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EX-32.1 - EXHIBIT 32.1 - Xenith Bankshares, Inc.a20170331exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Xenith Bankshares, Inc.a20170331exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Xenith Bankshares, Inc.a20170331exhibit311.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 March 31, 2017

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, a smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth 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)    Emerging growth company    ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

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 April 30, 2017 was 23,160,473 shares.
 



XENITH BANKSHARES, INC.

Table of Contents
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Balance Sheets
 
March 31, 2017
 
 
December 31, 2016
 
 
 
 
 
Consolidated Statements of Income
 
Three months ended March 31, 2017 and 2016
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three months ended March 31, 2017 and 2016
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Three months ended March 31, 2017
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Three months ended March 31, 2017 and 2016
 
 
 
 
 
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
 
 
 
 
EXHIBIT INDEX

2

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS




CONSOLIDATED BALANCE SHEETS
As of March 31, 2017 and December 31, 2016
(unaudited)
 
 
 
(in thousands, except share data)
March 31, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
16,187

 
$
18,825

Interest-bearing deposits in other banks
7,593

 
4,797

Overnight funds sold and due from Federal Reserve Bank
156,361

 
103,372

Investment securities available for sale, at fair value
318,741

 
317,443

Restricted equity securities, at cost
19,296

 
24,313

Loans
2,356,808

 
2,464,056

Allowance for loan losses
(18,275
)
 
(21,940
)
Net loans
2,338,533

 
2,442,116

Premises and equipment, net
56,371

 
56,996

Interest receivable
8,487

 
8,806

Other real estate owned and repossessed assets,
 
 
 
net of valuation allowance
5,185

 
5,345

Goodwill
26,931

 
26,931

Core deposit intangible, net
3,656

 
3,787

Net deferred tax assets, net of valuation allowance
154,899

 
157,825

Bank-owned life insurance
72,580

 
72,104

Other assets
13,760

 
13,969

Assets of discontinued operations

 
10,563

Totals assets
$
3,198,580

 
$
3,267,192

Liabilities and Shareholders' Equity
 
 
 
Deposits:
 
 
 
Noninterest-bearing demand
$
535,889

 
$
501,678

Interest-bearing:
 
 
 
Demand and money market
1,148,199

 
1,113,453

Savings
91,605

 
86,739

Time deposits less than $250
773,158

 
785,303

Time deposits $250 or more
70,792

 
84,797

Total deposits
2,619,643

 
2,571,970

Federal Home Loan Bank borrowings
50,000

 
172,000

Other borrowings
38,938

 
38,813

Interest payable
785

 
829

Other liabilities
18,143

 
19,093

Liabilities of discontinued operations
579

 
849

Total liabilities
2,728,088

 
2,803,554

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; 23,159,377 and 23,123,518 shares issued
 
 
 
and outstanding on March 31, 2017 and December 31, 2016,
 
 
 
respectively
232

 
231

Capital surplus
712,048

 
710,916

Accumulated deficit
(239,875
)
 
(245,538
)
Accumulated other comprehensive loss, net of tax
(1,913
)
 
(2,428
)
Total shareholders' equity before non-controlling interest
470,492

 
463,181

Non-controlling interest of discontinued operations

 
457

Total shareholders' equity
470,492

 
463,638

Total liabilities and shareholders' equity
$
3,198,580

 
$
3,267,192

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

3

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2017 and 2016
(unaudited)
 
(in thousands)
March 31, 2017
 
March 31, 2016
Interest Income
 
 
 
Loans, including fees
$
27,359

 
$
16,584

Investment securities
2,068

 
1,350

Overnight funds sold and deposits in other banks
236

 
44

Total interest income
29,663

 
17,978

Interest Expense
 

 
 

Deposits:
 

 
 

Demand and money market
1,584

 
846

Savings
56

 
16

Time deposits
2,319

 
1,864

Interest expense on deposits
3,959

 
2,726

Federal Home Loan Bank borrowings
173

 
18

Other borrowings
680

 
472

Total interest expense
4,812

 
3,216

Net interest income
24,851

 
14,762

Provision for loan losses
9

 
(25
)
Net interest income after provision for loan losses
24,842

 
14,787

Noninterest Income
 

 
 

Service charges on deposit accounts
1,160

 
1,139

Earnings from bank-owned life insurance
476

 
349

Gain on sale of loans
19

 

