company’s 2015 Form 10-K.

The net effect of the amortization and accretion of premiums and discounts associated with the Company’s acquisition accounting adjustments to assets acquired and liabilities assumed from VCB had the following impact on the consolidated statements of income during the three months ended March 31, 2016 and 2015:

	Three Months Ended			Three Months Ended
	March 31,			March 31,
(dollars in thousands)	2016			2015
Loans⁽¹⁾	$	123		$	278
Core deposit intangible⁽²⁾		(57	)		(66	)
Time deposits⁽³⁾		(10	)		(34	)
Net impact to income before income taxes	$	56		$	178

(1)

Loan discount accretion is included in the “Interest and fees on loans” section of “Interest and Dividend Income” in the consolidated statements of income.

(2)

Core deposit intangible premium amortization is included in the “Other operating expenses” section of “Noninterest Expenses” in the consolidated statements of income.

(3)

Time deposit premium amortization is included in the “Deposits” section of “Interest Expense” in the consolidated statements of income.

Note 3. Investment Securities

The amortized cost and estimated fair value, with gross unrealized gains and losses, of investment securities at March 31, 2016 and December 31, 2015 were as follows:

(dollars in thousands)	March 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available for Sale:
Obligations of U.S. Government agencies	$	7,988	$	22	$	10	$	8,000
SBA Pool securities		64,778		114		564		64,328
Agency residential mortgage-backed securities		22,234		46		137		22,143
Agency commercial mortgage-backed securities		23,228		296		-		23,524
Agency CMO securities		53,361		421		386		53,396
Non agency CMO securities		55		1		-		56
State and political subdivisions		61,972		1,224		140		63,056
Corporate securities		2,000		-		7		1,993
Total	$	235,616	$	2,124	$	1,244	$	236,496

(dollars in thousands)	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Available for Sale:
Obligations of U.S. Government agencies	$	9,404	$	-	$	142	$	9,262
SBA Pool securities		64,866		25		1,065		63,826
Agency residential mortgage-backed securities		24,250		7		354		23,903
Agency commercial mortgage-backed securities		18,503		-		188		18,315
Agency CMO securities		52,870		130		829		52,171
Non agency CMO securities*		61		-		-		61
State and political subdivisions		61,604		303		502		61,405
Corporate securities		2,000		-		-		2,000
Total	$	233,558	$	465	$	3,080	$	230,943

*The combined unrealized gains on these securities were less than $1.

(dollars in thousands)	March 31, 2016
			Net Unrealized
			Losses				Gross		Gross
	Amortized		Recorded		Carrying		Unrealized		Unrealized		Fair
	Cost		in AOCI*		Value		Gains		Losses		Value
Held to Maturity:
Agency CMO securities	$	11,240	$	54	$	11,186	$	235	$	-	$	11,421
State and political subdivisions		18,743		457		18,286		859		2		19,143
Total	$	29,983	$	511	$	29,472	$	1,094	$	2	$	30,564

*Represents the net unrealized holding loss at the date of transfer from available for sale to held to maturity, net of any accretion.

(dollars in thousands)	December 31, 2015
			Net Unrealized
			Losses				Gross		Gross
	Amortized		Recorded		Carrying		Unrealized		Unrealized		Fair
	Cost		in AOCI*		Value		Gains		Losses		Value
Held to Maturity:
Agency CMO securities	$	11,430	$	59	$	11,371	$	305	$	-	$	11,676
State and political subdivisions		18,807		480		18,327		572		-		18,899
Total	$	30,237	$	539	$	29,698	$	877	$	-	$	30,575

*Represents the net unrealized holding loss at the date of transfer from available for sale to held to maturity, net of any accretion.

There were no investment securities classified as “Trading” at March 31, 2016 or December 31, 2015. During the fourth quarter of 2013, the Company transferred investment securities with an amortized cost of $35.5 million, previously designated as “Available for Sale”, to “Held to Maturity” classification. The fair value of those investment securities as of the date of the transfer was $34.5 million, reflecting a gross unrealized loss of $994 thousand. The gross unrealized loss, net of tax at the time of transfer remained in Accumulated Other Comprehensive Income (Loss) and is being accreted over the remaining life of the investment securities as an adjustment to interest income.

At March 31, 2016, the Company’s mortgage-backed investment securities consisted of commercial and residential mortgage-backed investment securities. The Company’s mortgage-backed investment securities are all backed by an Agency of the U.S. government and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.

The amortized cost, carrying value and estimated fair value of investment securities at March 31, 2016, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

(dollars in thousands)	March 31, 2016
	Amortized Cost		Fair Value
Available for Sale:
Due in one year or less	$	3,350	$	3,373
Due after one year through five years		83,192		83,437
Due after five years through ten years		138,623		139,296
Due after ten years		10,451		10,390
Total	$	235,616	$	236,496

(dollars in thousands)	March 31, 2016
	Carrying Value		Fair Value
Held to Maturity:
Due in one year or less	$	1,020	$	1,031
Due after one year through five years		21,116		21,890
Due after five years through ten years		6,589		6,875
Due after ten years		747		768
Total	$	29,472	$	30,564

Proceeds from the sales of investment securities available for sale for the three months ended March 31, 2016 and 2015 were $12.9 million and $4.4 million, respectively. Net realized gains on the sales of investment securities available for sale for the three months ended March 31, 2016 and 2015 were $65 thousand and $25 thousand, respectively. Proceeds from maturities, calls and paydowns of investment securities available for sale for the three months ended March 31, 2016 and 2015 were $6.8 million and $5.0 million, respectively. Proceeds from maturities, calls and paydowns of investment securities held to maturity for the three months ended March 31, 2016 and 2015 were $146 thousand and $613 thousand, respectively.

The Company pledges investment securities to secure public deposits, balances with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and repurchase agreements. Investment securities with an aggregate book value of $65.0 million and an aggregate fair value of $65.7 million were pledged at March 31, 2016. Investment securities with both aggregate book and fair values of $88.0 million were pledged at December 31, 2015.

Investment securities in an unrealized loss position at March 31, 2016, by duration of the period of the unrealized loss, are shown below:

	March 31, 2016
(dollars in thousands)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Investment Securities	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies	$	-	$	-	$	4,488	$	10	$	4,488	$	10
SBA Pool securities		10,118		34		35,733		530		45,851		564
Agency residential mortgage-backed securities		788		1		9,638		136		10,426		137
Agency CMO securities		18,154		215		9,041		171		27,195		386
State and political subdivisions		5,520		46		5,838		96		11,358		142
Corporate securities		1,493		7		-		-		1,493		7
Total	$	36,073	$	303	$	64,738	$	943	$	100,811	$	1,246

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment that may result due to adverse economic conditions and associated credit deterioration. A determination as to whether an investment security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain investment securities in unrealized loss positions, the Company will enlist independent third-party firms to prepare cash flow analyses to compare the present value of cash flows expected to be collected from the investment security with the amortized cost basis of the investment security.

Based on the Company’s evaluation, management does not believe any unrealized losses at March 31, 2016, represent an other-than-temporary impairment as these unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, and are not attributable to credit deterioration. Interest rates have generally declined since December 31, 2015, thereby reducing the amount of unrealized losses present at that time. At March 31, 2016, there were 82 debt investment securities with fair values totaling $100.8 million considered temporarily impaired. Of these debt investment securities, 30 with fair values totaling $36.1 million were in an unrealized loss position of less than 12 months and 52 with fair values totaling $64.7 million were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities until recovery of the amortized cost basis and it is more likely than not that the Company will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 and no impairment has been recognized. At March 31, 2016, there were no equity securities in an unrealized loss position.

Investment securities in an unrealized loss position at December 31, 2015, by duration of the period of the unrealized loss, are shown below:

	December 31, 2015
(dollars in thousands)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Investment Securities	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies	$	4,848	$	58	$	4,414	$	84	$	9,262	$	142
SBA Pool securities		19,573		180		39,700		885		59,273		1,065
Agency residential mortgage-backed securities		9,370		104		9,341		250		18,711		354
Agency commercial mortgage-backed securities		18,315		188		-		-		18,315		188
Agency CMO securities		34,075		596		6,340		233		40,415		829
State and political subdivisions		31,415		408		3,840		94		35,255		502
Total	$	117,596	$	1,534	$	63,635	$	1,546	$	181,231	$	3,080

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $6.0 million and $5.9 million at March 31, 2016 and December 31, 2015, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Because the FHLB generated positive net income for each quarterly period beginning April 1, 2015, and ending March 31, 2016, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2016 and no impairment has been recognized. FHLB stock is included in a separate line item on the consolidated balance sheets (Restricted securities, at cost) and is not part of the Company’s investment securities portfolio. The Company’s restricted securities also include investments in the Reserve Bank and Community Bankers Bank, which are carried at cost.

Note 4. Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the Company’s total gross loans at the dates indicated:

	March 31, 2016						December 31, 2015
(dollars in thousands)	Amount			Percent			Amount			Percent
Commercial, industrial and agricultural	$	116,470			12.81	%	$	98,828			11.22	%
Real estate - one to four family residential:
Closed end first and seconds		230,507			25.35	%		232,826			26.43	%
Home equity lines		115,633			12.72	%		116,309			13.20	%
Total real estate - one to four family residential		346,140			38.07	%		349,135			39.63	%
Real estate - multifamily residential		33,363			3.67	%		29,672			3.37	%
Real estate - construction:
One to four family residential		17,866			1.97	%		19,495			2.21	%
Other construction, land development and other land		49,648			5.46	%		46,877			5.32	%
Total real estate - construction		67,514			7.43	%		66,372			7.53	%
Real estate - farmland		11,431			1.26	%		11,418			1.30	%
Real estate - non-farm, non-residential:
Owner occupied		186,507			20.53	%		187,224			21.27	%
Non-owner occupied		111,592			12.28	%		104,456			11.86	%
Total real estate - non-farm, non-residential		298,099			32.81	%		291,680			33.13	%
Consumer		20,964			2.31	%		19,993			2.27	%
Other		14,969			1.64	%		13,680			1.55	%
Total loans		908,950			100.00	%		880,778			100.00	%
Less allowance for loan losses		(10,936	)					(11,327	)
Loans, net	$	898,014					$	869,451

Deferred costs and (fees), net are included in the table above and totaled $1.6 million for both March 31, 2016 and December 31, 2015, respectively.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2016 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total Current*		Total Loans
Commercial, industrial and agricultural	$	-	$	-	$	105	$	105	$	116,365	$	116,470
Real estate - one to four family residential:
Closed end first and seconds		2,646		952		4,167		7,765		222,742		230,507
Home equity lines		127		-		1,469		1,596		114,037		115,633
Total real estate - one to four family residential		2,773		952		5,636		9,361		336,779		346,140
Real estate - multifamily residential		-		-		-		-		33,363		33,363
Real estate - construction:
One to four family residential		38		-		-		38		17,828		17,866
Other construction, land development and other land		-		-		-		-		49,648		49,648
Total real estate - construction		38		-		-		38		67,476		67,514
Real estate - farmland		-		102		-		102		11,329		11,431
Real estate - non-farm, non-residential:
Owner occupied		182		1,260		-		1,442		185,065		186,507
Non-owner occupied		264		-		676		940		110,652		111,592
Total real estate - non-farm, non-residential		446		1,260		676		2,382		295,717		298,099
Consumer		1		11		-		12		20,952		20,964
Other		-		-		-		-		14,969		14,969
Total loans	$	3,258	$	2,325	$	6,417	$	12,000	$	896,950	$	908,950

*For purposes of this table only, the "Total Current" column includes loans that are 1-29 days past due.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2015 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total Current*		Total Loans
Commercial, industrial and agricultural	$	149	$	-	$	193	$	342	$	98,486	$	98,828
Real estate - one to four family residential:
Closed end first and seconds		2,748		1,322		4,647		8,717		224,109		232,826
Home equity lines		1,166		-		250		1,416		114,893		116,309
Total real estate - one to four family residential		3,914		1,322		4,897		10,133		339,002		349,135
Real estate - multifamily residential		-		-		-		-		29,672		29,672
Real estate - construction:
One to four family residential		11		-		89		100		19,395		19,495
Other construction, land development and other land		-		-		-		-		46,877		46,877
Total real estate - construction		11		-		89		100		66,272		66,372
Real estate - farmland		-		-		-		-		11,418		11,418
Real estate - non-farm, non-residential:
Owner occupied		1,637		-		624		2,261		184,963		187,224
Non-owner occupied		-		-		676		676		103,780		104,456
Total real estate - non-farm, non-residential		1,637		-		1,300		2,937		288,743		291,680
Consumer		377		4		-		381		19,612		19,993
Other		-		-		-		-		13,680		13,680
Total loans	$	6,088	$	1,326	$	6,479	$	13,893	$	866,885	$	880,778

*For purposes of this table only, the "Total Current" column includes loans that are 1-29 days past due.

The following table presents nonaccrual loans, loans past due 90 days and accruing interest, and troubled debt restructurings (accruing) at the dates indicated:

(dollars in thousands)	March 31, 2016		December 31, 2015
Nonaccrual loans	$	6,616	$	6,175
Loans past due 90 days and accruing interest		1,127		1,117
Troubled debt restructurings (accruing)		15,158		15,535

At March 31, 2016 and December 31, 2015, there were approximately $1.2 million and $1.3 million, respectively, in troubled debt restructurings (“TDRs”) included in nonaccrual loans.

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans greater than 90 days past due may remain on an accrual status if management determines it has adequate collateral to cover the principal and interest. If a loan or a portion of a loan is adversely classified, or is partially charged off, the loan is generally classified as nonaccrual. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on a nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due.

When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, and the amortization of related deferred loan fees or costs is suspended. While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. These policies are applied consistently across our loan portfolio.

