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EX-32.1 - EXHIBIT 32.1 - Xenith Bankshares, Inc.a20160930exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Xenith Bankshares, Inc.a20160930exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Xenith Bankshares, Inc.a20160930exhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

Commission File Number:  001-32968
 
Xenith Bankshares, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Virginia
54-2053718
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
One James Center, 901 E. Cary Street, Suite 1700, Richmond, Virginia
23219
(Address of principal executive offices)
(Zip Code)
 
(804) 433-2200
(Registrant's telephone number, including area code)


(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 website, 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.  (Check one):
Large accelerated filer        ¨    Accelerated filer        ¨
Non-accelerated filer        ¨    Smaller reporting company    x
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
 
The number of shares of the issuer's Common Stock, par value $0.01 per share, outstanding as of November 4, 2016 was 230,908,387 shares.
 



XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)

Table of Contents
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Balance Sheets
 
September 30, 2016
 
 
December 31, 2015
 
 
 
 
 
Consolidated Statements of Operations
 
Three and nine months ended September 30, 2016 and 2015
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three and nine months ended September 30, 2016 and 2015
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Nine months ended September 30, 2016
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Nine months ended September 30, 2016 and 2015
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 
AND RESULTS OF OPERATIONS
 
 
 
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 4
CONTROLS AND PROCEDURES
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 1
LEGAL PROCEEDINGS
 
 
 
ITEM 1A
RISK FACTORS
 
 
 
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 6
EXHIBITS
 
 
 
 
SIGNATURES
 
 
 

2

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS




CONSOLIDATED BALANCE SHEETS
(unaudited)
 
 
 
(in thousands, except share data)
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Cash and due from banks
$
42,712

 
$
17,031

Interest-bearing deposits in other banks
4,791

 
691

Overnight funds sold and due from Federal Reserve Bank
62,406

 
46,024

Investment securities available for sale, at fair value
328,145

 
198,174

Restricted equity securities, at cost
24,475

 
9,830

Loans
2,471,032

 
1,538,952

Allowance for loan losses
(33,730
)
 
(23,157
)
Net loans
2,437,302

 
1,515,795

Premises and equipment, net
57,182

 
52,135

Interest receivable
9,205

 
4,116

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
6,293

 
12,409

Goodwill
26,225

 

Other intangible assets, net
3,918

 

Net deferred tax assets, net of valuation allowance
158,343

 
92,142

Bank-owned life insurance
71,658

 
50,695

Other assets
17,879

 
6,474

Assets of discontinued operations
74,933

 
60,424

Totals assets
$
3,325,467

 
$
2,065,940

Liabilities and Shareholders' Equity
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
507,300

 
$
298,351

Interest-bearing:
 
 
 
Demand
1,103,486

 
693,413

Savings
83,438

 
61,023

Time deposits:
 
 
 
Less than $250
807,553

 
592,089

$250 or more
84,831

 
60,269

Total deposits
2,586,608

 
1,705,145

Federal Home Loan Bank borrowings
197,500

 
25,000

Other borrowings
38,468

 
29,689

Interest payable
645

 
463

Other liabilities
22,921

 
13,974

Liabilities of discontinued operations
14,369

 
1,048

Total liabilities
2,860,511

 
1,775,319

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Preferred stock, 1,000,000 shares authorized; none issued
 
 
 
and outstanding

 

Common stock, $0.01 par value; 1,000,000,000 shares
 
 
 
authorized; 230,795,174 and 171,128,266 shares issued
 
 
 
and outstanding on September 30, 2016 and December 31, 2015,
 
 
 
respectively
2,308

 
1,711

Capital surplus
708,827

 
590,417

Accumulated deficit
(250,711
)
 
(302,580
)
Accumulated other comprehensive income, net of tax
3,388

 
560

Total shareholders' equity before non-controlling interest
463,812

 
290,108

Non-controlling interest of the discontinued operations
1,144

 
513

Total shareholders' equity
464,956

 
290,621

Total liabilities and shareholders' equity
$
3,325,467

 
$
2,065,940

See accompanying notes to unaudited consolidated financial statements.

3

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
 
Nine Months Ended
(in thousands, except share and per share data)
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Interest Income
 
 
 
 
 
 
 
Loans, including fees
$
25,513

 
$
17,106

 
$
58,797

 
$
50,382

Investment securities
1,763

 
1,436

 
4,476

 
4,733

Overnight funds sold and deposits in other banks
96

 
28

 
179

 
126

Total interest income
27,372

 
18,570

 
63,452

 
55,241

Interest Expense
 

 
 

 
 

 
 

Deposits:
 

 
 

 
 

 
 

Demand
1,391

 
667

 
3,075

 
2,023

Savings
40

 
15

 
81

 
39

Time deposits
2,169

 
1,959

 
5,746

 
5,753

Interest on deposits
3,600

 
2,641

 
8,902

 
7,815

Federal Home Loan Bank borrowings
109

 
95

 
109

 
668

Other borrowings
652

 
439

 
1,706

 
1,281

Total interest expense
4,361

 
3,175

 
10,717

 
9,764

Net interest income
23,011

 
15,395

 
52,735

 
45,477

Provision for loan losses
10,685

 
(15
)
 
10,704

 
622

Net interest income after provision for loan losses
12,326

 
15,410

 
42,031

 
44,855

Noninterest Income
 

 
 

 
 

 
 