Visa check card income
753

 
641

Other
724

 
384

Total noninterest income
3,132

 
2,513

Noninterest Expense
 

 
 

Salaries and employee benefits
10,487

 
7,771

Professional and consultant fees
1,199

 
585

Occupancy
1,981

 
1,416

FDIC insurance
729

 
414

Data processing and technology
1,026

 
1,204

Problem loan and repossessed asset costs
99

 
101

Impairments on and (gains) and losses from sales of other real estate owned and repossessed assets, net
70

 
(177
)
Equipment
334

 
284

Board fees
131

 
246

Advertising and marketing
224

 
50

Merger-related
250

 
1,568

Other
3,001

 
2,071

Total noninterest expense
19,531

 
15,533

Income from continuing operations before provision for income taxes
8,443

 
1,767

Provision for income taxes - continuing operations
2,704

 
734

Net income from continuing operations
5,739

 
1,033

Net (loss) income from discontinued operations before provision for income taxes
(255
)
 
570

(Benefit) provision for income taxes - discontinued operations
(56
)
 
15

Net (loss) income from discontinued operations attributable to non-controlling interest
(123
)
 
206

Net (loss) income from discontinued operations
(76
)
 
349

Net income attributable to Xenith Bankshares, Inc.
$
5,663

 
$
1,382

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

4

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2017 and 2016
(unaudited)
 
(in thousands)
March 31, 2017
 
March 31, 2016
Net income attributable to Xenith Bankshares, Inc.
$
5,663

 
$
1,382

Other comprehensive income, net of tax:
 

 
 

Change in unrealized gain on securities available for sale
793

 
1,893

Income tax effect
(278
)
 
(685
)
Other comprehensive income, net of tax
515

 
1,208

Comprehensive income attributable to Xenith Bankshares, Inc.
$
6,178

 
$
2,590

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.


5

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
Accumulated Other
 

 

(unaudited)
Common Stock
 
Capital
 
Accumulated
 
Comprehensive Income (Loss),
 
Non-controlling
 
Total Shareholders'
(in thousands, except share data)
Shares
 
Amount
 
Surplus
 
Deficit
 
Net of Tax
 
Interest
 
Equity
Balance at December 31, 2016
23,123,518

 
$
231

 
$
710,916

 
$
(245,538
)
 
$
(2,428
)
 
$
457

 
$
463,638

Net income

 

 

 
5,663

 

 
(123
)
 
5,540

Other comprehensive income, net of tax

 

 

 

 
515

 

 
515

Share-based compensation expense

 

 
624

 

 

 

 
624

Net settlement of restricted stock units
2,528

 

 
236

 

 

 

 
236

Restricted stock awards granted
13,323

 

 

 

 

 

 

Net issuance on exercise of stock options
20,008

 
1

 
272

 

 

 

 
273

Reclassification to other liabilities

 

 

 

 

 
(334
)
 
(334
)
Balance at March 31, 2017
23,159,377

 
$
232

 
$
712,048

 
$
(239,875
)
 
$
(1,913
)
 
$

 
$
470,492

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

6

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2017 and 2016
(unaudited)
 
 
 
(in thousands)
March 31, 2017
 
March 31, 2016
Cash flows from operating activities
 

 
 

Net income from continuing operations
$
5,739

 
$
1,033

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

 
 

Depreciation and amortization
742

 
734

Deferred income tax expense
2,704

 
734

Accretion and amortization of fair value adjustments
(890
)
 
272

Amortization of core deposit intangible
131

 

Provision for loan losses
9

 
(25
)
Share-based compensation expense
624

 
420

Net amortization of premiums and accretion of discounts on investment securities available for sale
868

 
59

Earnings from bank-owned life insurance
(476
)
 
(349
)
Impairments on and gains and losses from sales of other real estate owned and repossessed assets
70

 
(177
)
Impairments on and gains and losses from sales of premises and equipment
(2
)
 

Changes in:
 

 
 

Interest receivable
319

 
(189
)
Other assets
209

 
4,584

Interest payable
(44
)
 
18

Other liabilities
(714
)
 
6,823

Net cash provided by operating activities - continuing operations
9,289

 
13,937

Net cash provided by (used in) operating activities - discontinued operations
9,704