A loan (including a TDR) may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

Outstanding principal balance and the carrying amount of loans acquired pursuant to the Company’s acquisition of VCB (or “Acquired Loans”) that were recorded at fair value at the acquisition date and are included in the consolidated balance sheet at March 31, 2016 and December 31, 2015 were as follows:

	March 31, 2016						December 31, 2015
	Acquired						Acquired
	Loans -		Acquired				Loans -		Acquired
	Purchased		Loans -		Acquired		Purchased		Loans -		Acquired
	Credit		Purchased		Loans -		Credit		Purchased		Loans -
(dollars in thousands)	Impaired		Performing		Total		Impaired		Performing		Total
Commercial, industrial and agricultural	$	513	$	3,235	$	3,748	$	549	$	3,476	$	4,025
Real estate - one to four family residential:
Closed end first and seconds		1,127		6,209		7,336		1,116		6,290		7,406
Home equity lines		32		9,570		9,602		32		9,955		9,987
Total real estate - one to four family residential		1,159		15,779		16,938		1,148		16,245		17,393
Real estate - multifamily residential		-		1,905		1,905		-		1,988		1,988
Real estate - construction:
One to four family residential		-		451		451		-		515		515
Other construction, land development and other land		270		2,049		2,319		275		1,910		2,185
Total real estate - construction		270		2,500		2,770		275		2,425		2,700
Real estate - farmland		-		-		-		-		-		-
Real estate - non-farm, non-residential:
Owner occupied		4,258		16,216		20,474		4,296		16,528		20,824
Non-owner occupied		1,562		10,318		11,880		1,600		10,847		12,447
Total real estate - non-farm, non-residential		5,820		26,534		32,354		5,896		27,375		33,271
Consumer		-		216		216		-		276		276
Other		-		649		649		-		800		800
Total loans	$	7,762	$	50,818	$	58,580	$	7,868	$	52,585	$	60,453

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at March 31, 2016 and December 31, 2015:

					Over 90 Days Past
	Nonaccrual				Due and Accruing
	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2016		2015		2016		2015
Commercial, industrial and agricultural	$	173	$	193	$	-	$	-
Real estate - one to four family residential:
Closed end first and seconds		4,099		4,153		1,127		1,117
Home equity lines		1,657		425		-		-
Total real estate - one to four family residential		5,756		4,578		1,127		1,117
Real estate - construction:
One to four family residential		-		89		-		-
Total real estate - construction		-		89		-		-
Real estate - non-farm, non-residential:
Owner occupied		-		624		-		-
Non-owner occupied		676		676		-		-
Total real estate - non-farm, non-residential		676		1,300		-		-
Consumer		11		15		-		-
Total loans	$	6,616	$	6,175	$	1,127	$	1,117

The Company uses a risk grading system for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

Pass Grades

Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;

Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

Risk Grade 4 loans are satisfactory loans with borrowers not as strong as risk grade 3 loans but may exhibit a higher degree of financial risk based on the type of business supporting the loan; and

Risk Grade 5 loans are loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay.

Special Mention

Risk Grade 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position.

Classified Grades

Risk Grade 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged. These have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;

Risk Grade 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined; and

Risk Grade 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as a bank asset is not warranted.

The Company uses a past due grading system for consumer loans, including one to four family residential first and seconds and home equity lines. The past due status of a loan is based on the contractual due date of the most delinquent payment due. The past due grading of consumer loans is based on the following categories: current, 1-29 days past due, 30-59 days past due, 60-89 days past due and over 90 days past due. The consumer loans are segregated between performing and nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue interest, or are greater than 90 days past due and accruing interest. Non-impaired consumer loans are assigned an allowance factor which increases with the severity of past due status. This component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

The allocation methodology applied by the Company includes management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of migration analysis tracking movement of loans through past due classifications and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of classified loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. In determining the allowance for loan losses, the Company considers its portfolio segments and loan classes to be the same.

The following table presents commercial loans by credit quality indicator at March 31, 2016:

									Acquired
									Loans -
									Purchased
			Special						Credit
(dollars in thousands)	Pass		Mention		Substandard		Impaired		Impaired		Total
Commercial, industrial and agricultural	$	112,952	$	1,739	$	263	$	1,003	$	513	$	116,470
Real estate - multifamily residential		33,363		-		-		-		-		33,363
Real estate - construction:
One to four family residential		17,390		216		79		181		-		17,866
Other construction, land development and other land		42,760		-		1,092		5,526		270		49,648
Total real estate - construction		60,150		216		1,171		5,707		270		67,514
Real estate - farmland		10,416		316		166		533		-		11,431
Real estate - non-farm, non-residential:
Owner occupied		165,754		9,431		2,171		4,893		4,258		186,507
Non-owner occupied		95,021		1,314		1,026		12,669		1,562		111,592
Total real estate - non-farm, non-residential		260,775		10,745		3,197		17,562		5,820		298,099
Total commercial loans	$	477,656	$	13,016	$	4,797	$	24,805	$	6,603	$	526,877

The following table presents commercial loans by credit quality indicator at December 31, 2015:

									Acquired
									Loans -
									Purchased
			Special						Credit
(dollars in thousands)	Pass		Mention		Substandard		Impaired		Impaired		Total
Commercial, industrial and agricultural	$	95,440	$	1,709	$	291	$	839	$	549	$	98,828
Real estate - multifamily residential		29,672		-		-		-		-		29,672
Real estate - construction:
One to four family residential		19,000		220		89		186		-		19,495
Other construction, land development and other land		38,013		1,785		1,242		5,562		275		46,877
Total real estate - construction		57,013		2,005		1,331		5,748		275		66,372
Real estate - farmland		10,396		318		165		539		-		11,418
Real estate - non-farm, non-residential:
Owner occupied		162,103		12,206		2,283		6,336		4,296		187,224
Non-owner occupied		86,894		2,130		1,040		12,792		1,600		104,456
Total real estate - non-farm, non-residential		248,997		14,336		3,323		19,128		5,896		291,680
Total commercial loans	$	441,518	$	18,368	$	5,110	$	26,254	$	6,720	$	497,970

At March 31, 2016 and December 31, 2015, the Company did not have any loans classified as Doubtful or Loss.

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at March 31, 2016:

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	218,266	$	12,241	$	230,507
Home equity lines		113,334		2,299		115,633
Total real estate - one to four family residential		331,600		14,540		346,140
Consumer		20,634		330		20,964
Other		14,969		-		14,969
Total consumer loans	$	367,203	$	14,870	$	382,073

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at December 31, 2015:

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	220,016	$	12,810	$	232,826
Home equity lines		115,434		875		116,309
Total real estate - one to four family residential		335,450		13,685		349,135
Consumer		19,655		338		19,993
Other		13,678		2		13,680
Total consumer loans	$	368,783	$	14,025	$	382,808

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. The Company measures impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are considered impaired loans. TDRs occur when we agree to modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions can be temporary and are made in an attempt to avoid foreclosure and with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include, without limitation, rate reductions to below market rates, payment deferrals, forbearance, and, in some cases, forgiveness of principal or interest.

At the time of a TDR, the loan is placed on nonaccrual status. A loan (including a TDR) may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2016:

	Beginning										Ending
	Balance										Balance
(dollars in thousands)	January 1, 2016		Charge-offs			Recoveries		Provision			March 31, 2016
Commercial, industrial and agricultural	$	1,894	$	(46	)	$	26	$	348		$	2,222
Real estate - one to four family residential:
Closed end first and seconds		1,609		(373	)		81		320			1,637
Home equity lines		795		-			12		312			1,119
Total real estate - one to four family residential		2,404		(373	)		93		632			2,756
Real estate - multifamily residential		78		-			-		11			89
Real estate - construction:
One to four family residential		295		-			1		(9	)		287
Other construction, land development and other land		2,423		-			-		(116	)		2,307
Total real estate - construction		2,718		-			1		(125	)		2,594
Real estate - farmland		272		-			-		4			276
Real estate - non-farm, non-residential:
Owner occupied		1,964		(208	)		63		(470	)		1,349
Non-owner occupied		1,241		-			61		(428	)		874
Total real estate - non-farm, non-residential		3,205		(208	)		124		(898	)		2,223
Consumer		287		(33	)		15		37			306
Other		469		(15	)		8		8			470
Total	$	11,327	$	(675	)	$	267	$	17		$	10,936

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2015:

	Beginning										Ending
	Balance										Balance
(dollars in thousands)	January 1, 2015		Charge-offs			Recoveries		Provision			March 31, 2015
Commercial, industrial and agricultural	$	1,168	$	-		$	9	$	91		$	1,268
Real estate - one to four family residential:
Closed end first and seconds		1,884		(285	)		7		114			1,720
Home equity lines		1,678		(108	)		4		442			2,016
Total real estate - one to four family residential		3,562		(393	)		11		556			3,736
Real estate - multifamily residential		89		-			-		(5	)		84
Real estate - construction:
One to four family residential		235		(1	)		1		23			258
Other construction, land development and other land		2,670		-			-		11			2,681
Total real estate - construction		2,905		(1	)		1		34			2,939
Real estate - farmland		144		-			-		(18	)		126
Real estate - non-farm, non-residential:
Owner occupied		2,416		-			-		(381	)		2,035
Non-owner occupied		1,908		-			-		(230	)		1,678
Total real estate - non-farm, non-residential		4,324		-			-		(611	)		3,713
Consumer		305		(1	)		18		(59	)		263
Other		524		(12	)		5		12			529
Total	$	13,021	$	(407	)	$	44	$	-		$	12,658

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of March 31, 2016:

	Allowance allocated to loans:								Total Loans:
					Acquired								Acquired
	Individually		Collectively		loans -				Individually		Collectively		loans -
	evaluated		evaluated		purchased				evaluated		evaluated		purchased
	for		for		credit				for		for		credit
(dollars in thousands)	impairment		impairment		impaired		Total		impairment		impairment		impaired		Total
Commercial, industrial and agricultural	$	576	$	1,646	$	-	$	2,222	$	1,003	$	114,954	$	513	$	116,470
Real estate - one to four family residential:
Closed end first and seconds		463		1,157		17		1,637		8,074		221,306		1,127		230,507
Home equity lines		316		803		-		1,119		830		114,771		32		115,633
Total real estate - one to four family residential		779		1,960		17		2,756		8,904		336,077		1,159		346,140
Real estate - multifamily residential		-		89		-		89		-		33,363		-		33,363
Real estate - construction:
One to four family residential		64		223		-		287		181		17,685		-		17,866
Other construction, land development and other land		1,228		1,079		-		2,307		5,526		43,852		270		49,648
Total real estate - construction		1,292		1,302		-		2,594		5,707		61,537		270		67,514
Real estate - farmland		214		62		-		276		533		10,898		-		11,431
Real estate - non-farm, non-residential:
Owner occupied		289		1,060		-		1,349		4,893		177,356		4,258		186,507
Non-owner occupied		450		424		-		874		12,669		97,361		1,562		111,592
Total real estate - non-farm, non-residential		739		1,484		-		2,223		17,562		274,717		5,820		298,099
Consumer		81		225		-		306		330		20,634		-		20,964
Other		-		470		-		470		-		14,969		-		14,969
Total	$	3,681	$	7,238	$	17	$	10,936	$	34,039	$	867,149	$	7,762	$	908,950

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2015:

	Allowance allocated to loans:								Total Loans:
					Acquired								Acquired
	Individually		Collectively		loans -				Individually		Collectively		loans -
	evaluated		evaluated		purchased				evaluated		evaluated		purchased
	for		for		credit				for		for		credit
(dollars in thousands)	impairment		impairment		impaired		Total		impairment		impairment		impaired		Total
Commercial, industrial and agricultural	$	562	$	1,332	$	-	$	1,894	$	839	$	97,440	$	549	$	98,828
Real estate - one to four family residential:
Closed end first and seconds		517		1,092		-		1,609		8,163		223,547		1,116		232,826
Home equity lines		265		530		-		795		625		115,652		32		116,309
Total real estate - one to four family residential		782		1,622		-		2,404		8,788		339,199		1,148		349,135
Real estate - multifamily residential		-		78		-		78		-		29,672		-		29,672
Real estate - construction:
One to four family residential		67		228		-		295		186		19,309		-		19,495
Other construction, land development and other land		1,263		1,160		-		2,423		5,562		41,040		275		46,877
Total real estate - construction		1,330		1,388		-		2,718		5,748		60,349		275		66,372
Real estate - farmland		210		62		-		272		539		10,879		-		11,418
Real estate - non-farm, non-residential:
Owner occupied		824		1,140		-		1,964		6,336		176,592		4,296		187,224
Non-owner occupied		810		431		-		1,241		12,792		90,064		1,600		104,456
Total real estate - non-farm, non-residential		1,634		1,571		-		3,205		19,128		266,656		5,896		291,680
Consumer		88		199		-		287		338		19,655		-		19,993
Other		-		469		-		469		2		13,678		-		13,680
Total	$	4,606	$	6,721	$	-	$	11,327	$	35,382	$	837,528	$	7,868	$	880,778

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2016:

					Recorded		Recorded
			Unpaid		Investment		Investment				Average		Interest
	Recorded		Principal		With No		With		Related		Recorded		Income
(dollars in thousands)	Investment		Balance		Allowance		Allowance		Allowance		Investment		Recognized
Commercial, industrial and agricultural	$	1,003	$	1,003	$	368	$	635	$	576	$	986	$	13
Real estate - one to four family residential:
Closed end first and seconds		8,074		8,438		4,385		3,689		463		8,009		97
Home equity lines		830		830		380		450		316		728		1
Total real estate - one to four family residential		8,904		9,268		4,765		4,139		779		8,737		98
Real estate - construction:
One to four family residential		181		181		19		162		64		183		2
Other construction, land development and other land		5,526		5,526		-		5,526		1,228		5,535		64
Total real estate - construction		5,707		5,707		19		5,688		1,292		5,718		66
Real estate - farmland		533		535		-		533		214		535		7
Real estate - non-farm, non-residential:
Owner occupied		4,893		4,893		3,481		1,412		289		5,419		56
Non-owner occupied		12,669		12,669		8,456		4,213		450		12,807		145
Total real estate - non-farm, non-residential		17,562		17,562		11,937		5,625		739		18,226		201
Consumer		330		341		11		319		81		334		4
Other		-		-		-		-		-		1		-
Total loans*	$	34,039	$	34,416	$	17,100	$	16,939	$	3,681	$	34,537	$	389

*PCI loans are excluded from this table.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2015:

					Recorded		Recorded
			Unpaid		Investment		Investment				Average		Interest
	Recorded		Principal		With No		With		Related		Recorded		Income
(dollars in thousands)	Investment		Balance		Allowance		Allowance		Allowance		Investment		Recognized
Commercial, industrial and agricultural	$	839	$	839	$	-	$	839	$	562	$	753	$	49
Real estate - one to four family residential:
Closed end first and seconds		8,163		8,530		3,981		4,182		517		8,386		416
Home equity lines		625		625		175		450		265		521		16
Total real estate - one to four family residential		8,788		9,155		4,156		4,632		782		8,907		432
Real estate - construction:
One to four family residential		186		186		20		166		67		235		8
Other construction, land development and other land		5,562		5,562		-		5,562		1,263		5,611		260
Total real estate - construction		5,748		5,748		20		5,728		1,330		5,846		268
Real estate - farmland		539		541		-		539		210		167		36
Real estate - non-farm, non-residential:
Owner occupied		6,336		6,336		3,506		2,830		824		8,995		292
Non-owner occupied		12,792		12,792		7,686		5,106		810		11,312		595
Total real estate - non-farm, non-residential		19,128		19,128		11,192		7,936		1,634		20,307		887
Consumer		338		350		12		326		88		352		19
Other		2		2		2		-		-		4		-
Total loans*	$	35,382	$	35,763	$	15,382	$	20,000	$	4,606	$	36,336	$	1,691

*PCI loans are excluded from this table.