Service charges on deposit accounts
1,191

 
1,273

 
3,447

 
3,713

Earnings from bank-owned life insurance
395

 
302

 
1,046

 
956

Gain on sale of investment securities available for sale

 

 
15

 
238

Visa check card income
709

 
677

 
2,056

 
1,994

Other
575

 
441

 
1,430

 
547

Total noninterest income
2,870

 
2,693

 
7,994

 
7,448

Noninterest Expense
 

 
 

 
 

 
 

Salaries and employee benefits
9,880

 
10,100

 
24,990

 
26,091

Professional and consultant fees
978

 
1,459

 
2,101

 
3,584

Occupancy
1,594

 
1,556

 
4,428

 
4,654

FDIC insurance
679

 
339

 
1,524

 
1,361

Data processing
1,446

 
1,466

 
3,985

 
4,285

Problem loan and repossessed asset costs
219

 
538

 
420

 
1,150

Impairments and gains and losses on sales of other real estate owned and repossessed assets, net
685

 
225

 
112

 
1,471

Impairments and gains and losses on sale of premises and equipment, net
42

 

 
41

 
14

Equipment
309

 
300

 
812

 
942

Board fees
493

 
433

 
1,133

 
1,028

Advertising and marketing
398

 
115

 
503

 
389

Merger-related
12,910

 

 
15,555

 

Other
2,902

 
1,948

 
6,813

 
4,883

Total noninterest expense
32,535

 
18,479

 
62,417

 
49,852

(Loss) income from continuing operations before (benefit) provision for income taxes
(17,339
)
 
(376
)
 
(12,392
)
 
2,451

(Benefit) provision for income taxes
(64,840
)
 
28

 
(62,794
)
 
44

Net income (loss) from continuing operations
47,501

 
(404
)
 
50,402

 
2,407

Net income from discontinued operations before provision for income taxes
2,011

 
1,231

 
3,900

 
3,602

Provision for income taxes
842

 
23

 
877

 
82

Net income from discontinued operations attributable to non-controlling interest
806

 
501

 
1,556

 
1,563

Net income from discontinued operations
363

 
707

 
1,467

 
1,957

Net income attributable to Xenith Bankshares, Inc.
$
47,864

 
$
303

 
$
51,869

 
$
4,364

Basic and diluted income per share
$
0.23

 
$

 
$
0.28

 
$
0.03

See accompanying notes to unaudited consolidated financial statements.

4

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended
 
Nine Months Ended
(in thousands)
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Net income (loss) attributable to Xenith Bankshares, Inc.
 

 
$
47,864

 
 

 
$
303

 
 

 
$
51,869

 
 

 
$
4,364

Other comprehensive income, net of tax:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Change in unrealized gain on securities available for sale
$
475

 
 

 
$
350

 
 

 
$
4,178

 
 

 
$
1,048

 
 

Income tax effect

 
 

 

 
 

 
(1,340
)
 
 

 

 
 

Reclassification adjustment for securities gains included in net income

 
 

 

 
 

 
(15
)
 
 

 
(238
)
 
 

Income tax effect

 
 

 

 
 

 
5

 
 

 

 
 

Other comprehensive income, net of tax


 
475

 


 
350

 


 
2,828

 


 
810

Comprehensive income attributable to Xenith Bankshares, Inc.
 

 
$
48,339

 
 

 
$
653

 
 

 
$
54,697

 
 

 
$
5,174

See accompanying notes to unaudited consolidated financial statements.


5

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Accumulated Other
 

 

(unaudited)
Common Stock
 
Capital
 
Accumulated
 
Comprehensive Income,
 
Non-controlling
 
Total Shareholders'
(in thousands, except share data)
Shares
 
Amount
 
Surplus
 
Deficit
 
Net of Tax
 
Interest
 
Equity
Balance at December 31, 2015
171,128,266

 
$
1,711

 
$
590,417

 
$
(302,580
)
 
$
560

 
$
513

 
$
290,621

Net income

 

 

 
51,869

 

 
1,556

 
53,425

Other comprehensive income, net of tax

 

 

 

 
2,828

 

 
2,828

Issuance of common stock for the Merger
58,915,439

 
590

 
117,829

 

 

 

 
118,419

Share-based compensation expense

 

 
1,532

 

 

 

 
1,532

Net settlement of restricted stock units
725,069

 
7

 
(977
)
 

 

 

 
(970
)
Stock options exercised
26,400

 

 
26

 

 

 

 
26

Distributed non-controlling interest

 

 

 

 

 
(925
)
 
(925
)
Balance at September 30, 2016
230,795,174

 
$
2,308

 
$
708,827

 
$
(250,711
)
 
$
3,388

 
$
1,144

 
$
464,956

See accompanying notes to unaudited consolidated financial statements.