 
(2,614
)
Cash provided by operating activities
18,993

 
11,323

Cash flows from investing activities
 

 
 

Proceeds from maturities and calls of investment securities available for sale
8,920

 
8,892

Purchase of investment securities available for sale
(10,293
)
 
(8,000
)
Proceeds from sale of restricted equity securities
7,310

 
4,122

Purchase of restricted equity securities
(2,293
)
 
(6,299
)
Net decrease in loans
104,465

 
19,575

Proceeds from sale of other real estate owned and repossessed assets, net
214

 
5,107

Purchases of premises and equipment
(115
)
 
(108
)
Net cash provided by investing activities - continuing operations
108,208

 
23,289

Net cash provided by (used in) investing activities - discontinued operations

 
(1,321
)
Cash provided by investing activities
108,208

 
21,968

Net increase (decrease) in deposits
47,673

 
(20,887
)
Net decrease in short-term Federal Home Loan Bank borrowings
(122,000
)
 
(14,000
)
Issuance of common stock related to exercised options
273

 

Repurchase of common stock in the settlement of restricted stock units

 
(45
)
Distributed non-controlling interest

 
(173
)
Net cash used in financing activities
(74,054
)
 
(35,105
)
Increase (decrease) in cash and cash equivalents
53,147

 
(1,814
)
Cash and cash equivalents at beginning of period
126,994

 
63,746

Cash and cash equivalents at end of period
$
180,141

 
$
61,932

Supplemental cash flow information:
 

 
 

Cash paid for interest
$
4,850

 
$
3,070

Cash paid for income taxes
$

 
$

Supplemental non-cash information:
 

 


   Change in unrealized gain on investment securities available for sale, net of tax
$
515

 
$
1,208

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

 
$
545

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

 
$
993

   Transfer from loans to other real estate owned and repossessed assets
$
124

 
$
734

 
 
 
 
See accompanying notes to unaudited consolidated financial statements.

7

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - Basis of Presentation

Xenith Bankshares, Inc. ("Xenith Bankshares" or the "Company") is the bank holding company for Xenith Bank (the "Bank"), a Virginia-based institution headquartered in Richmond, Virginia. As of March 31, 2017, the Company, through the Bank, operates 42 full-service branches and two loan production offices. Xenith Bank is a commercial bank specifically targeting the banking needs of middle market and small business, local real estate developers and investors, and retail banking clients. The Bank offers marine finance floorplan and end-user loans through its Shore Premier Finance unit. Xenith Bank's regional area of operations spans from Baltimore, Maryland, to Raleigh and eastern North Carolina, complementing its significant presence in greater Washington, D.C., greater Richmond, Virginia, and greater Hampton Roads, Virginia.
 
Effective July 29, 2016, the Company (previously, Hampton Roads Bankshares, Inc.) completed its 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, received 4.4 shares of common stock of the Company, par value $0.01 per share (the "common stock"), for each share of Legacy Xenith common stock held immediately prior to the effective time of the Merger, with cash 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 Bank, with the Bank surviving the Bank Merger. In connection with the Bank Merger, the Bank changed its name from "The Bank of Hampton Roads" to "Xenith Bank."

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 (f/k/a The Bank of Hampton Roads). Information presented herein as of and for the three-month period ended March 31, 2016 does not include the operations of Legacy Xenith.

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 included originating, closing, funding and selling first lien residential mortgage loans, to an unrelated party (the "GBMI Sale"). The completion of the GBMI Sale occurred on October 17, 2016. The operations of GBMI have been reported as discontinued operations for all periods presented herein.

On December 7, 2016, the Company announced a reverse stock split of its outstanding shares of common stock at a ratio of 1-for-10 (the "Reverse Stock Split"), which had been previously approved by the Company's shareholders. The Reverse Stock Split became effective on December 13, 2016. No fractional shares were issued in the Reverse Stock Split, rather shareholders of fractional shares received a cash payment based on the closing price of the Company's common stock as of the date of the Reverse Stock Split. The par value of each share of common stock remained unchained at $0.01 per share and the number of authorized shares was not affected. References made to outstanding shares or per share amounts in the accompanying consolidated financial statements and disclosures have been retroactively adjusted to reflect the Reverse Stock Split, unless otherwise noted.