Determining the fair value of purchased credit-impaired (“PCI”) loans required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference and is not recorded. In accordance with U.S. GAAP, the Company did not “carry over” any allowances for loan losses that were reserved for the VCB loan portfolio prior to the Company’s acquisition of VCB. PCI loans had unpaid principal balances of $8.7 million and $8.8 million and recorded carrying values of $7.8 million and $7.9 million at March 31, 2016 and December 31, 2015, respectively.

The following table presents a summary of the changes in the accretable yield of the PCI loan portfolio for the period indicated:

	Three months ended			Three months ended
	March 31, 2016			March 31, 2015
(dollars in thousands)	Accretable Yield			Accretable Yield
Balance at beginning of period	$	1,280		$	1,131
Accretion		(129	)		(102	)
Reclassification of nonaccretable difference due to improvement in expected cash flows		24			-
Other changes, net		46			-
Balance at end of period	$	1,221		$	1,029

The following table presents, by loan class, information related to loans modified as TDRs during the three months ended March 31, 2016 and 2015:

	Three Months Ended March 31, 2016						Three Months Ended March 31, 2015
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
(dollars in thousands)	Loans		Balance		Balance*		Loans		Balance		Balance*
Commercial, industrial and agricultural		1	$	68	$	68		-	$	-	$	-
Real estate - one to four family residential:
Closed end first and seconds		1		41		41		-		-		-
Total		2	$	109	$	109		-	$	-	$	-

*The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

During the three months ended March 31, 2016 and 2015, there were no defaults (i.e., 90 days or more past due) on loans modified as TDRs within the prior 12 months. At March 31, 2016, $761 thousand in foreclosed residential real estate properties were included in OREO, and $2.4 million in residential real estate loans were in the process of foreclosure.

Note 5. Deferred Income Taxes

As of March 31, 2016 and December 31, 2015, the Company had recorded net deferred income tax assets of approximately $13.0 million and $15.1 million, respectively. The realization of deferred income tax assets is assessed quarterly and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Further, management has considered future reversals of existing taxable temporary differences and limited, prudent and feasible tax-planning strategies, such as changes in investment security income (tax-exempt to taxable), additional sales of loans and sales of branches/buildings with an appreciated asset value over the tax basis. Based upon an analysis of available evidence, management has determined that it is “more likely than not” that the Company’s deferred income tax assets as of March 31, 2016 and December 31, 2015 will be fully realized and therefore no valuation allowance to the Company’s deferred income tax assets was recorded. However, the Company can give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions which are subject to uncertainty and based on estimates that may change due to changing economic conditions and other factors. Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

The Company’s ability to realize its deferred income tax assets may be limited if the Company experiences an ownership change as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). For additional information see Part I, Item 1A. “Risk Factors” included in the Company’s 2015 Form 10-K.

Note 6. Bank Premises and Equipment

Bank premises and equipment are summarized as follows:

(dollars in thousands)	March 31, 2016			December 31, 2015
Land and improvements	$	6,837		$	6,837
Buildings and leasehold improvements		28,715			28,487
Furniture, fixtures and equipment		20,554			20,385
Construction in progress		1,233			1,136
		57,339			56,845
Less accumulated depreciation		(29,566	)		(29,009	)
Net balance	$	27,773		$	27,836

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2016 and 2015 amounted to $633 thousand and $631 thousand, respectively.

Note 7. Borrowings

Federal funds purchased and repurchase agreements. The Company has unsecured lines of credit with SunTrust Bank, Community Bankers Bank and Pacific Coast Bankers Bank for the purchase of federal funds in the amount of $20.0 million, $15.0 million and $5.0 million, respectively. These lines of credit have a variable rate based on the lending bank’s daily federal funds sold rate and are due on demand. Repurchase agreements are secured transactions and generally mature the day following the day sold. Customer repurchases are standard transactions that involve a Bank customer instead of a wholesale bank or broker. The Company offers this product as an accommodation to larger retail and commercial customers that request safety for their funds beyond the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limits. The Company does not use or have any open repurchase agreements with broker-dealers.

The tables below present selected information on federal funds purchased and repurchase agreements during the three months ended March 31, 2016 and the year ended December 31, 2015:

Federal funds purchased
(dollars in thousands)	March 31, 2016			December 31, 2015
Balance outstanding at period end	$	-		$	-
Maximum balance at any month end during the period	$	-		$	2,440
Average balance for the period	$	25		$	63
Weighted average rate for the period		1.02	%		0.72	%
Weighted average rate at period end		0.00	%		0.00	%

Repurchase agreements
(dollars in thousands)	March 31, 2016			December 31, 2015
Balance outstanding at period end	$	6,009		$	5,015
Maximum balance at any month end during the period	$	6,017		$	12,392
Average balance for the period	$	5,505		$	8,002
Weighted average rate for the period		0.47	%		0.57	%
Weighted average rate at period end		0.47	%		0.47	%

Short-term borrowings. Short-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. Short-term advances from the FHLB at March 31, 2016 consisted of $12.0 million using a daily rate credit, which is due on demand, and $102.6 million in fixed rate one month advances. Short-term advances from the FHLB at December 31, 2015 consisted of $114.4 million in fixed rate one month advances. Outstanding accrued interest at March 31, 2016 and December 31, 2015 totaled $37 thousand and $14 thousand, respectively.

The table below presents selected information on short-term borrowings during the three months ended March 31, 2016 and the year ended December 31, 2015:

Short-term borrowings
(dollars in thousands)	March 31, 2016			December 31, 2015
Balance outstanding at period end	$	114,560		$	114,413
Maximum balance at any month end during the period	$	122,923		$	114,413
Average balance for the period	$	114,696		$	89,580
Weighted average rate for the period		0.43	%		0.22	%
Weighted average rate at period end		0.45	%		0.32	%

Long-term borrowings. From time to time, the Company may obtain long-term borrowings from the FHLB, which consist of advances from the FHLB that are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. At March 31, 2016 and December 31, 2015, the Company had no long-term FHLB advances outstanding.

The Company’s line of credit with the FHLB can equal up to 30% of the Company’s gross assets or approximately $380.9 million at March 31, 2016. This line of credit totaled $227.0 million with approximately $112.5 million available at March 31, 2016. As of March 31, 2016 and December 31, 2015, loans with a carrying value of $304.3 million and $307.2 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

Note 8. Net Income Per Common Share

The Company applies the two-class method of computing basic and diluted net income per common share. Under the two-class method, net income per common share is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Based on FASB guidance, the Company considers its Series B Preferred Stock (defined below) to be a participating security. FASB guidance requires that all outstanding unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s common stock outstanding.

The following table shows the computation of basic and diluted net income per common share for the periods presented:

	Three Months Ended
(dollars in thousands, except share and per share amounts)	March 31, 2016		March 31, 2015
Basic Net Income Per Common Share
Net income available to common shareholders	$	2,227	$	1,389
Less: Net income allocated to participating securities, Series B Preferred Stock		639		400
Net income allocated to common shareholders	$	1,588	$	989
Weighted average common shares outstanding for basic net income per common share		13,035,249		12,985,429
Basic net income per common share	$	0.12	$	0.08

Diluted Net Income Per Common Share
Net income available to common shareholders	$	2,227	$	1,389
Weighted average common shares outstanding for basic net income per common share		13,035,249		12,985,429
Effect of dilutive securities, stock options		-		-
Effect of dilutive securities, Series B Preferred Stock		5,240,192		5,240,192
Weighted average common shares outstanding for diluted net income per common share		18,275,441		18,225,621
Diluted net income per common share	$	0.12	$	0.08

At March 31, 2016 and 2015, options to acquire 67,525 and 103,887 shares of common stock, respectively, were not included in computing diluted net income per common share for the three months ended March 31, 2016 and 2015 because their effects were anti-dilutive.

On June 12, 2013, the Company issued 5,240,192 shares of non-voting mandatorily convertible non-cumulative preferred stock, Series B (the “Series B Preferred Stock”) through private placements to certain investors. Each share of Series B Preferred Stock can, under certain limited circumstances as set forth in the Company’s articles of incorporation, be converted into one share of the Company’s common stock, and is therefore reflected in the dilutive weighted average common shares outstanding. For more information related to the conversion rights of these preferred shares, see Note 12 – Preferred Stock and Warrant.

Additionally, the impact of warrants to acquire shares of the Company’s common stock that were issued to the U.S. Department of the Treasury (“Treasury”) in connection with the Company’s participation in the Capital Purchase Program is not included, as the warrants were anti-dilutive. As previously disclosed, these warrants were repurchased by the Company during May 2015. For additional information on preferred stock warrants, see Note 12 – Preferred Stock and Warrant.

The Company identified and corrected an immaterial error affecting the calculation of basic net income per common share for certain periods prior to the second quarter of 2015. Previously, the Company did not consider the Series B Preferred Stock as a participating security when calculating basic net income per common share. The Company has corrected basic net income per common share for historical periods as such measures were disclosed in subsequent public reports, filings and statements. This immaterial error had no impact on previously reported diluted net income per common share for any historical periods.

Note 9. Stock Based Compensation Plans

On September 21, 2000, the Company adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan (the “2000 Plan”) to provide a means for selected key employees and directors to increase their personal financial interest in the Company, thereby stimulating their efforts and strengthening their desire to remain with the Company. Under the 2000 Plan, up to 400,000 shares of Company common stock could be granted in the form of stock options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the “2003 Plan”) and still authorizing the issuance of up to 400,000 shares of common stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights, common stock, restricted stock and phantom stock. Under the terms of the 2003 Plan, after April 17, 2013 no additional awards may be granted under the 2003 Plan. Any awards previously granted under the 2003 Plan that were outstanding as of April 17, 2013 remain outstanding and will vest in accordance with their regular terms.

On April 19, 2007, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative and to encourage such persons to have a greater financial interest in the Company. The 2007 Plan authorizes the Company to issue up to 400,000 additional shares of common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units. There were 162,057 shares still available to be granted as awards under the 2007 Plan as of March 31, 2016.

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant.

Accounting standards also require that new awards to employees eligible for accelerated vesting at retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.

Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock option award. There were no stock options granted or exercised in the three months ended March 31, 2016 and 2015. There was no remaining unrecognized compensation expense related to stock options at March 31, 2016, and there was no stock option compensation expense for three months ended March 31, 2016 or 2015.

A summary of the Company’s stock option activity and related information is as follows:

					Remaining		Aggregate
	Options		Weighted Average		Contractual Life		Intrinsic Value*
	Outstanding		Exercise Price		(in years)		(in thousands)
Stock options outstanding at December 31, 2015		67,525	$	18.12
Stock options outstanding at March 31, 2016		67,525	$	18.12		1.36	$	-

Stock options exercisable at March 31, 2016		67,525	$	18.12		1.36	$	-

*Intrinsic value is the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date.

The table below summarizes information concerning stock options outstanding and exercisable at March 31, 2016:

Stock Options Outstanding and Exercisable
Exercise		Number		Weighted Average
Price		Outstanding		Remaining Term
$	21.16		28,525	0.50 years
$	19.25		20,000	1.50 years
$	12.36		19,000	2.50 years
$	18.12		67,525	1.36 years

On March 24, 2016, the Company granted 65,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2017. The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2019 to the extent certain financial performance requirements for fiscal year 2018 are met. On March 19, 2015, the Company granted 45,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2016. The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2018 to the extent certain financial performance requirements for fiscal year 2017 are met. On October 15, 2014, the Company granted 42,500 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2015. The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2017 to the extent certain financial performance requirements for fiscal year 2016 are met.

For the three months ended March 31, 2016, restricted stock compensation expense was $61 thousand compared to restricted stock compensation expense of $52 thousand for the same period in 2015, and was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $6.80 per share for the March 24, 2016 awards, $6.28 per share for the March 19, 2015 awards and $6.10 per share for the October 15, 2014 awards.

A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of March 31, 2016, and changes during the three months ended March 31, 2016, is presented below; the weighted average price is the weighted average fair value at the date of grant:

				Weighted-Average
	Shares			Price
Nonvested as of December 31, 2015		121,271		$	6.01
Granted		65,000			6.80
Vested		(8,750	)		6.19
Nonvested as of March 31, 2016		177,521		$	6.29

At March 31, 2016, there was $874 thousand of total unrecognized compensation expense related to restricted stock awards. This unearned compensation is being amortized over the remaining vesting period for the time and performance based shares.

Note 10. Employee Benefit Plan – Pension

The Company has historically maintained a defined benefit pension plan covering substantially all of the Company’s employees. The plan was amended January 28, 2008 to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participants’ account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. Components of net periodic pension benefit related to the Company’s pension plan were as follows for the periods indicated:

	Three Months Ended
	March 31,
(dollars in thousands)	2016			2015
Components of net periodic pension (benefit)
Interest cost	$	98		$	101
Expected return on plan assets		(158	)		(178	)
Amortization of prior service cost		2			2
Recognized net actuarial loss		27			27
Net periodic pension (benefit)	$	(31	)	$	(48	)

The Company made no contributions to the pension plan during 2015. The Company has not determined at this time how much, if any, contributions to the plan will be made for the year ending December 31, 2016.

Note 11. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

Level 1 – Valuation is based upon quoted prices (unadjusted) for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market.

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any fair value option elections as of March 31, 2016.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets Measured at Fair Value on a Recurring Basis

Securities Available For Sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available for sale securities are considered to be Level 2 securities.

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Recurring Basis at March 31, 2016 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		March 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2016
Assets
Securities available for sale
Obligations of U.S. Government agencies	$	-	$	8,000	$	-	$	8,000
SBA Pool securities		-		64,328		-		64,328
Agency residential mortgage-backed securities		-		22,143		-		22,143
Agency commercial mortgage-backed securities		-		23,524		-		23,524
Agency CMO securities		-		53,396		-		53,396
Non agency CMO securities		-		56		-		56
State and political subdivisions		-		63,056		-		63,056
Corporate securities		-		1,993		-		1,993
Total securities available for sale	$	-	$	236,496	$	-	$	236,496

Assets Measured at Fair Value on a Recurring Basis at December 31, 2015 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		December 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2015
Assets
Securities available for sale
Obligations of U.S. Government agencies	$	-	$	9,262	$	-	$	9,262
SBA Pool securities		-		63,826		-		63,826
Agency residential mortgage-backed securities		-		23,903		-		23,903
Agency commercial mortgage-backed securities		-		18,315		-		18,315
Agency CMO securities		-		52,171		-		52,171
Non agency CMO securities		-		61		-		61
State and political subdivisions		-		61,405		-		61,405
Corporate securities		-		2,000		-		2,000
Total securities available for sale	$	-	$	230,943	$	-	$	230,943

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of fair value accounting or impairment write-downs of individual assets.