6

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
(in thousands)
September 30, 2016
September 30, 2015
Cash flows from operating activities
 

 

Net income from continuing operations
$
50,402

$
2,407

Net income from discontinued operations
3,023

3,520

Adjustments to reconcile net income to net cash used in operating activities:
 

 

Depreciation and amortization
2,146

2,387

Deferred income tax expense
(67,536
)

Amortization of fair value adjustments
(798
)
444

Provision for loan losses
10,704

622

Share-based compensation expense
1,532

1,428

Net amortization of premiums and accretion of discounts on investment securities available for sale
1,541

1,712

Income from bank-owned life insurance
(1,046
)
(956
)
Gain on sale of investment securities available for sale
(15
)
(238
)
Impairments and gains and losses on sales of other real estate owned and repossessed assets
56

1,471

Impairments and gains and losses on sales of premises and equipment
41

14

Changes in:
 

 

Interest receivable
(625
)
354

Other assets
10,883

720

Interest payable
(103
)
(77
)
Other liabilities
(37,483
)
1,690

Net cash provided by (used in) operating activities - continuing operations
(27,278
)
15,498

Net cash used in operating activities - discontinued operations
(1,188
)
(26,451
)
Cash used in operating activities
(28,466
)
(10,953
)
Cash flows from investing activities
 

 

Cash acquired in acquisition
69,241


Proceeds from maturities and calls of investment securities available for sale
27,002

25,670

Proceeds from sale of investment securities available for sale
31,632

82,695

Purchase of investment securities available for sale
(46,943
)
(10,842
)
Proceeds from sale of restricted equity securities
11,317

8,916

Purchase of restricted equity securities
(25,962
)
(3,487
)
Net increase in loans
(107,841
)
(118,432
)
Proceeds from sale of other real estate owned and repossessed assets, net
12,078

10,721

Purchase of premises and equipment
(1,788
)
(588
)
Proceeds from bank-owned life insurance death benefit

80

Net cash used in investing activities - continuing operations
(31,264
)
(5,267
)
Net cash provided by (used in) investing activities - discontinued operations
1,473

(1,375
)
Cash used in investing activities
(29,791
)
(6,642
)
Net increase in deposits
(74,615
)
105,460

Net increase in short term Federal Home Loan Bank borrowings
172,500

40,000

Repayments of long term Federal Home Loan Bank borrowings

(165,500
)
Net increase in other borrowings
8,405


Issuance of common stock related to bank acquisition


Issuance of common stock related to exercised options
26


Repurchase of common stock in the settlement of restricted stock units
(970
)
3

Cash consideration paid in acquisition
(1
)

Distributed non-controlling interest
(925
)
(1,226
)
Net cash provided by (used in) financing activities
104,420

(21,263
)
Increase (decrease) in cash and cash equivalents
46,163

(38,858
)
Cash and cash equivalents at beginning of period
63,746

103,619

Cash and cash equivalents at end of period
$
109,909

$
64,761

Supplemental cash flow information:
 

 

Cash paid for interest
$
10,140

$
9,218


7

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


Cash paid for income taxes
79

8

Supplemental non-cash information:
 



   Change in unrealized gain on investment securities available for sale, net of tax
$
2,828

$
810

   Transfer from other real estate owned and repossessed assets to loans
1,194

696

   Transfer from other real estate owned and repossessed assets to other assets

449

   Transfer from loans to other real estate owned and repossessed assets
5,003

4,066

   Transfer from premises and equipment to other real estate owned and repossessed assets
734


Non-cash transaction related to the Merger


Assets acquired
1,094,987


Liabilities assumed
1,002,793


See accompanying notes to unaudited consolidated financial statements.


8

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - Basis of Presentation
 
Effective July 29, 2016, Xenith Bankshares, Inc., a Virginia corporation (previously, Hampton Roads Bankshares, Inc., the “Company”), completed its previously announced merger (the “Merger”) with legacy Xenith Bankshares, Inc., a Virginia corporation (“Legacy Xenith”), pursuant to an Agreement and Plan of Reorganization (the “Merger Agreement”), dated as of February 10, 2016, by and between the Company and Legacy Xenith. At the effective time of the Merger, Legacy Xenith merged with and into the Company, with the Company surviving the Merger. Also at the effective time of the Merger, the Company changed its name from “Hampton Roads Bankshares, Inc.” to “Xenith Bankshares, Inc.” and changed its ticker symbol to “XBKS.”

Pursuant to the Merger Agreement, holders of Legacy Xenith common stock, par value $1.00 per share (“Legacy Xenith common stock”), received 4.4 shares (the “Exchange Ratio”) of common stock of the Company, par value $0.01 per share (the “Company common stock”), for each share of Legacy Xenith common stock held immediately prior to the effective time of the Merger, with cash to be paid in lieu of fractional shares. Each outstanding share of the Company common stock remained outstanding and was unaffected by the Merger.

Pursuant to the Merger Agreement and immediately following the completion of the Merger, legacy Xenith Bank, a Virginia banking corporation and wholly owned subsidiary of Legacy Xenith, merged (the “Bank Merger”) with and into the Company’s wholly-owned bank subsidiary, Xenith Bank (previously, The Bank of Hampton Roads, the “Surviving Bank”), with the Surviving Bank surviving the Bank Merger. In connection with the Bank Merger, the Surviving Bank changed its name from “The Bank of Hampton Roads” to “Xenith Bank.”

Through September 30, 2016, the Company had incurred $15.6 million of Merger-related expenses, including legal, professional and printing services, systems conversion costs, retention and severance costs, and filing fees. Merger-related costs incurred by Legacy Xenith prior to the completion of the Merger are not included in the Company’s consolidated statements of income. The Company expects the incurrence of these one-time Merger-related costs to be substantially complete by the end of 2016.

Information contained herein as of the period ended September 30, 2016 includes the balances of Legacy Xenith; information contained herein as of periods prior to September 30, 2016 does not include the balances of Legacy Xenith. Information for the three and nine month periods ended September 30, 2016 includes the operations of Legacy Xenith only for the period immediately following the effective date of the Merger (July 29, 2016) through September 30, 2016.