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

8

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

necessary for a fair presentation. The results of operations for the three months ended March 31, 2017 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. All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

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, 2016 ("2016 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 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 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 ASC Topic 842, Leases ("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.

9

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

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. The implementation of this standard occurred in the current period and did not have a material effect on the Company's consolidated financial statements.

In accordance with ASU 2016-09 and beginning in 2017, the Company will recognize excess tax benefits and tax deficiencies as income tax benefit or expense, respectively, in the reporting period in which they occur. Prior to the adoption of this standard, the Company recognized excess tax benefits as capital surplus only when the amounts reduced taxes payable. Additionally, under the updated guidance, the Company will classify excess tax benefits as an operating activity as part of cash payments for taxes on its consolidated statement of cash flows. Under the new guidance, companies are permitted to make an election to account for forfeitures as they occur, rather than estimating forfeitures as of the award's grant date. The Company recognizes forfeitures as they occur, so the new guidance had no effect on the Company's accounting for forfeitures. The Company classifies tax payments made on behalf of employees as cash outflows from financing activities on the statement of cash flows, which results in no change under the new guidance.

In June 2016, the FASB issued ASC 326, Measurement of Credit Losses on Financial Instruments ("ASC 326"), 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 ASC 326 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 ASC 326 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. This standard is 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 the impact the adoption of this standard will have on the Company's consolidated financial statements.

In August 2016, the FASB issued ASC 230, Statement of Cash Flows ("ASC 230"), 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 believes the adoption of this standard will not have a material effect on its consolidated statements of cash flows.

In October 2016, the FASB issued ASC 740, Income Taxes (Topic 740): Intra-Equity Transfers of Assets Other Than Inventory ("ASC 740"), which requires entities to recognize at the transaction date the income tax consequences of intercompany asset

10

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

transfers other than inventory. This ASC is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt the standard, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company believes the adoption of this standard will not have a material effect on its consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"), which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. ASU 2016-18 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoptions in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes the interim period. The Company believes the adoption of this standard will not have a material effect on its consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements ("ASU 2016-19"), which amends a number of topics in the FASB ASC. The ASU is part of an ongoing FASB project to facilitate ASC updates for non-substantive technical corrections, clarifications and improvements that are not expected to have a significant effect on accounting practice or create a significant administrative cost to most entities. ASU 2016-19 will apply to all reporting entities within the scope of the effected accounting guidance.

Most amendments included in ASU 2016-19 were effective upon issuance (December 2016). Certain amendments that require transition guidance are effective for:
1. Public business entities for annual and interim periods in fiscal years beginning after December 2016 (for cloud computing arrangements); and
2. All entities for annual and interim periods in fiscal years beginning after December 15, 2016 (for certain others, including the change to fair value measurement disclosures).

Early adoption is permitted for the amendments that require transition guidance. The adoption of this guidance did not have a material effect the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"), which provides a new framework for determining whether transactions should be accounted for as acquisitions or dispositions of assets or businesses. ASU 2017-01 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt ASU 2017-01 and apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. The Company believes the adoption of this standard will not have a material effect on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. ASU 2017-04 is effective for annual and interim periods in fiscal years beginning after December 15, 2019. Entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company believes the adoption of this standard will not have a material effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"), which requires companies to present the service cost component of net benefit cost in the same line items which they report compensation costs. Companies will be required to present all other components of net benefit cost outside of operating income, if this subtotal is presented. ASU 2017-07 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or make available for issuance. The Company believes the adoption of this standard will not have a material effect on its consolidated financial statements.

11

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - 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 14 - Fair Value Measurements in these consolidated financial statements.

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 allocation of consideration paid in the Merger to the acquired assets and assumed liabilities. The allocation resulted in goodwill of $26.9 million, which represents the growth opportunities and franchise value the Bank has in the markets it serves.