Impaired Loans. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a non-recurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

Other Real Estate Owned. OREO is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a non-recurring basis. Any initial fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of income.

The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2016 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		March 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2016
Assets
Impaired loans	$	-	$	-	$	13,258	$	13,258
Other real estate owned	$	-	$	-	$	898	$	898

Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2015 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		December 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2015
Assets
Impaired loans	$	-	$	-	$	15,394	$	15,394
Other real estate owned	$	-	$	-	$	520	$	520

The following table displays quantitative information about Level 3 Fair Value Measurements as of March 31, 2016 and December 31, 2015:

Quantitative information about Level 3 Fair Value Measurements at March 31, 2016

(dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average)

Assets

Impaired loans

13,258

Discounted appraised value

Selling cost

0% - 26% (13%)

Discount for lack of marketability and age of appraisal

0% - 25% (4%)

Other real estate owned

898

Discounted appraised value

Selling cost

10% (10%)

Discount for lack of marketability and age of appraisal

0% - 79% (16%)

Quantitative information about Level 3 Fair Value Measurements at December 31, 2015

(dollars in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average)

Assets

Impaired loans

15,394

Discounted appraised value

Selling cost

0% - 24% (13%)

Discount for lack of marketability and age of appraisal

0% - 30% (4%)

Other real estate owned

520

Discounted appraised value

Selling cost

10% (10%)

Discount for lack of marketability and age of appraisal

0% - 36% (5%)

Fair Value of Financial Instruments

U.S. GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies and assumptions for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies and assumptions for other financial assets and financial liabilities are discussed below:

Cash and Short-Term Investments. For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities. For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. All securities prices are provided by independent third party vendors.

Restricted Securities. The carrying amount approximates fair value based on the redemption provisions of the correspondent banks.

Loans. The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note.

Bank Owned Life Insurance. Bank owned life insurance represents insurance policies on officers of the Company. The cash values of the policies are estimated using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

Deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using market rates for deposits of similar remaining maturities.

Short-Term Borrowings. The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.

Long-Term Borrowings. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness 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 standby 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. The fair value of guarantees of credit card accounts previously sold is based on the estimated cost to settle the obligations with the counterparty at the reporting date. At March 31, 2016 and December 31, 2015, the fair value of loan commitments, standby letters of credit and credit card guarantees are not significant and are not included in the table below.

The estimated fair value and the carrying value of the Company’s recorded financial instruments are as follows:

			Fair Value Measurements at March 31, 2016 Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable		Balance at
			Identical Assets		Inputs		Inputs		March 31,
(dollars in thousands)	Carrying Amount		(Level 1)		(Level 2)		(Level 3)		2016
Assets:
Cash and short-term investments*	$	12,333	$	12,333	$	-	$	-	$	12,333
Interest bearing deposits with banks		3,067		3,067		-		-		3,067
Securities available for sale		236,496		-		236,496		-		236,496
Securities held to maturity		29,472		-		30,564		-		30,564
Restricted securities		9,045		-		9,045		-		9,045
Loans, net		898,014		-		-		897,331		897,331
Bank owned life insurance		25,258		-		25,258		-		25,258
Accrued interest receivable		4,490		-		4,490		-		4,490
Total	$	1,218,175	$	15,400	$	305,853	$	897,331	$	1,218,584

Liabilities:
Noninterest-bearing demand deposits	$	189,069	$	189,069	$	-	$	-	$	189,069
Interest-bearing deposits		809,811		-		758,946		-		758,946
Short-term borrowings**		120,569		120,569		-		-		120,569
Junior subordinated debt		10,310		-		10,784		-		10,784
Senior subordinated debt***		19,046		-		20,427		-		20,427
Accrued interest payable		916		-		916		-		916
Total	$	1,149,721	$	309,638	$	791,073	$	-	$	1,100,711

*Includes federal funds sold.

**Includes federal funds purchased and repurchase agreements.

***Net of unamortized debt issuance costs of $954.

			Fair Value Measurements at December 31, 2015 Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable		Balance at
			Identical Assets		Inputs		Inputs		December 31,
(dollars in thousands)	Carrying Amount		(Level 1)		(Level 2)		(Level 3)		2015
Assets:
Cash and short-term investments*	$	13,651	$	13,651	$	-	$	-	$	13,651
Interest bearing deposits with banks		18,304		18,304		-		-		18,304
Securities available for sale		230,943		-		230,943		-		230,943
Securities held to maturity		29,698		-		30,575		-		30,575
Restricted securities		8,959		-		8,959		-		8,959
Loans, net		869,451		-		-		871,989		871,989
Bank owned life insurance		25,099		-		25,099		-		25,099
Accrued interest receivable		4,059		-		4,059		-		4,059
Total	$	1,200,164	$	31,955	$	299,635	$	871,989	$	1,203,579

Liabilities:
Noninterest-bearing demand deposits	$	174,071	$	174,071	$	-	$	-	$	174,071
Interest-bearing deposits		814,648		-		763,315		-		763,315
Short-term borrowings**		119,428		119,428		-		-		119,428
Junior subordinated debt		10,310		-		9,933		-		9,933
Senior subordinated debt***		19,022		-		19,669		-		19,669
Accrued interest payable		590		-		590		-		590
Total	$	1,138,069	$	293,499	$	793,507	$	-	$	1,087,006

*Includes federal funds sold.

**Includes federal funds purchased and repurchase agreements.

***Net of unamortized debt issuance costs of $978.

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

Note 12. Preferred Stock and Warrant

On January 9, 2009, the Company signed a definitive agreement with the Treasury under the Emergency Economic Stabilization Act of 2008 to participate in the Treasury’s Capital Purchase Program. Pursuant to this agreement, the Company sold 24,000 shares of its Series A fixed rate cumulative perpetual preferred stock, liquidation value $1,000 per share (the “Series A Preferred Stock”), to the Treasury for an aggregate purchase price of $24 million. The Series A Preferred Stock paid a cumulative dividend at a rate of 5% for the first five years, and effective January 9, 2014, paid a rate of 9%. As part of its purchase of the Series A Preferred Stock, the Treasury was also issued a warrant (the “Warrant”) to purchase, on its initial terms, up to 373,832 shares of the Company’s common stock at an initial exercise price of $9.63 per share. If not exercised, the Warrant would have expired after ten years. On October 21, 2013, the Treasury sold all 24,000 shares of Series A Preferred Stock that were held by Treasury to private investors. Capital stock transactions by the Company subsequent to the Warrant’s issuance adjusted the Warrant’s exercise price per share to $9.374 and increased the number of shares that could have been acquired upon exercise to 384,041.19 shares.

On May 13, 2015, the Company repurchased from the Treasury the Warrant for an aggregate repurchase price of $115 thousand, based on the fair value of the Warrant as agreed upon by the Company and the Treasury. Following the repurchase of the Warrant, the Treasury has no remaining equity investment in the Company. Additionally, on June 15, 2015, the Company redeemed the remaining $9.0 million of its Series A Preferred Stock.

Accounting for the issuance of the Series A Preferred Stock included entries to the equity portion of the Company’s consolidated balance sheet to recognize the Series A Preferred Stock at the full amount of the issuance, the Warrant and discount on the Series A Preferred Stock at values calculated by discounting the future cash flows by a prevailing interest rate that a similar security would receive in the current market environment. At the time of issuance, that discount rate was determined to be 12%. The fair value of the Warrant of $950 thousand was calculated using the Black-Scholes model with inputs of 7 year volatility, average rate of quarterly dividends, 7 year Treasury strip rate and the exercise price of $9.63 per share exercisable for up to 10 years. The present value of the Series A Preferred Stock using a 12% discount rate was $14.4 million. The Series A Preferred Stock discount determined by the allocation of discount to the Warrant was accreted quarterly over a 5 year period on a constant effective yield method at a rate of approximately 6.4%. Allocation of the Series A Preferred Stock discount and the Warrant as of January 9, 2009 is provided in the tables below:

Warrant Value	2009
Series A Preferred Stock	$	24,000,000
Price	$	9.63
Warrant - shares		373,832
Value per Warrant	$	2.54
Fair value of Warrant	$	949,533

NPV of Series A Preferred Stock
@ 12% discount rate	(dollars in thousands)
			Relative			Relative
	Fair Value		Value %			Value
$24 million 1/09/2009
NPV of Series A Preferred Stock (12% discount rate)	$	14,446		93.8	%	$	22,519
Fair value of Warrant		950		6.2	%		1,481
	$	15,396		100.0	%	$	24,000

In connection with its private placements, on June 12, 2013, the Company issued 5,240,192 shares of its Series B Preferred Stock for a gross purchase price of $23.8 million, or $4.55 per share. The Series B Preferred Stock has no maturity date. The holders of Series B Preferred Stock are entitled to receive dividends if, as and when declared by the Company’s Board of Directors, in an identical form of consideration and at the same time, as those dividends or distributions that would have been payable on the number of whole shares of the Company’s common stock that such shares of Series B Preferred Stock would be convertible into upon satisfaction of certain conditions. The Company will not pay any dividends with respect to its common stock unless an equivalent dividend also is paid to the holders of Series B Preferred Stock. The Series B Preferred Stock ranks junior with regard to dividends to any class or series of capital stock of the Company the terms of which expressly provide that such class or series will rank senior to the common stock or the Series B Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company.

Note 13. Junior and Senior Subordinated Debt

On September 17, 2003, $10 million of trust preferred securities were placed through EVB Statutory Trust I in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”) issued by the Company. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.95%. As of March 31, 2016 and December 31, 2015, the interest rate was 3.59% and 3.48%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At March 31, 2016 and December 31, 2015, all of the trust preferred securities qualified as Tier 1 capital.

Subject to certain exceptions and limitations, the Company is permitted to elect from time to time to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debt relating to its trust preferred securities. If the Company defers interest payments on the Junior Subordinated Debt for more than 20 consecutive quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements would be immediately due and payable.

On April 22, 2015, the Company entered into a Senior Subordinated Note Purchase Agreement with certain institutional accredited investors pursuant to which the Company sold $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 ("Senior Subordinated Debt") to the investors at a price equal to 100% of the aggregate principal amount of the Senior Subordinated Debt. The Senior Subordinated Debt bears interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the Senior Subordinated Debt will bear interest at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus 502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2020. The Company may, at its option, redeem, in whole or in part, the Senior Subordinated Debt as early as May 1, 2020, and any partial redemption would be made pro rata among all of the holders. At March 31, 2016, all of the Senior Subordinated Debt qualified as Tier 2 capital. At March 31, 2016, the remaining unamortized debt issuance costs related to the Senior Subordinated Debt totaled $954 thousand.

Note 14. Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet regulatory capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

In July 2013, the federal bank regulatory agencies adopted rules to implement the Basel III capital framework and a revised framework for calculating risk-weighted assets (the “Basel III Capital Rules”). The Basel III Capital Rules were effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain portions of the new rules). For a summary of these final rules, see Part I, Item 1. “Business” under the heading “Regulation and Supervision – Capital Requirements” included in the Company’s 2015 Form 10-K.

As of March 31, 2016, the most recent notification from the Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, common equity Tier 1 (“CET1”) risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The capital ratios of the Company and the Bank as of March 31, 2016 and December 31, 2015, presented with related minimum regulatory guidelines, is as follows:

							Minimum To Be
As of March 31, 2016							Well-Capitalized
				Minimum			Under Prompt
				Capital			Corrective Action
	Actual Capital			Requirements*			Provisions
CET1 to risk weighted assets:
Company		9.5386	%		5.1250	%		N/A
Bank		13.0169	%		5.1250	%		6.5000	%

Tier 1 capital to risk weighted assets:
Company		12.5691	%		6.6250	%		N/A
Bank		13.0169	%		6.6250	%		8.0000	%

Total capital to risk weighted assets:
Company		15.9504	%		8.6250	%		N/A
Bank		14.2104	%		8.6250	%		10.0000	%

Tier 1 capital to average assets:
Company		9.2132	%		4.0000	%		N/A
Bank		9.5456	%		4.0000	%		5.0000	%

Except with regard to the Company’s and the Bank’s Tier 1 capital to average assets ratio, includes the current phased-in portion of the Basel III Capital Rules capital conservation buffer (0.625%) which is added to the minimum capital requirements for capital adequacy purposes. The capital conservation buffer is being phased in through four equal annual installments of 0.625% from 2015 to 2019, with full implementation in January 2019 (2.5%). The Company’s and the Bank’s capital conservation buffer must consist of additional CET1 above regulatory minimum requirements. Failure to maintain the prescribed levels places limitations on capital distributions and discretionary bonuses to executives. As of March 31, 2016, the capital conservation buffer of the Company and the Bank was 5.0386% and 6.2104%, respectively.

							Minimum to be
As of December 31, 2015							Well-Capitalized
				Minimum			Under Prompt
				Capital			Corrective Action
	Actual Capital			Requirements			Provisions
CET1 to risk weighted assets:
Company		9.8000	%		4.5000	%		N/A
Bank		13.0200	%		4.5000	%		6.5000	%

Tier 1 capital to risk weighted assets:
Company		12.6600	%		6.0000	%		N/A
Bank		13.0200	%		6.0000	%		8.0000	%

Total capital to risk weighted assets:
Company		16.1700	%		8.0000	%		N/A
Bank		14.2700	%		8.0000	%		10.0000	%

Tier 1 capital to average assets:
Company		9.2000	%		4.0000	%		N/A
Bank		9.4600	%		4.0000	%		5.0000	%

Note 15. Low Income Housing Tax Credits

The Company has invested in four separate housing equity funds at March 31, 2016. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were $2.7 million and $2.8 million at March 31, 2016 and December 31, 2015, respectively. These investments and related tax benefits have expected terms through 2032, with the majority maturing by 2027. Tax credits and other tax benefits recognized related to these investments during the three months ended March 31, 2016 and 2015 were $119 thousand and $116 thousand, respectively. Total projected tax credits to be received for 2016 are $324 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $1.0 million at both March 31, 2016 and December 31, 2015 and are included in other liabilities on the consolidated balance sheets.