Unless otherwise stated herein or the context otherwise requires, references herein to “the Company” prior to the effective time of the Merger are to Hampton Roads Bankshares, Inc. and its wholly-owned subsidiaries, and references to “the Bank” are to The Bank of Hampton Roads. Unless otherwise stated herein or the context otherwise requires, references herein to “the Company” after the effective time of the Merger are to Xenith Bankshares, Inc. (f/k/a Hampton Roads Bankshares, Inc.) and its wholly-owned subsidiaries, and references to “the Bank” are to Xenith Bank.

On September 16, 2016, the Company announced its decision to cease operations of its mortgage banking business. In connection with this decision, the Bank entered into a definitive asset purchase agreement to sell certain assets of Gateway Bank Mortgage, Inc., a wholly-owned subsidiary of the Bank (“GBMI”), and to transition GBMI’s operations, which include originating, closing, funding and selling first lien residential mortgage loans, to an unrelated party (the “GBMI Sale”). The operations of GBMI have been reported as discontinued operations for all periods presented herein. See Note C - Discontinued Operations for further discussion. The completion of the GBMI Sale occurred on October 17, 2016. See Note P - Subsequent Events for further discussion.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year. The Company has one banking subsidiary, the Bank, which constitutes substantially all of the Company’s assets and operations.

Certain comparative balances have been reclassified to reflect current presentation. Any reclassification had no effect on total assets, total shareholders’ equity or net income.

9

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make assumptions, judgments, and estimates that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term are the determination of the allowance for loan losses, the valuation of other real estate owned and repossessed assets, the valuation of net deferred tax assets, the determination of fair value for financial instruments, and the determination of preliminary fair values of loans and other assets acquired and liabilities assumed in the Merger.

Recent Accounting Pronouncements

During the second quarter of 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”). ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. ASU 2014-09 creates a new topic within the Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, ("ASC 606"). ASC 606 will supersede the current revenue recognition requirements in ASC 605, Revenue Recognition, and supersede or amend much of the industry-specific revenue recognition guidance found throughout the ASC. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASC 606 creates a five-step process for achieving that core principle: (1) identifying the contract with the customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations, and (5) recognizing revenue when an entity has completed the performance obligations. ASC 606 also requires additional disclosures that allow users of the financial statements to understand the nature, timing, and uncertainty of revenue and cash flows resulting from contracts with customers. The effective date of ASC 606 is for the year beginning January 1, 2018. The new revenue standard permits the use of retrospective or cumulative effect transition methods. A majority of the Company’s contracts with customers (i.e., financial instruments) do not fall within the scope of ASC 606; therefore, the Company does not expect the adoption of this standard to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, ASC Topic 842 ("ASC 842"), which replaces ASC 840, Leases. The core principle of ASC 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee are as follows:

For finance leases, a lessee is required to do the following:
1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position;
2. Recognize interest on the lease liability separately from amortization of the right-of-use asset in the statement of comprehensive income; and
3. Classify repayments of principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.

For operating leases, a lessee is required to do the following:
1. Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial position;
2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and
3. Classify all cash payments within operating activities in the statement of cash flows.

10

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The effective date for ASC 842 is for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating whether adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU 2016-09 changes seven aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes; (6) practical expedient - expected term (nonpublic entities only); and (7) intrinsic value (nonpublic entities only). ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted in any interim or annual period provided that the entire ASU 2016-09 is adopted. The Company does not expect the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in ASU 2016-13 replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The changes are effective for annual and interim periods in fiscal years beginning after December 15, 2019. An entity may early adopt the standard for annual and interim periods in fiscal years beginning after December 15, 2018. The Company is evaluating whether the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows ("ASU 2016-15"), which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The guidance addresses: (1) debt prepayment on debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investments; (7) beneficial interest in securitizations transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted, including adoption in an interim period. The Company is evaluating whether the adoption of this guidance will have material effect on its consolidated statement of cash flows.

11

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - Business Combination
 
The Company has accounted for the Merger under the acquisition method of accounting, in accordance with ASC Topic 805,Business Combinations, whereby the acquired assets and assumed liabilities are recorded by the Company at their estimated fair values as of the effective date of the Merger, which was July 29, 2016.

The Merger combined two banks with complementary capabilities and geographical focus, thus provided the opportunity for the organization to leverage its existing infrastructure, including people, processes and systems, across a larger asset base.
 
In accordance with the framework established by ASC Topic 820, Fair Value Measurements and Disclosure , the Company used a fair value hierarchy to prioritize the information used to form assumptions and estimates in determining fair values. These fair value hierarchies are further discussed in Note N - Fair Value Measurements. Fair value estimates were based on management’s assessment of the best information available and are preliminary and subject to change.

The following table presents the summary unaudited balance sheet of Legacy Xenith as of the date of the Merger inclusive of the estimated fair value adjustments and the preliminary allocation of consideration paid in the Merger to the acquired assets and assumed liabilities. The final determination of estimated fair values of assets and liabilities will be made when all necessary information becomes available and management has completed its analysis. The preliminary allocation resulted in goodwill of $26.2 million, which represents the growth opportunities and franchise value the Bank has in the markets it serves.