12

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

  Securities
 
139,025

  Loans
 
827,987

  Premises and equipment
 
6,180

  Other real estate owned
 
738

  Core deposit intangible
 
4,006

  Accrued interest receivable
 
4,464

  Deferred tax asset
 
5,156

  Bank owned life insurance
 
19,917

  Other assets
 
17,879

    Total assets
 
$
1,094,593

Fair value of liabilities assumed:
  Deposits
 
$
956,078

  Accrued interest payable
 
285

  Supplemental executive retirement plan
 
2,162

Borrowings
 
36,533

  Other liabilities
 
8,112

    Total liabilities
 
$
1,003,170

    Net identifiable assets acquired
 
$
91,423

 
 
 
Consideration paid:
  Company's common shares issued (1)
 
58,915,439

  Purchase price per share (2)
 
$
1.97

  Value of common stock issued
 
$
116,063

  Estimated fair value of stock options
 
2,290

  Cash in lieu of fractional shares
 
1

  Total consideration paid
 
118,354

    Goodwill
 
$
26,931

_______________________
 
 
(1) The issuance of shares of common stock in the Merger preceded the Reverse Stock Split and the number of shares of common stock is presented on a pre-Reverse Stock Split basis.
(2) The value of the shares of common stock exchanged for shares of Legacy Xenith common stock was based upon the closing price of 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 fair value adjustments recorded immediately following the Merger:


 Purchased Performing
 
 Purchased Impaired
 
 Total
Principal payments receivable
$
830,613

 
$
9,851

 
$
840,464

Fair value adjustment - credit and interest
(9,318
)
 
(3,159
)
 
(12,477
)
  Fair value of acquired loans
$
821,295

 
$
6,692

 
$
827,987


The following table presents, on a pro forma basis, the effect of the Merger for the three months ended March 31, 2016, as if the Merger had occurred at the beginning of 2016. Merger-related costs of $1.6 million incurred in the three months ended March 31,

13

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2016, which are included in the Company's consolidated statements of income, 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 income 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 core deposit intangibles. An effective income tax rate of 35% was used in determining pro forma net income.
 
Three Months Ended
 

March 31, 2016
 
Revenue (net interest income plus noninterest income)
$
26,869

 
Net income from continuing operations
$
4,304

 
Earnings per common share (basic and diluted)
$
0.19

 

NOTE 3 - Discontinued Operations

In connection with the GBMI Sale, which was completed on October 17, 2016, GBMI ceased taking new mortgage loan applications, and all applications with prospective borrowers that were in process at the completion of the GBMI Sale were managed by GBMI through funding and sale to investors in the ordinary course of business. The decision to exit the mortgage business was based on a number of factors, including the costs of regulatory compliance and the scale required to be competitive. Proceeds from the GBMI Sale, which included the sale of certain fixed assets, were $87 thousand.

As of December 31, 2016, there were no remaining loans to be funded and $9.9 million of loans were held for sale to investors related to GBMI, which are included in assets from discontinued operations in the Company's consolidated balance sheet as of December 31, 2016. As of March 31, 2017, the operations of GBMI had been transitioned to the purchaser and there were no remaining loans held for sale and no assets remaining related to GBMI. Management believes, as of March 31, 2017, there are no significant on-going obligations, which include the Company's share of obligations to third-party investors and certain wind-down expenses, with respect to the mortgage banking business. As of March 31, 2017, the Company had a liability of $579 thousand recorded as liabilities of discontinued operations on its consolidated balance sheets, which is a reserve for any future obligations.

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


14

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
Three Months Ended

March 31, 2017
March 31, 2016
Net interest income
$
19

$
154

Provision for loan losses
(5
)
26

Net interest income after provision for loan losses
24

128

Noninterest income
140

4,439

Noninterest expense:
 
 
  Salaries and employee benefits
237

3,010

  Professional and consultant fees
2

49

  Occupancy
5

206

  Data processing
40

104

  Equipment
2

20

  Advertising and marketing
6

220

  Other
127

388

Total noninterest expense
419

3,997

Net (loss) income before provision for income taxes
(255
)
570

(Benefit) provision for income taxes
(56
)
15

Net (loss) income
(199
)
555

Net (loss) income attributable to non-controlling interest
(123
)
206

Net (loss) income attributable to Xenith Bankshares, Inc.
$
(76
)
$
349


NOTE 4 - Cash Reserves

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 requirements for the periods closest to March 31, 2017 and December 31, 2016 were $60.1 million and $63.9 million, respectively. The Bank was in compliance with these requirements at March 31, 2017 and December 31, 2016.