Note 16. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss for the three months ended March 31, 2016 and 2015 are summarized as follows:

(dollars in thousands)	Unrealized Securities Gains (Losses)			Adjustments Related to Pension Plan			Accumulated Other Comprehensive Loss
Balance at December 31, 2015	$	(2,082	)	$	(1,804	)	$	(3,886	)
Other comprehensive income before reclassification and amortization		2,350			-			2,350
Reclassification adjustment for gains included in net income		(43	)		-			(43	)
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity		18			-			18
Net current period other comprehensive income		2,325			-			2,325
Balance at March 31, 2016	$	243		$	(1,804	)	$	(1,561	)

Balance at December 31, 2014	$	(1,954	)	$	(2,112	)	$	(4,066	)
Other comprehensive income before reclassification and amortization		1,473			-			1,473
Reclassification adjustment for gains included in net income		(16	)		-			(16	)
Net amortization of unrealized losses on securities transferred from available for sale to held to maturity		26			-			26
Net current period other comprehensive income		1,483			-			1,483
Balance at March 31, 2015	$	(471	)	$	(2,112	)	$	(2,583	)

Reclassifications of gains on securities available for sale are reported in the consolidated statements of income as “Gain on sale of available for sale securities, net” with the corresponding income tax effect being reflected as a component of income tax expense. Amortization of unrealized losses on securities transferred from available for sale to held to maturity is included in interest on investments (taxable or tax exempt, as appropriate) in the Company’s consolidated statements of income.

During the three months ended March 31, 2016 and 2015, the Company reported gains on the sale of available for sale securities and amortization of unrealized losses on securities transferred from available for sale to held to maturity as shown in the following table:

	Three Months Ended
	March 31,
(dollars in thousands)	2016			2015
Gains on sale of available for sale securities	$	65		$	25
Less: tax effect		(22	)		(9	)
Net gains on the sale of available for sale securities	$	43		$	16

Amortization of unrealized losses on securities transferred from available for sale to held to maturity	$	(28	)	$	(40	)
Less: tax effect		10			14
Net amortization of unrealized losses on securities transferred from
available for sale to held to maturity	$	(18	)	$	(26	)

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

We present management’s discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about the major components of our results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes to the Interim Consolidated Financial Statements presented elsewhere in this report and the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in the Company’s 2015 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.

Internet Access to Corporate Documents

Information about the Company can be found on the Company’s investor relations website at http://www.evb.org. The Company posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those documents as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. All such filings are available at no charge. The information on the Company’s website is not, and shall not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated into any other filings the Company makes with the SEC.

Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Exchange Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, income or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services, the performance of portions of the Company’s asset portfolio, future changes to the Bank’s branch network and the payment of dividends; (iii) statements of future financial performance and economic conditions; (iv) statements regarding the adequacy of the allowance for loan losses; (v) statements regarding the Company’s liquidity; (vi) statements of management’s expectations regarding future trends in interest rates, real estate values, business opportunities and economic conditions generally and in the Company’s markets; (vii) statements regarding future asset quality, including expected levels of charge-offs; (viii) statements regarding potential changes to laws, regulations or administrative guidance; (ix) statements regarding strategic initiatives of the Company or the Bank and the results of these initiatives; and (x) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

factors that adversely affect our strategic and business initiatives, including, without limitation, changes in the economic or business conditions in the Company’s markets;

our ability and efforts to assess, manage and improve our asset quality;

the strength of the economy in the Company’s target market area, as well as general economic, market, political, or business factors;

changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers or issuers;

concentrations in segments of the loan portfolio or declines in real estate values in the Company’s markets;

the effects of our adjustments to the composition of our investment portfolio;

the strength of the Company’s counterparties;

an insufficient allowance for loan losses;

our ability to meet the capital requirements of our regulatory agencies;

changes in laws, regulations and the policies of federal or state regulators and agencies, including the Basel III Capital Rules;

changes in the interest rates affecting our deposits and loans;

the loss of any of our key employees;

failure, interruption or breach of any of the Company’s communication or information systems, including those provided by external vendors;

the effects of cyber-attacks or other security breaches;

our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth;

future mergers or acquisitions, if any;

changes in government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan products and financial services;

our ability to maintain internal control over financial reporting;

our ability to realize our deferred tax assets, including in the event the Company experiences an ownership change as defined by Section 382 of the Code;

our ability to raise capital as needed by our business;

our reliance on secondary sources, such as FHLB advances, sales of securities and loans and federal funds lines of credit from correspondent banks to meet our liquidity needs; and

other circumstances, many of which are beyond our control.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions and projections within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, actions or achievements of the Company will not differ materially from any future results, performance, actions or achievements expressed or implied by such forward-looking statements. Readers should not place undue reliance on such statements, which speak only as of the date of this report. The Company does not undertake any steps to update any forward-looking statement that may be made from time to time by it or on its behalf. For additional information on risk factors that could affect the Company’s forward-looking statements, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and other reports filed with the SEC.

Critical Accounting Policies

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.

Allowance for Loan Losses

The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. For more information see the section titled “Asset Quality” within this Item 2.

Impairment of Loans

The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The Company does not consider a loan impaired during a period of insignificant payment shortfalls if we expect the ultimate collection of all amounts due. Impairment is measured on a loan by loan basis for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans, representing consumer, one to four family residential first and seconds and home equity lines, are collectively evaluated for impairment. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are also considered impaired loans. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial condition, grants a concession (including, without limitation, rate reductions to below-market rates, payment deferrals, forbearance and, in some cases, forgiveness of principal or interest) to the borrower that it would not otherwise consider. For more information see the section titled “Asset Quality” within this Item 2.

Loans Acquired in a Business Combination

The Company accounts for loans acquired in a business combination in accordance with the FASB ASC Topic 805, “Business Combinations.” Accordingly, acquired loans are segregated between PCI loans and purchased performing loans and are recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair market value, PCI loans are aggregated into pools of loans based on common characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing or PCI loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition.

Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss). For equity securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Other Real Estate Owned

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings.

Goodwill

With the adoption of FASB ASU 2011-08, “Intangible-Goodwill and Other-Testing Goodwill for Impairment,” the Company is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill, it determines that it is more likely than not that the fair value of goodwill is less than its carrying amount. If the likelihood of impairment is more than 50 percent, the Company must perform a test for impairment and we may be required to record impairment charges. In assessing the recoverability of the Company’s goodwill, the Company must make assumptions in order to determine the fair value of the respective assets. Major assumptions used in the impairment analysis were discounted cash flows, merger and acquisition transaction values (including as compared to tangible book value), and stock market capitalization. The Company chose to bypass the preliminary assessment of qualitative impairment factors and completed its annual goodwill impairment test during the fourth quarter of 2015 through the use of an independent third party specialist and determined there was no impairment to be recognized in 2015. If the underlying estimates and related assumptions change in the future, the Company may be required to record impairment charges.

Retirement Plan

The Company has historically maintained a defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended on February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participant’s account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

Accounting for Income Taxes

Determining the Company’s effective tax rate requires judgment. In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Company’s tax returns are subject to audit by various tax authorities. Although we believe that the estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. For more information, see Item 1. “Financial Statements,” under the heading “Note 5. Deferred Income Taxes” in this Quarterly Report on Form 10-Q and Item 8. “Financial Statements and Supplementary Data,” under the headings “Note 1. Summary of Significant Accounting Policies” and “Note 11. Income Taxes” in the Company’s 2015 Form 10-K.

For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1. Summary of Significant Accounting Policies” in the Company’s 2015 Form 10-K.

Business Overview

The Company provides a broad range of personal and commercial banking services including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower to make decisions at the local level, so they can provide timely lending decisions and respond promptly to customer inquiries. Having been in many of our markets for over 100 years, we have established relationships with and an understanding of our customers. We believe that, by offering our customers personalized service and a breadth of products, we can compete effectively as we expand within our existing markets and into new markets.

The Company is committed to delivering strong, long-term earnings using a prudent allocation of capital, in business lines where we have demonstrated the ability to compete successfully. During the first three months of 2016, the national and local economies continued to show slow, but measured signs of recovery with the main challenges continuing to be underemployment above historical levels and uneven economic growth. Macro-economic and political issues continue to temper the global economic outlook and, as such, the Company remains cautiously optimistic regarding the improvements seen in our local markets. Despite this, the Company believes that our local markets are poised for stronger growth in the coming months and years than the economic recovery has provided in our markets in recent periods.

Since 2013 the Company has completed strategic initiatives that have significantly improved the Company’s financial condition. These initiatives represent significant progress toward the Company’s long-term goal of growing a more robust community banking business, and will provide the platform for continued growth and success in future periods. These initiatives include:

Raising in 2013 an aggregate of $50.0 million of gross proceeds from sales of the Company’s common stock and Series B Preferred Stock in private placements to certain institutional investors ($45.0 million in gross proceeds) and a rights offering to existing shareholders ($5.0 million in gross proceeds) (collectively, the “2013 Capital Initiative”);

Using a portion of the proceeds from the 2013 Capital Initiative to prepay long-term, higher-rate FHLB advances and to accelerate the disposition of adversely classified assets;

Paying all current and previously deferred interest and all current and previously deferred, but accumulated, dividends on the Company’s Junior Subordinated Debt and Series A Preferred Stock (as defined in Item 1 “Financial Statements,” under the heading “Note 12. Preferred Stock and Warrant” in this Quarterly Report on Form 10-Q), respectively;

Redeeming all of the Company’s Series A Preferred Stock, which eliminated one of the Company’s most expensive sources of capital;

Acquiring VCB effective November 14, 2014, thus adding three branches to the Bank’s branch network and an aggregate of $128.9 million of assets to the Company’s balance sheet. All former VCB branches have been fully integrated into the Bank’s branch network and operate as branches of the Bank, expanding the Bank’s branch network into the Virginia cities of Hampton, Newport News and Williamsburg;

Opening a loan production office in Chesterfield County, Virginia to increase the Bank’s presence in the Richmond metropolitan area;

Declaring dividends to holders of both the Company’s common stock and Series B Preferred Stock. Dividends of $0.01 were declared as of March 6, 2015 and May 8, 2015, which were paid on March 20, 2015 and May 22, 2015, respectively. Dividends of $0.02 were declared as of August 7, 2015, November 7, 2015 and February 19, 2016, which were paid on August 21, 2015, November 20, 2015 and March 4, 2016, respectively; and

Raising in the second quarter of 2015 an aggregate of $20.0 million in gross proceeds from sales of Senior Subordinated Debt (as defined in Item 1 “Financial Statements,” under the heading “Note 13. Junior and Senior Subordinated Debt” in this Quarterly Report on Form 10-Q) in private placements to certain institutional investors. A portion of these proceeds were used to redeem the remainder of the Company’s Series A Preferred Stock and to repurchase the Warrant (as defined in Item 1 “Financial Statements,” under the heading “Note 12. Preferred Stock and Warrant” in this Quarterly Report on Form 10-Q), that was issued to the Treasury through the Capital Purchase Program.

The Company expects to recognize the continued benefits of these initiatives during the remainder of 2016, including through lower interest expense related to the extinguished FHLB advances in 2013, elimination of the Series A Preferred Stock dividend as of June 15, 2015, additional interest income and cost savings related to the acquisition of VCB and positive contributions to the Company’s loan portfolio generated by the three branches acquired from VCB and the Chesterfield County, Virginia loan production office. During 2016, the Company also plans to continue its focus on developing online and mobile banking options and offering these products and services to the Bank’s customers.

While the Company has largely worked through the economic challenges of the past few years and believes that it is positioned for future success, in significant part due to the successful execution of the strategic initiatives summarized above, the Company will continue to evaluate business development and other strategic initiatives and opportunities it identifies during the remainder of 2016. These opportunities and initiatives could include opportunities to grow the Company’s business or strengthen the Bank’s branch network in existing or new markets. Also, during the first half of 2015, the Company engaged an independent consultant to conduct a comprehensive assessment of its operations. This assessment identified operating efficiencies and revenue enhancement opportunities. The Company has leveraged the assessment’s findings and with the Company’s focus on growth and profitability has begun to realize targeted increases in revenues and declines in certain noninterest expenses. Throughout the balance of 2016 and forward, we plan to evaluate and implement additional strategies that we believe will improve our performance and profitability and will increase the value of our company.

Summary of First Quarter 2016 Operating Results and Financial Condition

Table 1: Performance Summary

	Three Months Ended March 31,
(dollars in thousands, except per share data)	2016			2015
Net income ⁽¹⁾	$	2,227		$	1,609
Net income available to common shareholders ⁽¹⁾	$	2,227		$	1,389
Basic and diluted net income per common share	$	0.12		$	0.08
Return on average assets (annualized)		0.70	%		0.48	%
Return on average common shareholders' equity (annualized)		8.34	%		5.63	%
Net interest margin (tax equivalent basis)⁽²⁾		3.78	%		4.00	%

(1)

The difference between net income and net income available to common shareholders is the effective dividend to holders of the Company’s Series A Preferred Stock. The Company redeemed the remaining shares of Series A Preferred Stock during the second quarter of 2015.

(2)

For more information on the calculation of net interest margin on a tax equivalent basis, see the average balance sheet and net interest margin analysis for the three months ended March 31, 2016 and 2015 contained in "Results of Operations" in this Item 2.

For the three months ended March 31, 2016, the following were significant factors in the Company’s reported results:

Increase in net interest income of $441 thousand from the same period in 2015, principally due to a $762 thousand increase in interest and fees on loans driven primarily by loan growth, partially offset by an increase in interest expense primarily associated with the issuance of $20.0 million in Senior Subordinated Debt during the second quarter of 2015;

Net interest margin (tax equivalent basis) decreased 22 basis points to 3.78% during the first quarter of 2016 as compared to 4.00% for the same period of 2015 primarily due to a decline in yields on the loan portfolio and the impact of interest incurred on the Senior Subordinated Debt;

Net accretion attributable to accounting adjustments related to the VCB acquisition was $56 thousand for the first quarter of 2016, as compared to $178 thousand in the same period of 2015;

Decrease in salaries and employee benefits of $240 thousand from the same period in 2015, primarily due to reductions in staff levels during 2015 that were driven by operating efficiencies identified in the aforementioned comprehensive assessment of our operations;

There was $17 thousand in loan loss provisions recorded in the first quarter of 2016 compared to no provision in the same period of 2015. Net charge-offs increased to $408 thousand for the first quarter of 2016 from $363 thousand in the same period of 2015;

Nonperforming assets at March 31, 2016 increased $829 thousand from December 31, 2015, primarily due to a $441 thousand increase in nonaccrual loans and a $378 thousand increase in OREO. Nonperforming assets at March 31, 2016 decreased $1.3 million from March 31, 2015, primarily due to a $1.3 million decrease in nonaccrual loans and a $857 thousand decrease in OREO, partially offset by an increase of $887 thousand in loans past due 90 days and accruing interest;

Consultant fees decreased $121 thousand from the same period of 2015, primarily due to expenses incurred related to the aforementioned comprehensive assessment of our operations that was completed during 2015;

Increased collection, repossession and OREO expense of $76 thousand from the same period in 2015 due to increased collections costs associated with classified assets;

Marketing and advertising expenses increased $144 thousand as compared to the same period in 2015 due to the timing of campaigns and other initiatives;

Decrease in merger and merger related expenses of $221 thousand due to certain costs incurred during the first quarter of 2015 associated with the VCB acquisition that were not repeated in 2016; and

No effective dividend on preferred stock in the first quarter of 2016 as compared to $220 thousand from the same period of 2015. This was due to the redemption of the remaining 14,000 shares of the Company’s Series A Preferred Stock in transactions completed during the first and second quarters of 2015.