12

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)


Fair value of assets acquired:
  Cash and cash equivalents
 
$
69,241

  Securities
 
139,025

  Loans
 
828,880

  Premises and equipment
 
6,180

  Other real estate owned
 
738

  Core deposit intangible
 
4,006

  Accrued interest receivable
 
4,464

  Deferred tax asset
 
4,741

  Bank owned life insurance
 
19,917

  Other assets
 
17,795

    Total assets
 
$
1,094,987

Fair value of liabilities assumed:
  Deposits
 
$
956,078

  Accrued interest payable
 
285

  Supplemental executive retirement plan
 
2,162

  Other liabilities
 
44,268

    Total liabilities
 
$
1,002,793

 
 
 
    Net identifiable assets acquired
 
$
92,194

 
 
 
Consideration paid:
  Company's common shares issued
 
58,915,439

  Purchase price per share (1)
 
$
1.97

  Value of common stock issued
 
$
116,063

  Estimated fair value of stock options
 
2,355

  Cash in lieu of fractional shares
 
1

  Total consideration paid
 
118,419

 
 
 
    Goodwill
 
$
26,225

_______________________
 
 
(1) The value of the shares of Company common stock exchanged for shares of Legacy Xenith common stock was based upon the closing price of Company common stock at July 28, 2016, the last trading day prior to the date of completion of the Merger.

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

(in thousands)
 Purchased Performing
 
 Purchased Impaired
 
 Total
Principal payments receivable
$
830,613

 
$
9,851

 
$
840,464

Fair value adjustment - credit and interest
(8,558
)
 
(3,026
)
 
(11,584
)
  Fair value of acquired loans
$
822,055

 
$
6,825

 
$
828,880


The following table presents the effect of the Merger on the Company, on a pro forma basis, as if the Merger had occurred at the beginning of the three- and nine-month periods ended September 30, 2016 and 2015. Merger-related costs of $12.9 million and

13

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$15.6 million for the three and nine months ended September 30, 2016, respectively, which are included in the Company’s consolidated statements of operations, are not included in the pro forma information below. Merger-related costs incurred by Legacy Xenith prior to the completion of the Merger are not included in the Company’s consolidated statements of operations and are also not included in the pro forma information below. Net income includes pro forma adjustments for the accretion of estimated fair value adjustments (discounts) on acquired loans and amortization of estimated core deposit intangibles. As accretion of acquired loan discounts is recognized, the carrying value of the acquired loans increases. This change in carrying amount could require that provision for loan losses in a similar amount would be required and recorded. Therefore, the effect of accretion on pro forma revenue has no effect on pro forma net income from continuing operations. An effective income tax rate of 36% was used in determining pro forma net income.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share data)
2016
2015
 
2016
2015
Revenue (net interest income plus noninterest income)
$
27,423

$
26,396

 
$
79,197

$
79,452

Net (loss) income from continuing operations
$
(3,494
)
$
482

 
$
3,523

$
3,703

(Loss) income per common share (basic and diluted)
$
(0.02
)
$

 
$
0.02

$
0.02


NOTE C - Discontinued Operations

In connection with the GBMI Sale, which was completed on October 17, 2016, GBMI ceased taking new mortgage loan applications; however, all applications with prospective borrowers that were in process at the completion of the GBMI Sale will continue to be managed by GBMI through funding and sale to investors in the ordinary course of business. Management expects processing of these applications and investor funding of these loans will be substantially complete by December 31, 2016. Management believes, after the discontinued operations have been transitioned to the purchaser, there will be no material on-going obligations with respect to the mortgage banking business.

The following table presents summarized operating results of the discontinued operations for the periods stated:


14

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Three Months Ended
 
Nine Months Ended
(in thousands)
September 30, 2016
September 30, 2015
 
September 30, 2016
September 30, 2015
Net interest income
$
133

$
197

 
$
440

$
544

Provision (benefit) for loan losses
(3
)
15

 
(22
)
(22
)
Net interest income
 

 
 
 

 

  after provision for loan losses
136

182

 
462

566

Noninterest income
6,760

5,722

 
16,987

15,444

Noninterest expense:
 
 
 
 
 
  Salaries and employee benefits
3,901

3,588

 
10,368

9,514

  Professional and consultant fees
73

83

 
204

226

  Occupancy
176

195

 
590

514

  Data processing
146

50

 
371

269

  Equipment
13

49

 
56

92

  Advertising and marketing
137

271

 
568

701

  Other
439

437

 
1,392

1,092

Total noninterest expense
4,885

4,673

 
13,549

12,408

Net income before provision
 

 

 
 
 

  for income taxes
2,011

1,231

 
3,900

3,602

Provision for income taxes
842

23

 
877

82

Net income
1,169

1,208

 
3,023

3,520

Net income attributable to
 

 

 
 

 

  non-controlling interest
806

501

 
1,556

1,563

Net income attributable to
 

 

 
 

 

  Xenith Bankshares, Inc.
$
363

$
707

 
$
1,467

$
1,957


NOTE D - Earnings Per Share
 
The following table presents basic and diluted income per share calculations for the three and nine months ended September 30, 2016 and 2015.  There were 5,050,288 and 5,571,214 stock options not included in the diluted earnings per share calculations for the three and nine months ended September 30, 2016, respectively, and 2,425,140 and 2,425,140 for the same periods in 2015, respectively, because their inclusion would have been antidilutive.

15

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Three Months Ended
 
Nine Months Ended
(in thousands, except share and per share data)
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Net income attributable to Xenith Bankshares, Inc.
$
47,864

 
$
303

 
$
51,869

 
$
4,364

Shares:
 
 
 
 
 
 
 
Weighted average shares outstanding
209,592,890

 
170,803,757

 
184,159,924

 
170,694,643

Weighted average vested restricted stock units
461,687

 
725,381

 
461,687

 
725,381

Weighted average number of common shares outstanding
210,054,577

 
171,529,138

 
184,621,611

 
171,420,024




 


 


 


Dilutive effect of TARP-related warrants
502,469

 
496,782

 
472,632

 
474,212

Dilutive effect of restricted stock units
282,917

 
484,243

 
339,391

 
416,066

Dilutive effect of stock options
368,539

 
273,334

 
172,527

 
177,799

Total dilutive effect
1,153,925

 
1,254,359

 
984,550

 
1,068,077

Diluted weighted average number of common shares outstanding
211,208,502

 
172,783,497

 
185,606,161

 
172,488,101

Basic and diluted income per share
$
0.23

 
$

 
$
0.28

 
$
0.03

 

16

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - Restrictions of Cash

To comply with regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement based on the weeks closest to September 30, 2016 and December 31, 2015 was $56.9 million and $32.0 million, respectively. The Bank was in compliance with this requirement at September 30, 2016.

NOTE F - Investment Securities
 
The following table presents amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
 
 
Gross
 
Gross
 
 
 
 
 
Unrealized
 
Unrealized
 
 
(in thousands)
Amortized Cost
 
Gains
 
Losses
 
Fair Value
Corporate bonds
$
986

 
$
1

 
$

 
$
987

Mortgage-backed securities - Agency
220,094

 
3,762

 
47

 
223,809

Asset-backed securities
14,862

 

 
103

 
14,759

Equity securities
969

 
710

 

 
1,679

Municipals
 
 
 
 
 
 
 
    Tax-exempt
68,040

 
578

 
76

 
68,542

    Taxable
18,154

 
215

 

 
18,369

    Total securities available for sale
$
323,105

 
$
5,266

 
$
226

 
$
328,145

 
December 31, 2015
 
 
 
Gross
 
Gross
 
 
 

 
Unrealized
 
Unrealized
 

(in thousands)
Amortized Cost
 
Gains
 
Losses
 
Fair Value
U.S. agency securities
$
12,565

 
$
507

 
$

 
$
13,072

Corporate bonds
11,994

 

 
804

 
11,190

Mortgage-backed securities - Agency
147,980

 
1,498

 
279

 
149,199

Asset-backed securities
23,787

 

 
495

 
23,292

Equity securities
970

 
451

 

 
1,421

 Total securities available for sale
$
197,296

 
$
2,456

 
$
1,578

 
$
198,174


Unrealized losses
 
The following tables present the fair values and gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015
 
September 30, 2016
(in thousands)
Less than 12 Months
 
12 Months or More
 
Total
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized

Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Mortgage-backed securities - Agency
$
14,831

 
$
47

 
$

 
$

 
$
14,831

 
$
47

Asset-backed securities
14,758

 
103

 

 

 
14,758

 
103

Municipals
17,143

 
76

 

 

 
17,143

 
76

    Total securities
$
46,732

 
$
226

 
$

 
$

 
$
46,732

 
$
226

 

17

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2015
(in thousands)
Less than 12 Months
 
12 Months or More
 
Total
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized

Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Corporate bonds
$

 
$


$
11,190


$
804


$
11,190


$
804

Mortgage-backed securities - Agency
56,787

 
244

 
1,517

 
35

 
58,304

 
279

Asset-backed securities
17,554

 
291

 
5,738

 
204

 
23,292

 
495

    Total securities
$
74,341


$
535

 
$
18,445

 
$
1,043

 
$
92,786

 
$
1,578

 
Debt securities with unrealized losses totaling $226 thousand at September 30, 2016 included thirteen municipals, six mortgage-backed agency securities, and six asset-backed securities, compared with unrealized losses totaling $1.6 million at December 31, 2015, which included four corporate securities, 23 mortgage-backed agency securities, and nine asset-backed securities.  In instances where an unrealized loss did occur, there was no indication of an adverse change in credit on any of the underlying securities in the tables above, and management believes no individual unrealized loss represented an other-than-temporary impairment ("OTTI") as of those dates. The Company does not intend to sell and it is not more likely than not that it will be required to sell the securities before the recovery of their amortized cost basis, which may be at maturity.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  In evaluating OTTI, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before its anticipated recovery.  The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available at a point in time.
 
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss.  If an entity intends to sell or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date.  If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors.  The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings.  The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.  The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
 
Maturities of investment securities
 
The following table presents the amortized cost and fair value by contractual maturity of investment securities available for sale at September 30, 2016 and December 31, 2015
 
Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Mortgage-backed and asset-backed securities that are not due at a single maturity date and equity securities, which do not have contractual maturities, are shown separately.