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income, the fundamental source of the Company’s earnings, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and investment securities, while deposits, short-term borrowings, Junior Subordinated Debt and Senior Subordinated Debt represent the major portion of interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations and the yield of our interest earning assets compared to our cost of funding these assets.

Net interest margin is calculated by expressing tax-equivalent net interest income as a percentage of average interest earning assets, and represents the Company’s net yield on its earning assets. Net interest margin is an indicator of the Company’s effectiveness in generating income from its earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competitive pressures, Federal Reserve Board policies and the economy. The spread that can be earned between interest earning assets and interest-bearing liabilities is also dependent to a large extent on the slope of the yield curve.

Table 2 presents the average balances of assets and liabilities, the average yields earned on such assets (on a tax equivalent basis) and rates paid on such liabilities, and the net interest margin for the three months ended March 31, 2016 and 2015.

Table 2: Average Balance Sheet and Net Interest Margin Analysis

	Three Months Ended March 31,
(dollars in thousands)	2016								2015
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (1)			Balance			Expense		Rate (1)
Assets:
Securities
Taxable	$	251,217		$	1,506		2.41	%	$	213,674		$	1,202		2.28	%
Restricted securities		8,984			115		5.15	%		7,787			108		5.62	%
Tax exempt (2)		10,508			100		3.84	%		38,211			375		3.98	%
Total securities		270,709			1,721		2.56	%		259,672			1,685		2.63	%
Interest bearing deposits in other banks		8,321			10		0.48	%		6,966			4		0.23	%
Federal funds sold		142			-		0.00	%		277			-		0.00	%
Loans, net of unearned income (3)		895,742			10,953		4.92	%		817,046			10,191		5.06	%
Total earning assets		1,174,914			12,684		4.34	%		1,083,961			11,880		4.44	%
Less allowance for loan losses		(11,221	)							(12,906	)
Total non-earning assets		111,556								113,691
Total assets	$	1,275,249							$	1,184,746

Liabilities & Shareholders' Equity:
Interest-bearing deposits
Checking	$	303,348		$	276		0.37	%	$	281,337		$	254		0.37	%
Savings		99,422			41		0.17	%		91,325			30		0.13	%
Money market savings		164,539			196		0.48	%		165,751			194		0.47	%
Large dollar certificates of deposit (4)		122,123			321		1.06	%		109,728			293		1.08	%
Other certificates of deposit		119,675			237		0.80	%		132,386			280		0.86	%
Total interest-bearing deposits		809,107			1,071		0.53	%		780,527			1,051		0.55	%
Federal funds purchased and repurchase agreements		5,530			7		0.51	%		11,735			18		0.62	%
Short-term borrowings		114,696			122		0.43	%		82,435			42		0.21	%
Junior subordinated debt		10,310			88		3.43	%		10,310			80		3.15	%
Senior subordinated debt		19,033			351		7.42	%		-			-		0.00	%
Total interest-bearing liabilities		958,676			1,639		0.69	%		885,007			1,191		0.55	%
Noninterest-bearing liabilities
Demand deposits		180,038								161,643
Other liabilities		7,591								6,754
Total liabilities		1,146,305								1,053,404
Shareholders' equity		128,944								131,342
Total liabilities and shareholders' equity	$	1,275,249							$	1,184,746

Net interest income (2)				$	11,045							$	10,689

Interest rate spread (2)(5)							3.65	%							3.89	%
Interest expense as a percent of average earning assets							0.56	%							0.45	%
Net interest margin (2)(6)							3.78	%							4.00	%

Notes:

(1)

Yields are annualized and based on average daily balances.

(2)

Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%, with a $30 adjustment for 2016 and a $115 adjustment in 2015.

(3)

Nonaccrual loans have been included in the computations of average loan balances.

(4)

Large dollar certificates of deposit are certificates issued in amounts of $100 or greater.

(5)

Interest rate spread is the average yield on earning assets, calculated on a fully taxable basis, less the average rate incurred on interest-bearing liabilities.

(6)

Net interest margin is the net interest income, calculated on a fully taxable basis, expressed as a percentage of average earning assets.

Interest Income and Expense

Net interest income and net interest margin

Net interest income in the first quarter of 2016 increased $441 thousand, or 4.2%, when compared to the first quarter of 2015. The Company's net interest margin (tax equivalent basis) decreased to 3.78% for the three months ended March 31, 2016, representing a 22 basis point decrease over the Company's net interest margin (tax equivalent basis) for the three months ended March 31, 2015. The quarter-over-quarter decline in the net interest margin (tax equivalent basis) was primarily driven by lower loan yields as a result of competitive pressures in the historically low rate environment, lower accretion of fair value adjustments related to the VCB acquisition and increased interest expense as a result of the private placement of $20.0 million of Senior Subordinated Debt in April 2015. These margin pressures were largely offset in the Company’s results for the quarter ended March 31, 2016, as compared to 2015, by the impact of increases in average loan balances. The most significant factors impacting net interest income during the three month period ended March 31, 2016 were as follows:

Positive Impacts:

Increases in average loan balances, primarily due to organic loan growth and loan purchases, partially offset by lower loan yields; and

Increases in average balances of total investment securities, partially offset by decreases in average yields earned.

Negative Impacts:

Private placement of $20.0 million of Senior Subordinated Debt resulting in increases to total average interest-bearing liabilities and related interest expense;

Increases in average short-term borrowings balances and rates paid, primarily due to loan growth outpacing deposit growth and other strategic initiatives; and

The Company experienced higher average interest-bearing deposit balances during the three months ended March 31, 2016 over the comparable 2015 period, primarily due to customer growth. However, average rates paid on total interest-bearing deposits decreased 2 basis points for the three months ended March 31, 2016 over the comparable period in 2015. The result was a slight increase in interest expense attributable to the Company’s deposit portfolio.

Total interest and dividend income

Total interest and dividend income increased 7.6% for the three months ended March 31, 2016, as compared to the same period in 2015. The increase in total interest and dividend income during the three months ended March 31, 2016 was primarily driven by an increase in average loan and investment securities balances, partially offset by a decrease in average loan and investment securities yields.

Loans

Average loan balances increased for the three month period ended March 31, 2016, as compared to the same period in 2015, primarily due to organic loan growth and the purchase of $29.5 million in performing one-to-four family residential mortgage loans, consumer loans and government guaranteed loans between June 2015 and March 2016. Loan growth during the first quarter of 2016 outpaced our internal targets. However, loan growth in our rural markets, especially with respect to consumer loans, remains weak while competition for commercial loans, especially in the Richmond and Tidewater markets, has been and we expect will continue to be intense given the historically low rate environment. The Company’s average loan balances increased $78.7 million for the three months ended March 31, 2016 as compared to average loan balances for the same period in 2015. Total average loans were 76.2% of total average interest-earning assets for the three months ended March 31, 2016, compared to 75.4% for the three months ended March 31, 2015.

Investment securities

Average total investment securities balances increased 4.3% for the three month period ended March 31, 2016 as compared to the same period in 2015. The overall increase was the result of measured loan demand in the Company’s markets, management of the Company’s liquidity needs to support its operations and funds provided by deposit growth, partially offset by a lack of investment opportunities with acceptable risk-adjusted rates of return. The Company remains committed to its long-term target of managing the investment securities portfolio to comprise 20% of the Company’s total assets. The yields on average investment securities decreased 7 basis points for the three months ended March 31, 2016, as compared to the same period in 2015. The decrease in yields on average investment securities during the three month period ended March 31, 2016, as compared to the same period in 2015, was driven by a lower allocation of the investment securities portfolio to SBA Pool securities and tax exempt municipal securities, both of which also tend to be higher-yielding segments of the Company’s investment securities portfolio. These decreases were partially offset by higher interest rates and a greater allocation of the investment securities portfolio to higher yielding Agency CMO securities, Agency CMBS securities and taxable municipal securities.

Interest-bearing deposits

Average total interest-bearing deposit balances increased for the three month period ended March 31, 2016, as compared to the same period in 2015, primarily due to organic deposit growth that was in part driven by the Company’s marketing and advertising initiatives.

Borrowings

Average total borrowings increased for the three month period ended March 31, 2016, as compared to the same period in 2015, primarily due to the issuance of $20.0 million in Senior Subordinated Debt in April 2015 and increased short-term borrowings. Average short-term borrowings increased for the three month period ended March 31, 2016, as compared to the same period in 2015, due to additional short-term FHLB advances to fund loan growth and other strategic initiatives.

Noninterest Income

Noninterest income is comprised of all sources of income other than interest and dividend income on our earning assets. Significant revenue items include fees collected on certain deposit account transactions, debit and credit card fees, fees from other general services, earnings from other investments we own in part or in full and gains or losses on sales of investment securities, loans, and fixed assets.

The following table depicts the components of noninterest income for the three months ended March 31, 2016 and 2015:

Table 3: Noninterest Income

	Three Months Ended March 31,
(dollars in thousands)	2016			2015		Change $			Change %
Service charges and fees on deposit accounts	$	739		$	663	$	76			11.5	%
Debit card/ATM fees		397			363		34			9.4	%
Gain on sale of available for sale securities, net		65			25		40			160.0	%
(Loss) gain on sale of bank premises and equipment		(4	)		3		(7	)		-233.3	%
Other operating income		354			465		(111	)		-23.9	%
Total noninterest income	$	1,551		$	1,519	$	32			2.1	%

Key changes in the components of noninterest income for the three months ended March 31, 2016, as compared to the same period in 2015, are discussed below:

Service charges and fees on deposit accounts increased primarily due to increases in service charge, overdraft and NSF fees on checking accounts;

Debit card/ATM fees increased primarily due to an increase in debit card fees driven by a higher utilization rate of debit cards by our customer base;

Gain on sale of available for sale securities, net increased for the first quarter of 2016 compared to the same period of 2015 primarily as a result of the Company adjusting the composition of the investment securities portfolio as part of the Company’s overall asset/liability management strategy; and

Other operating income decreased primarily due to lower earnings from the Bank’s subsidiaries and its investment in Bankers Insurance, LLC, partially offset by higher earnings from the Bank’s investment in Southern Trust Mortgage, LLC. Additionally, other operating income includes earnings from the Bank’s investment in Bankers Title, LLC and losses from the Bank’s investment in housing equity funds.

Noninterest Expense

Noninterest expense includes all expenses with the exception of those paid for interest on borrowings and deposits. Significant expense items included in this component are salaries and employee benefits, occupancy and equipment expenses and other operating expenses.

The following table depicts the components of noninterest expense for the three months ended March 31, 2016 and 2015:

Table 4: Noninterest Expense

	Three Months Ended March 31,
(dollars in thousands)	2016		2015		Change $			Change %
Salaries and employee benefits	$	5,248	$	5,488	$	(240	)		-4.4	%
Occupancy and equipment expenses		1,430		1,514		(84	)		-5.5	%
Telephone		208		197		11			5.6	%
FDIC expense		203		172		31			18.0	%
Consultant fees		222		343		(121	)		-35.3	%
Collection, repossession and other real estate owned		165		89		76			85.4	%
Marketing and advertising		461		317		144			45.4	%
Loss on sale of other real estate owned		1		32		(31	)		-96.9	%
Impairment losses on other real estate owned		-		5		(5	)		-100.0	%
Merger and merger related expenses		-		221		(221	)		-100.0	%
Other operating expenses		1,481		1,589		(108	)		-6.8	%
Total noninterest expenses	$	9,419	$	9,967	$	(548	)		-5.5	%

Key changes in the components of noninterest expense for the three months ended March 31, 2016, as compared to the same period in 2015, are discussed below:

Salaries and employee benefits decreased primarily due to the reduction in staff levels initiated in the second half of 2015 (which was driven by operating efficiencies identified in the aforementioned comprehensive assessment of our operations), increased deferred compensation on loan originations and reduced commissions. These decreases were partially offset by an increase in group insurance expense, recruiter fees, bonuses and other incentive compensation;

FDIC expense increased due to a higher assessment base in the first quarter of 2016 as compared to the first quarter of 2015;

Consultant fees decreased from the same period of 2015, primarily due to expenses incurred related to the aforementioned comprehensive assessment of our operations that was completed during 2015;

Collection, repossession and other real estate owned expenses increased for the first quarter of 2016 due to increases in collection costs associated with classified assets;

Marketing and advertising expenses increased due to the timing of campaigns and other initiatives;

Loss on sale of other real estate owned recorded during the first quarter of 2015 was primarily due to the resolution and disposition of a distressed property that was sold during that period, with minimal losses occurring during the same period in 2016; and

Merger and merger related expenses incurred during the first quarter of 2015 were related to the acquisition of VCB in 2014, and no similar expenses were incurred during the same period in 2016.

Income Taxes

The Company recorded income tax expense of $903 thousand for the three months ended March 31, 2016, as compared to $517 thousand for the same period of 2015, reflecting a $386 thousand increase in income tax expense.

The increase in income tax expense for the three months ended March 31, 2016, as compared to the same period in 2015, was primarily due to the Company’s pretax income increasing by $1.0 million and a reduction in tax-exempt interest income from the Company’s investment securities portfolio. The decrease in tax-exempt interest income was primarily a result of the Company decreasing the percentage of tax-exempt investment securities that comprised its overall investment securities portfolio.

The effective tax rate for the three months ended March 31, 2016 was 28.8%, as compared to 24.3% for the same period in 2015. The increase in the effective tax rate from the first three months of 2015 to the same period in 2016 was primarily due to a decrease in tax-exempt interest income from the Company’s investment securities portfolio, as discussed above.

Asset Quality

Provision and Allowance for Loan Losses

The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as probable credit losses inherent in the loan portfolio, and is based on periodic evaluations of the collectability and historical loss experience of loans. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio. Actual credit losses are deducted from the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is comprised of a specific allowance for identified problem loans and a general allowance representing estimations performed pursuant to either FASB ASC Topic 450 “Accounting for Contingencies”, or FASB ASC Topic 310 “Accounting by Creditors for Impairment of a Loan.” The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when deemed appropriate. The general component covers non-classified or performing loans and those loans classified as substandard, doubtful or loss that are not impaired. The general component is based on migration analysis adjusted for qualitative factors, such as economic conditions, interest rates and unemployment rates. The Company uses a risk grading system for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

Pass Grades

Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;

Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

Risk Grade 4 loans are satisfactory loans with borrowers not as strong as risk grade 3 loans but may exhibit a higher degree of financial risk based on the type of business supporting the loan; and

Risk Grade 5 loans are loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay.

Special Mention

Classified Grades

Risk Grade 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as a bank asset is not warranted.

The Company uses a past due grading system for consumer loans, including one to four family residential first and seconds and home equity lines. The past due status of a loan is based on the contractual due date of the most delinquent payment due. The past due grading of consumer loans is based on the following categories: current, 1-29 days past due, 30-59 days past due, 60-89 days past due and over 90 days past due. The consumer loans are segregated between performing and nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue interest, are greater than 90 days past due and accruing interest or considered impaired. Non-impaired consumer loans are assigned an allowance factor which increases with the severity of past due status. This component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

The Company's ALL Committee is responsible for assessing the overall appropriateness of the allowance for loan losses and monitoring the Company's allowance for loan losses methodology, particularly in the context of current economic conditions and a rapidly changing regulatory environment. The ALL Committee reviews at least annually the Company's allowance for loan losses methodology.

The allocation methodology applied by the Company includes management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of migration analysis and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of classified loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. In determining the allowance for loan losses, the Company considers its portfolio segments and loan classes to be the same.

Management believes that the level of the allowance for loan losses is appropriate in light of the credit quality and anticipated risk of loss in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses through increased provisions for loan losses or may require that certain loan balances be charged-off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examinations.

The following table presents the Company’s loan loss experience for the periods indicated:

Table 5: Allowance for Loan Losses

	Three Months Ended March 31,
(dollars in thousands)	2016			2015
Average loans outstanding*	$	895,742		$	817,046
Allowance for loan losses, January 1	$	11,327		$	13,021
Charge-offs:
Commercial, industrial and agricultural		(46	)		-
Real estate - one to four family residential:
Closed end first and seconds		(373	)		(285	)
Home equity lines		-			(108	)
Real estate - construction:
One to four family residential		-			(1	)
Real estate - non-farm, non-residential:
Owner occupied		(208	)		-
Consumer		(33	)		(1	)
Other		(15	)		(12	)
Total loans charged-off		(675	)		(407	)
Recoveries:
Commercial, industrial and agricultural		26			9
Real estate - one to four family residential:
Closed end first and seconds		81			7
Home equity lines		12			4
Real estate - construction:
One to four family residential		1			1
Real estate - non-farm, non-residential:
Owner occupied		63			-
Non-owner occupied		61			-
Consumer		15			18
Other		8			5
Total recoveries		267			44
Net charge-offs		(408	)		(363	)
Provision for loan losses		17			-
Allowance for loan losses, March 31	$	10,936		$	12,658
Ratios:
Ratio of allowance for loan losses to total loans outstanding, end of period		1.20	%		1.55	%
Ratio of annualized net charge-offs to average loans outstanding during the period		0.18	%		0.18	%

*Net of unearned income and includes nonaccrual loans.

The Company made a provision for loan losses of $17 thousand for the three months ended March 31, 2016 compared to no provision for loan losses for the same period in 2015. The allowance for loan losses totaled $10.9 million at March 31, 2016, representing a decline of $391 thousand from December 31, 2015 and a decline of $1.7 million from March 31, 2015. The decline in the allowance for loan losses from December 31, 2015 was primarily due to charge-offs of loans for which the Company had specifically reserved. Impaired loans decreased approximately $1.3 million from December 31, 2015, primarily due to the upgraded credit quality of a large commercial borrower and the partial charge-off and foreclosure of another. The decline in the allowance for loan losses from March 31, 2015 was due to improvements in economic and financial conditions in the Company’s markets, improvements in the Company’s asset quality and charge-offs of loans for which the Company had specifically reserved. Additionally, due to purchase accounting related to the Company’s acquisition of VCB, the Company recorded loans acquired from VCB at fair value at the effective time of the acquisition, and any allowance for loan losses previously established by VCB was not recorded on the Company’s financial statements. Net charge-offs for the three months ended March 31, 2016 were $408 thousand, compared to $363 thousand for the same period of 2015. This represents, on an annualized basis, 0.18% of average loans outstanding for both the three months ended March 31, 2016 and 2015.

The allowance for loan losses represented 1.20% of period end loans at March 31, 2016, compared with 1.29% of year end loans at December 31, 2015.

The following table shows the allocation of the allowance for loan losses at the dates indicated. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any category of loan.

Table 6: Allocation of Allowance for Loan Losses

	At March 31,					At December 31,
	2016					2015
(dollars in thousands)	Allowance		Percent			Allowance		Percent
Commercial, industrial and agricultural	$	2,222		12.81	%	$	1,894		11.22	%
Real estate - one to four family residential:
Closed end first and seconds		1,637		25.35	%		1,609		26.43	%
Home equity lines		1,119		12.72	%		795		13.20	%
Real estate - multifamily residential		89		3.67	%		78		3.37	%
Real estate - construction:
One to four family residential		287		1.97	%		295		2.21	%
Other construction, land development and other land		2,307		5.46	%		2,423		5.32	%
Real estate - farmland		276		1.26	%		272		1.30	%
Real estate - non-farm, non-residential:
Owner occupied		1,349		20.53	%		1,964		21.27	%
Non-owner occupied		874		12.28	%		1,241		11.86	%
Consumer		306		2.31	%		287		2.27	%
Other		470		1.64	%		469		1.55	%
Total allowance for loan losses	$	10,936		100.00	%	$	11,327		100.00	%

(Percent is portfolio loans in category divided by total loans.)

Tabular presentations of commercial loans by credit quality indicator and consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at March 31, 2016 and December 31, 2015 can be found under Item 1. “Financial Statements,” under the heading “Note 4. Loan Portfolio.”

Nonperforming Assets

Real estate acquired through, or in lieu of, foreclosure (or OREO) is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Cost includes loan principal and accrued interest. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings. Development and improvement costs relating to property are capitalized. Net operating income or expenses of such properties are included in collection, repossession and OREO expenses.

The following table presents information concerning nonperforming assets as of and for the three months ended March 31, 2016 and the year ended December 31, 2015:

Table 7: Nonperforming Assets

	March 31,			December 31,
(dollars in thousands)	2016			2015			Change $		Change %
Nonaccrual loans*	$	6,616		$	6,175		$	441		7.1	%
Loans past due 90 days and accruing interest		1,127			1,117			10		0.9	%
Total nonperforming loans	$	7,743		$	7,292		$	451		6.2	%
Other real estate owned		898			520			378		72.7	%
Total nonperforming assets	$	8,641		$	7,812		$	829		10.6	%

Nonperforming assets to total loans and other real estate owned		0.95	%		0.89	%
Allowance for loan losses to nonaccrual loans		165.31	%		183.43	%
Allowance for loan losses to nonperfoming loans		141.25	%		155.34	%
Annualized net charge-offs to average loans for the period		0.18	%		0.20	%
Allowance for loan losses to period end loans		1.20	%		1.29	%

*Includes $1.2 million and $1.3 million in nonaccrual TDRs at March 31, 2016 and December 31, 2015, respectively.

The following table presents the change in the OREO balance for the three months ended March 31, 2016 and 2015:

Table 8: OREO Changes

	March 31,
(dollars in thousands)	2016			2015			Change $			Change %
Balance at the beginning of period, gross	$	522		$	1,914		$	(1,392	)		-72.7	%
Transfers from loans		466			384			82			21.4	%
Capitalized costs		-			1			(1	)		-100.0	%
Sales proceeds		(87	)		(431	)		344			79.8	%
Previously recognized impairment losses on disposition		-			(78	)		78			100.0	%
Loss on disposition		(1	)		(32	)		31			96.9	%
Balance at the end of period, gross		900			1,758			(858	)		-48.8	%
Less valuation allowance		(2	)		(3	)		1			33.3	%
Balance at the end of period, net	$	898		$	1,755		$	(857	)		-48.8	%

The following table presents the change in the valuation allowance for OREO for the three months ended March 31, 2016 and 2015:

Table 9: OREO Valuation Allowance Changes

	March 31,
(dollars in thousands)	2016		2015
Balance at the beginning of period	$	2	$	76
Valuation allowance		-		5
Charge-offs		-		(78	)
Balance at the end of period	$	2	$	3

Nonperforming assets were $8.6 million, or 0.95%, of total loans and OREO at March 31, 2016 compared to $7.8 million, or 0.89%, at December 31, 2015. The slow and measured economic recovery has prompted the Company to maintain the heightened level of the allowance for loan losses, which was 165.31% of nonaccrual loans at March 31, 2016, compared to 183.43% at December 31, 2015. Nonperforming loans increased $451 thousand, or 6.2%, during the three months ended March 31, 2016 to $7.7 million, primarily due to increases in nonaccrual loans.

Nonaccrual loans were $6.6 million at March 31, 2016, an increase of $441 thousand, or 7.1%, from $6.2 million at December 31, 2015. Of the current $6.6 million in nonaccrual loans, $6.4 million, or 97.2%, is secured by real estate in our market area. Of these real estate secured loans, $5.8 million are one to four family residential real estate and $676 thousand are commercial properties.

Loans past due 90 days and accruing interest were $1.1 million at March 31, 2016, an increase of $10 thousand from December 31, 2015 and an increase of $887 thousand from $240 thousand at March 31, 2015. The increase from March 31, 2015 was due to the nonpayment of a large one to four family residential real estate loan as a result of the deteriorating financial condition of the borrower. This loan has remained on accrual status as it is well secured and full recovery is anticipated.

OREO, net of valuation allowance at March 31, 2016 was $898 thousand, an increase of $378 thousand, or 72.7%, from December 31, 2015. The balance of OREO at March 31, 2016 was comprised of fifteen properties of which $68 thousand were real estate construction properties, $761 thousand were closed end one to four family residential properties and $69 thousand were nonfarm nonresidential properties. During the three months ended March 31, 2016, new foreclosures included seven properties totaling $466 thousand transferred from loans. Sales of two OREO properties for the three months ended March 31, 2016 resulted in a net loss of $1 thousand. Subsequent to March 31, 2016, one property totaling $132 thousand was foreclosed on and transferred from loans, three properties were sold that resulted in a net loss of $19 thousand and one property totaling $50 thousand was placed under contract for sale and is not expected to generate any material loss on sale. The remaining properties are being actively marketed and the Company does not anticipate any material losses associated with these properties. The Company recorded no losses in its consolidated statements of income for the three months ended March 31, 2016, due to valuation adjustments on OREO properties as compared to $5 thousand for the same period of 2015. Asset quality continues to be a top priority for the Company. The Company continues to allocate significant resources to the expedient disposition and collection of nonperforming and other lower quality assets.

As discussed earlier in this Item 2, the Company measures impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are considered impaired loans. TDRs occur when we agree to modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions can be temporary and are made in an attempt to avoid foreclosure and with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include, without limitation, rate reductions to below market rates, payment deferrals, forbearance, and, in some cases, forgiveness of principal or interest.

A tabular presentation of loans individually evaluated for impairment by class of loans at March 31, 2016 and December 31, 2015 can be found under Item 1. “Financial Statements,” under the heading “Note 4. Loan Portfolio” in this Quarterly Report on Form 10-Q.

At March 31, 2016, the balance of impaired loans was $34.0 million, for which there were specific valuation allowances of $3.7 million. At December 31, 2015, the balance of impaired loans was $35.4 million, for which there were specific valuation allowances of $4.6 million. The average balance of impaired loans was $34.5 million for the three months ended March 31, 2016, compared to $36.3 million for the year ended December 31, 2015. Impaired loans decreased approximately $1.3 million from December 31, 2015, primarily due to the upgraded credit quality of a large commercial borrower and the partial charge-off and foreclosure of another. The Company’s balance of impaired loans remains elevated over pre-2009 levels primarily due to performing TDRs, against which there are no valuation allowances.

The following table presents the balances of TDRs at March 31, 2016 and December 31, 2015:

Table 10: Troubled Debt Restructurings (TDRs)

	March 31,		December 31,
(dollars in thousands)	2016		2015		Change $			Change %
Performing TDRs	$	15,158	$	15,535	$	(377	)		-2.4	%
Nonperforming TDRs*		1,209		1,300		(91	)		-7.0	%
Total TDRs	$	16,367	$	16,835	$	(468	)		-2.8	%

*Included in nonaccrual loans in Table 7: Nonperforming Assets.

Financial Condition

Summary

At March 31, 2016, the Company had total assets of $1.29 billion, an increase of approximately $15.8 million, or 1.2%, from $1.27 billion at December 31, 2015. The increase in total assets was principally the result of increases in loans and investment securities primarily funded by short-term borrowings, continued deposit growth and a reduction in interest bearing deposits with banks. Major categories and changes in our balance sheet are as detailed in the following schedule.

Table 11: Balance Sheet Changes

	March 31,		December 31,
(dollars in thousands)	2016		2015		Change $			Change %
Total assets	$	1,286,185	$	1,270,384	$	15,801			1.2	%
Interest bearing deposits with banks		3,067		18,304		(15,237	)		-83.2	%
Securities available for sale, at fair value		236,496		230,943		5,553			2.4	%
Securities held to maturity, at carrying value		29,472		29,698		(226	)		-0.8	%
Total loans		908,950		880,778		28,172			3.2	%
Total deposits		998,880		988,719		10,161			1.0	%
Total borrowings		149,925		148,760		1,165			0.8	%
Total shareholders' equity		130,514		126,275		4,239			3.4	%

Investment Securities

The investment securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity. In addition, the investment securities portfolio serves as a source of liquidity and is used as needed to meet collateral requirements, such as those related to secure public deposits, balances with the Reserve Bank and repurchase agreements. The investment securities portfolio consists of held to maturity and available for sale investment securities. There were no investment securities classified as “trading” at March 31, 2016 or December 31, 2015. We classify investment securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the investment securities until maturity. Management determines the appropriate classification of investment securities at the time of purchase, subject to any subsequent change in our intent and ability to hold the investment securities until maturity. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Investment securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at estimated fair value.