18

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
September 30, 2016
 
December 31, 2015
 
Amortized
 
 
 
Amortized
 
 
(in thousands)
Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
$
506

 
$
507

 
$

 
$

Due after one year
 
 
 
 
 
 
 
but less than five years
12,319

 
12,391

 
2,253

 
2,304

Due after five years
 
 
 
 
 
 
 
but less than ten years
71,725

 
72,317

 
12,518

 
11,785

Due after ten years
2,630

 
2,683

 
9,788

 
10,173

Mortgage-backed securities - Agency
220,094

 
223,809

 
147,980

 
149,199

Asset-backed securities
14,862

 
14,759

 
23,787

 
23,292

Equity securities
969

 
1,679

 
970

 
1,421

Total securities available for sale
$
323,105

 
$
328,145

 
$
197,296

 
$
198,174


Federal Home Loan Bank (“FHLB”)
 
The Company’s investment in FHLB stock totaled $11.2 million at September 30, 2016 and $2.9 million at December 31, 2015.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security, as it is required to be held in order to access FHLB advances (i.e., borrowings).  The Company earns dividends from its investment in FHLB stock, and for the three months ended September 30, 2016, the FHLB declared a dividend at an annualized rate of 4.64%. The investment in FHLB stock is carried at cost as there is no active market or exchange for the stock other than the FHLB or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value.  The Company does not consider this investment to be other-than-temporarily impaired at September 30, 2016, and no impairment has been recognized.
 
Federal Reserve Bank (“FRB”) and Other Restricted Stock
 
The Company’s investment in FRB and other restricted stock totaled $13.3 million at September 30, 2016 and $7.0 million at December 31, 2015.  FRB stock comprises $13.1 million of this amount and is generally viewed as a long-term investment and as a restricted investment security, as it is required to be held to effect membership in the Federal Reserve.  It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.  The Company does not consider these investments to be other-than-temporarily impaired at September 30, 2016, and no impairment has been recognized.


19

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE G - Borrowings

The Bank has secured borrowing facilities with the FHLB and the FRB. Total credit availability as of September 30, 2016 under the FHLB facility was $524.7 million and with a pledged, lendable collateral value of $301.4 million. Under this facility, as of September 30, 2016, there were short-term, non-amortizing borrowings outstanding of $197.5 million Credit availability under the FRB facility as of September 30, 2016 was $256.2 million, which is also based on pledged collateral. As of September 30, 2016, the Bank had no federal funds purchased or long-term borrowings under the FRB facility.

On June 26, 2015, Legacy Xenith issued and sold $8.5 million in aggregate principal amount of its 6.75% subordinated notes due 2025 pursuant to a Subordinated Note Purchase Agreement (the "Subordinated Notes"). The Subordinated Notes, which the Company assumed in the Merger, bear interest at an annual rate of 6.75%, which is payable quarterly in arrears on March 31, June 30, September 30 and December 31. The Subordinated Notes qualify as Tier 2 capital for the Company. As of September 30, 2016, the outstanding balance of the Subordinated Notes, net of capitalized loan origination costs, was $8.4 million. For the period from the Merger through September 30, 2016, the effective interest rate, including the amortization of loan origination costs, on the Subordinated Notes was 7.13%. As of September 30, 2016, the Company and the Bank, as applicable, were in compliance with all covenants of the Subordinated Notes.

Legacy Xenith had an agreement with a national bank that provided an unsecured senior term loan credit facility up to $15 million (the “Credit Agreement”). Immediately prior to the completion of the Merger, amounts outstanding under the Credit Agreement of $10.4 million, including accrued and unpaid interest, were repaid in full by the Company.

NOTE H - Loans and Allowance for Loan Losses
 
The following table presents the Company's composition of loans as of September 30, 2016 and December 31, 2015. All lending decisions are based upon a thorough evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.  With few exceptions, personal guarantees are required on all loans.

The Company makes owner-occupied real estate (“OORE”) loans, which are secured in part by the real estate that is generally the offices or production facilities of the borrower. In some cases, the real estate is not held by the commercial enterprise, rather it is owned by the principals of the business or an entity controlled by the principals. The Company classifies OORE loans as commercial and industrial, as the primary source of repayment of the loan is generally dependent on the financial performance of the commercial enterprise occupying the property, with the real estate being a secondary source of repayment. All periods presented herein reflect this classification.

The Company holds guaranteed student loans (“GSLs”), which were purchased by Legacy Xenith in 2013 and acquired by the Company in the Merger. These loans were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, the student loans are substantially guaranteed by a guaranty agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers on defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders. The Company has an agreement with a third-party servicer of student loans to provide all day-to-day operational requirements for the servicing of the loans. The GSLs carry a nearly 98% guarantee of principal and accrued interest. In allocating the consideration paid in the Merger, the Company recorded a preliminary fair value adjustment for GSLs that reduced the carrying amount in the GSLs to approximate the guaranteed portion of the loans.

20

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)
September 30, 2016
 
December 31, 2015
Commercial & Industrial
$
923,598

 
$
465,746

Construction
239,345

 
141,208

Commercial real estate
609,187

 
423,468

Residential real estate
418,166

 
347,336

Consumer
233,347

 
161,918

Guaranteed student loans
46,682

 

Deferred loan fees and related costs
707

 
(724
)
Total loans
$
2,471,032

 
$
1,538,952


Acquired Loans

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

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that contractually required principal and interest payments will not be collected are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). A portion of the loans acquired in the Merger are deemed to be purchased credit-impaired loans qualifying for accounting under ASC 310-30.

In applying ASC 310-30 to acquired loans, the amount and timing of cash flows expected to be collected is estimated. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including estimated default rates and the amount and timing of prepayments, in addition to other factors. The excess of cash flows expected to be collected over the estimated fair value of purchased credit-impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the period of expected cash flows from the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference.