Table 12: Investment Securities

	March 31,		December 31,
(dollars in thousands)	2016		2015		Change $			Change %
Available for Sale (at Fair Value):
Obligations of U.S. Government agencies	$	8,000	$	9,262	$	(1,262	)		-13.6	%
SBA Pool securities		64,328		63,826		502			0.8	%
Agency residential mortgage-backed securities		22,143		23,903		(1,760	)		-7.4	%
Agency commercial mortgage-backed securities		23,524		18,315		5,209			28.4	%
Agency CMO securities		53,396		52,171		1,225			2.3	%
Non agency CMO securities		56		61		(5	)		-8.2	%
State and political subdivisions		63,056		61,405		1,651			2.7	%
Corporate securities		1,993		2,000		(7	)		-0.4	%
Total	$	236,496	$	230,943	$	5,553			2.4	%

	March 31,		December 31,
(dollars in thousands)	2016		2015		Change $			Change %
Held to Maturity (at Carrying Value):
Agency CMO securities	$	11,186	$	11,371	$	(185	)		-1.6	%
State and political subdivisions		18,286		18,327		(41	)		-0.2	%
Total	$	29,472	$	29,698	$	(226	)		-0.8	%

Total investment securities were $266.0 million at March 31, 2016, reflecting an increase of approximately $5.3 million, or 2.0%, from $260.6 million at December 31, 2015. The increase in the investment securities portfolio during the first three months of 2016 was the result of investing excess liquidity that resulted from increases in total deposits and borrowings.

During the first three months of 2016, the Company primarily invested in Agency commercial mortgage-backed securities, Agency CMO securities and securities issued by State and political subdivisions. The Company decreased its investments in Agency residential mortgage-backed securities while increasing its investments in Agency commercial mortgage-backed securities and Agency CMO securities in an effort to enhance the portfolio’s overall structure and provide more consistent cash flows and reinvestment opportunities. As part of our overall asset/liability management strategy, we are targeting our investment securities portfolio to be approximately 20% of our total assets. As of March 31, 2016 and December 31, 2015, our investment securities portfolio was 20.7% and 20.5%, respectively, of total assets.

The available for sale portfolio had an unrealized gain, net of tax expense, of $581 thousand at March 31, 2016 compared with an unrealized (loss), net of tax benefit, of ($1.7) million at December 31, 2015. These unrealized gains as of March 31, 2016 are principally due to financial market conditions for these types of investments, particularly changes in interest rates, which decreased during the first three months of 2016 causing bond prices to increase and thereby decreased the amount of unrealized losses at March 31, 2016.

Loans

The Company offers an array of lending and credit services to customers including mortgage, commercial and consumer loans. A substantial portion of the loan portfolio is represented by commercial and residential mortgage loans in our market area. The ability of our debtors to honor their contracts is dependent upon the real estate and general economic conditions in our market area. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. Total loans were $909.0 million at March 31, 2016, an increase of approximately $28.2 million, or 3.2%, from $880.8 million at December 31, 2015. The following table presents the composition of the Company’s loan portfolio at the dates indicated.

Table 13: Loan Portfolio

	March 31,		December 31,
(dollars in thousands)	2016		2015		Change $			Change %
Commercial, industrial and agricultural	$	116,470	$	98,828	$	17,642			17.9	%
Real estate - one to four family residential:
Closed end first and seconds		230,507		232,826		(2,319	)		-1.0	%
Home equity lines		115,633		116,309		(676	)		-0.6	%
Total real estate - one to four family residential		346,140		349,135		(2,995	)		-0.9	%
Real estate - multifamily residential		33,363		29,672		3,691			12.4	%
Real estate - construction:
One to four family residential		17,866		19,495		(1,629	)		-8.4	%
Other construction, land development and other land		49,648		46,877		2,771			5.9	%
Total real estate - construction		67,514		66,372		1,142			1.7	%
Real estate - farmland		11,431		11,418		13			0.1	%
Real estate - non-farm, non-residential:
Owner occupied		186,507		187,224		(717	)		-0.4	%
Non-owner occupied		111,592		104,456		7,136			6.8	%
Total real estate - non-farm, non-residential		298,099		291,680		6,419			2.2	%
Consumer		20,964		19,993		971			4.9	%
Other		14,969		13,680		1,289			9.4	%
Total loans	$	908,950	$	880,778	$	28,172			3.2	%

Loans increased during the first three months of 2016 primarily due to organic loan growth and the purchase of loans. However, loan growth in the Company’s rural markets, primarily on the consumer side, remained weak while competition for commercial loans, especially in the Richmond and Tidewater markets, has been and is expected to continue to be intense given the historically low rate environment and increased competition among banks and other financial institutions.

Deposits

The Company’s predominant source of funds is depository accounts. The Company’s deposit base, which is provided by individuals and businesses located within the communities served, is comprised of demand deposits, savings and money market accounts, and time deposits. The Company augments its deposit base through conservative use of brokered deposits, including through the Certificate of Deposit Account Registry Service program (“CDARS”). The Company’s balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios.

Total deposits were $998.9 million as of March 31, 2016, an increase of approximately $10.2 million, or 1.0%, from $988.7 million as of December 31, 2015. The following table presents the composition of the Company’s deposits at the dates indicated.

Table 14: Deposits

	March 31,		December 31,
(dollars in thousands)	2016		2015		Change $			Change %
Noninterest-bearing demand deposits	$	189,069	$	174,071	$	14,998			8.6	%

Interest-bearing deposits:
Demand deposits		305,231		306,503		(1,272	)		-0.4	%
Savings deposits		101,266		97,407		3,859			4.0	%
Money market savings deposits		161,718		172,530		(10,812	)		-6.3	%
Time deposits $100 and over		123,762		119,098		4,664			3.9	%
Other time deposits		117,834		119,110		(1,276	)		-1.1	%
Total interest-bearing deposits		809,811		814,648		(4,837	)		-0.6	%
Total deposits	$	998,880	$	988,719	$	10,161			1.0	%

During the first three months of 2016, the Company’s deposits increased due to organic growth that was in part driven by the Company’s marketing and advertising initiatives. At March 31, 2016 and December 31, 2015, the Company had $61.1 million and $53.8 million in brokered certificates of deposits, respectively. The interest rates paid on these deposits are approximately consistent with the market rates offered in our local area. Included in these brokered certificates of deposits as of March 31, 2016 and December 31, 2015 are $35.7 million and $28.4 million, respectively, in deposits under the CDARS program.

Borrowings

The Company’s ability to borrow funds through non-deposit sources provides additional flexibility in meeting the liquidity needs of customers while enhancing its cost of funds structure. Total borrowings were $149.9 million at March 31, 2016, an increase of approximately $1.2 million, or 0.8%, from $148.8 million at December 31, 2015.

Off-Balance Sheet Arrangements

As of March 31, 2016, there have been no material changes to the off-balance sheet arrangements disclosed in the Company’s 2015 Form 10-K.

Contractual Obligations

As of March 31, 2016, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s 2015 Form 10-K.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations, including through the sale of existing assets or the acquisition of additional funds through short-term borrowings. Our liquidity is provided from cash and due from banks, interest bearing deposits with other banks, federal funds sold, repayments from loans, sales of loans, increases in deposits, lines of credit from the FHLB and three correspondent banks, sales of investments, interest and dividend payments received from investments and maturing investments. We also use other short and long-term borrowings to provide additional liquidity when available on terms favorable to the Company, including entering into repurchase agreements with customers and issuing subordinated debt and notes. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets and available borrowing capacity under certain of our borrowing sources. Depending on our liquidity levels, our capital position, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, or other possible capital market transactions, the proceeds of which could provide additional liquidity for operations.

As a result of our management of liquid assets and our ability to generate liquidity through liability funding, we believe that we maintain overall liquidity to satisfy our depositors’ requirements and to meet customers’ credit needs. We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit.

We monitor and plan our liquidity position for future periods. Liquidity strategies are implemented and monitored by our Asset/Liability Committee.

Cash, cash equivalents and federal funds sold totaled $15.4 million as of March 31, 2016 compared to $32.0 million as of December 31, 2015. At March 31, 2016, cash, cash equivalents, federal funds sold and unpledged securities available for sale were $215.7 million, or 16.8%, of total assets, compared to $204.4 million, or 16.1%, of total assets at December 31, 2015.

As disclosed in the Company’s consolidated statements of cash flows, net cash provided by operating activities was $4.4 million, net cash used in investing activities was $31.9 million and net cash provided by financing activities was $10.9 million for the three months ended March 31, 2016. Combined, this contributed to a $16.6 million decrease in cash and cash equivalents for the three months ended March 31, 2016.

The Company maintains access to short-term funding sources as well, including federal funds lines of credit with three correspondent banks up to $40.0 million and the ability to borrow from the FHLB up to $380.9 million. The Company has no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

Certificates of deposit of $100,000 or more, maturing in one year or less, totaled $60.0 million at March 31, 2016. Certificates of deposit of $100,000 or more, maturing in more than one year, totaled $63.8 million at March 31, 2016.

As of March 31, 2016, and other than referenced in this Quarterly Report on Form 10-Q, the Company was not aware of any other known trends, events or risks that have or are reasonably likely to have a material impact on our liquidity. As of March 31, 2016, the Company has no material commitments or long-term debt for capital expenditures.

Capital Resources

The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The Company regularly reviews the adequacy of the Company’s capital. The Company maintains a capital structure that it believes will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet regulatory capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weighting, and other factors.

In July 2013, the federal bank regulatory agencies adopted rules to implement the Basel III capital framework and a revised framework for calculating risk-weighted assets. The Basel III Capital Rules were effective for the Company and the Bank on January 1, 2015, and the phase-in period for the capital conservation buffer began for the Company and the Bank on January 1, 2016. For a summary of these final rules, see Part I, Item 1 under the heading “Regulation and Supervision – Capital Requirements” included in the Company’s 2015 Form 10-K.

Quantitative measures established by regulation to ensure capital adequacy require that the Bank maintain minimum amounts and ratios of total, common equity Tier 1 (or CET1) and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The capital conservation buffer requires that the Company and the Bank maintain additional CET1 above minimum capital adequacy requirements. Management believes, as of March 31, 2016, the Bank meets all minimum capital requirements to which it is subject.

As of March 31, 2016, the Bank was categorized as “well capitalized,” the highest level of capital adequacy. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, CET1 risked-based, Tier 1 risk-based, and Tier 1 leverage ratios. The Company’s and the Bank’s actual capital ratios as of March 31, 2016 and December 31, 2015 are presented under Item 1. “Financial Statements,” under the heading “Note 14. Capital Requirements” in this Quarterly Report on Form 10-Q.

Cash Dividends

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the bank. Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years, and may be further limited if the Bank does not meet the applicable capital conservation buffer. For the three months ended March 31, 2016 and 2015, no cash dividends have been paid from the Bank to the Company.

The Company’s Board of Directors determines whether to declare dividends and the amount of any dividends declared. Such determinations by the Board take into account the Company’s financial condition, results of operations and other relevant factors, including any relevant regulatory restrictions including limits that would be imposed if the Company fails to meet the capital conservation buffer.

For the three months ended March 31, 2016, the Company paid $0.02 of cash dividends to common shareholders and the holders of the Company’s Series B Preferred Stock, as compared to paying $0.01 of cash dividends in the same period of 2015.

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. The primary effect of inflation on the Company’s operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are significantly impacted by changes in the inflation rate, they do not necessarily change at the same time or in the same magnitude as the inflation rate. For additional information, see the Company’s 2015 Form 10-K in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Impact of Inflation and Changing Prices.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes from the quantitative and qualitative disclosures about market risk made in the Company’s 2015 Form 10-K.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2016 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Company’s periodic reports.

Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company and its subsidiaries may become a party to legal proceedings, or property of the Company or its subsidiaries may become subject to legal proceedings. As of March 31, 2016 and based on information currently available, there are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Item 1A. Risk Factors

There have been no material changes in the risk factors faced by the Company from those disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2015 Form 10-K. These risk factors could materially affect our business, financial condition or future results. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

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

In January 2001, the Company announced a stock repurchase program by which management was authorized to repurchase up to 300,000 shares of the Company’s common stock. This plan was amended in 2003 and the number of shares by which management is authorized to repurchase is up to 5% of the outstanding shares of the Company’s common stock on January 1 of each year. There is no stated expiration date for the program. During the three months ended March 31, 2016, the Company did not repurchase any shares of its common stock under the program.

The following table summarizes repurchases of the Company’s common stock that occurred during the three months ended March 31, 2016.

					Total Number		Maximum Number
					of Shares		(or Approximate Dollar
	Total Number				Purchased as Part of		Value) of Shares that May
	of Shares		Average Price Paid		Publicly Announced		Yet Be Purchased Under
(dollars in thousands, except for per share amounts)	Purchased		per Share		Plans or Programs		the Plans or Programs
January 1, 2016 - January 31, 2016		-	$	-		-		-
February 1, 2016 - February 29, 2016		-		-		-		-
March 1, 2016 - March 31, 2016		1,415		6.69		-		-
Total⁽¹⁾		1,415	$	6.69		-		651,477 shares

(1)

These shares were withheld from employees to satisfy tax withholding obligations arising upon the vesting of restricted shares of the Company’s common stock. Accordingly, these shares are not included in the calculation of shares that may yet be purchased under the publicly announced repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

2.1	Agreement and Plan of Reorganization, dated as of May 29, 2014, among Eastern Virginia Bankshares, Inc., EVB and Virginia Company Bank (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed May 30, 2014).
3.1	Amended and Restated Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective December 29, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed March 10, 2009).
3.1.1	Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective January 6, 2009 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 13, 2009).
3.1.2	Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective June 10, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 14, 2013).
3.2	Bylaws of Eastern Virginia Bankshares, Inc., as amended June 4, 2013 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed June 14, 2013).
10.18	Base salaries for executive officers of Eastern Virginia Bankshares, Inc.*
10.19	Non-employee directors’ annual compensation for Eastern Virginia Bankshares, Inc.*
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101	The following materials from Eastern Virginia Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to the Interim Consolidated Financial Statements (unaudited).

* Management contract or compensatory plan or arrangement.

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.

Eastern Virginia Bankshares, Inc.

(Registrant)

Date:	May 10, 2016	/s/ Joe A. Shearin
		Joe A. Shearin
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	May 10, 2016	/s/ J. Adam Sothen
		J. Adam Sothen
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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