ASC 310-30 requires periodic re-evaluation of expected cash flows for purchased credit-impaired loans subsequent to acquisition date. Decreases in expected cash flows attributable to credit will generally result in an impairment charge to earnings such that the accretable yield remains unchanged. Increases in expected cash flows will result in an increase in the accretable yield, which is a reclassification from the nonaccretable difference. The increased accretable yield is recognized in income over the remaining period of expected cash flows from the loan. Any impairment charge recorded as a result of a re-evaluation is recorded as an increase in the allowance for loan and lease losses. In the period since the Merger through September 30, 2016, no impairment charge has been recorded with respect to loans accounted for under ASC 310-30.

Acquired loans for which the amount or timing of cash flows cannot be predicted are accounted for under the cost recovery method, whereby principal and interest payments received reduce the carrying value of the loan until such amount has been received. Amounts received in excess of the carrying value are reported in interest income.

Allowance for Loan Losses

The following table presents the allowance for loan loss activity, by loan category, for the three and nine months ended September 30, 2016 and 2015:

21

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Balance at beginning of period
$
22,903

 
$
27,720

 
$
23,157

 
$
26,997

Charge-offs:
 
 
 
 
 
 
 
  Commercial & Industrial
84

 
3,723

 
1,160

 
4,259

  Construction

 
1,557

 
635

 
2,021

  Commercial real estate

 
3

 
663

 
103

  Residential real estate
340

 
313

 
2,234

 
782

  Consumer
3

 
6

 
45

 
58

  Guaranteed student loans

 

 

 

  Overdrafts
43

 
36

 
106

 
112

    Total charge-offs
470

 
5,638

 
4,843

 
7,335

Recoveries:
 
 
 
 
 
 
 
  Commercial & Industrial
173

 
441

 
2,833

 
1,131

  Construction
167

 
126

 
911

 
617

  Commercial real estate
11

 
78

 
341

 
262

  Residential real estate
253

 
125

 
603

 
507

  Consumer
7

 
6

 
23

 
42

  Guaranteed student loans

 

 

 

  Overdrafts
1

 

 
1

 

    Total recoveries
612

 
776

 
4,712

 
2,559

      Net (recoveries) charge-offs
(142
)
 
4,862

 
131

 
4,776

Provision (benefit) for loan losses
10,685

 
(15
)
 
10,704

 
622

Balance at end of period
$
33,730

 
$
22,843

 
$
33,730

 
$
22,843


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

22

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
September 30, 2016
 
 
 
 Individually Evaluated
 
 Collectively Evaluated
(in thousands)
 Total Amount
 
 for Impairment
 
 for Impairment
Allowance for loan losses applicable to:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$

 
$

 
$

    Construction

 

 

    Commercial real estate

 

 

    Residential real estate

 

 

    Consumer

 

 

      Total purchased credit-impaired loans

 

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
10,979

 
7,724

 
3,255

    Construction
8,579

 
7,167

 
1,412

    Commercial real estate
3,416

 
901

 
2,515

    Residential real estate
6,721

 
1,120

 
5,601

    Consumer
2,051

 
1,180

 
871

    Guaranteed student loans

 

 

    Unallocated qualitative
1,984

 

 
1,984

      Total originated and other purchased loans
33,730

 
18,092

 
15,638

        Total allowance for loan losses
$
33,730

 
$
18,092

 
$
15,638

Loan balances applicable to:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$
875

 
$
875

 
$

    Construction
1,824

 
1,824

 

    Commercial real estate
1,607

 
1,607

 

    Residential real estate
2,326

 
2,326

 

    Consumer
16

 
16

 

      Total purchased credit-impaired loans
6,648

 
6,648

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
922,723

 
28,647

 
894,076

    Construction
237,521

 
15,649

 
221,872

    Commercial real estate
607,580

 
9,933

 
597,647

    Residential real estate
415,840

 
10,928

 
404,912

    Consumer
233,331

 
1,400

 
231,931

    Guaranteed student loans
46,682

 

 
46,682

  Deferred loan fees and related costs
707

 

 
707

      Total originated and other purchased loans
2,464,384

 
66,557

 
2,397,827

        Total loans
$
2,471,032

 
$
73,205

 
$
2,397,827



23

XENITH BANKSHARES, INC. (f/k/a Hampton Roads Bankshares, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2015
 
 
 
 Individually Evaluated
 
 Collectively Evaluated
(in thousands)
 Total Amount
 
 for Impairment
 
 for Impairment
Allowance for loan losses applicable to:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$

 
$

 
$

    Construction

 

 

    Commercial real estate

 

 

    Residential real estate

 

 

    Consumer

 

 

      Total purchased credit-impaired loans

 

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
5,925

 
1,593

 
4,332

    Construction
3,339

 
951

 
2,388

    Commercial real estate
3,952

 
640

 
3,312

    Residential real estate
7,501

 
2,175

 
5,326

    Consumer
840

 
88

 
752

    Guaranteed student loans

 

 

    Unallocated qualitative
1,600

 

 
1,600

      Total originated and other purchased loans
23,157

 
5,447

 
17,710

        Total allowance for loan losses
$
23,157

 
$
5,447

 
$
17,710

Loan balances applicable to:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$

 
$

 
$

    Construction

 

 

    Commercial real estate

 

 

    Residential real estate

 

 

    Consumer

 

 

      Total purchased credit-impaired loans

 

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
465,746

 
23,505

 
442,241

    Construction
141,208

 
21,092

 
120,116

    Commercial real estate
423,468

 
8,647

 
414,821

    Residential real estate