NOTE 5 - Investment Securities
 
The following table presents amortized cost, gross unrealized gains and losses, and fair values of investment securities available for sale as of the dates stated:

15

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
March 31, 2017
 
 
 
Gross
 
Gross
 
 
 
 
 
Unrealized
 
Unrealized
 
 
 
Amortized Cost
 
Gains
 
Losses
 
Fair Value
Mortgage-backed securities
 
 
 
 
 
 
 
Agencies
$
139,616

 
$
736

 
$
898

 
$
139,454

Collateralized
62,075

 
61

 
1,026

 
61,110

Collateralized mortgage obligations
18,181

 
259

 
108

 
18,332

Asset-backed securities
14,868

 

 
109

 
14,759

Municipals
 
 
 
 
 
 
 
  Tax-exempt
66,938

 

 
2,577

 
64,361

  Taxable
18,056

 

 
387

 
17,669

Corporate bonds
980

 
1

 

 
981

Equity securities
969

 
1,106

 

 
2,075

    Total securities available for sale
$
321,683

 
$
2,163

 
$
5,105

 
$
318,741

 
December 31, 2016
 
 
 
Gross
 
Gross
 
 
 

 
Unrealized
 
Unrealized
 


Amortized Cost
 
Gains
 
Losses
 
Fair Value
Mortgage-backed securities


 


 


 


Agencies
$
135,054

 
$
793

 
$
957

 
$
134,890

Collateralized
63,837

 
61

 
1,145

 
62,753

Collateralized mortgage obligations
19,626

 
288

 
104

 
19,810

Asset-backed securities
14,866

 

 
108

 
14,758

Municipals


 


 


 


Tax-exempt
67,738

 

 
2,983

 
64,755

Taxable
18,105

 
1

 
430

 
17,676

Corporate bonds
983

 
1

 

 
984

Equity securities
969

 
848

 

 
1,817

 Total securities available for sale
$
321,178

 
$
1,992

 
$
5,727

 
$
317,443


As of March 31, 2017 and December 31, 2016, the Company had available-for-sale securities with a fair value of $80.1 million and $83.0 million, respectively, pledged as collateral for public deposits, borrowings and other depositor requirements.

Unrealized Losses
 
The following tables present the fair values and gross unrealized losses aggregated by investment category and length of time and the number of individual securities that have been in a continuous unrealized loss position as of the dates stated:

16

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
 
 
March 31, 2017
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized
 
Securities
 
Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
   Agencies
36

 
$
87,594

 
$
893

 
$
640

 
$
5

 
$
88,234

 
$
898

   Collateralized
20

 
47,099

 
1,026

 

 

 
47,099

 
1,026

Collateralized mortgage obligations
7

 
7,218

 
108

 

 

 
7,218

 
108

Asset-backed securities
6

 
5,443

 
64

 
9,315

 
45

 
14,758

 
109

Municipals
 
 
 
 
 
 
 
 
 
 
 
 
 
   Tax-exempt
43

 
64,361

 
2,577

 

 

 
64,361

 
2,577

   Taxable
10

 
17,669

 
387

 

 

 
17,669

 
387

    Total securities available for sale
122

 
$
229,384

 
$
5,055

 
$
9,955

 
$
50

 
$
239,339

 
$
5,105

 
 
 
 
December 31, 2016

 
 
Less than 12 Months
 
12 Months or More
 
Total
 
Number of
 
 
 
Unrealized
 
 
 
Unrealized
 
 
 
Unrealized

Securities
 
Fair Value
 
Loss
 
Fair Value
 
Loss
 
Fair Value
 
Loss
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
   Agencies
33

 
$
88,315

 
$
945

 
$
695

 
$
12

 
$
89,010

 
$
957

   Collateralized
19

 
42,272

 
1,145

 

 

 
42,272

 
1,145

Collateralized mortgage obligations
6

 
7,216

 
104

 

 

 
7,216

 
104

Asset-backed securities
6

 
5,443

 
64

 
9,315

 
44

 
14,758

 
108

Municipals
 
 
 
 
 
 
 
 
 
 
 
 
 
   Tax-exempt
44

 
64,755

 
2,983

 

 

 
64,755

 
2,983

   Taxable
9

 
17,149

 
430

 

 

 
17,149

 
430

    Total securities available for sale
117

 
$
225,150

 
$
5,671

 
$
10,010

 
$
56

 
$
235,160

 
$
5,727

 
Management evaluates securities for other-than-temporary impairment ("OTTI") at least quarterly and more frequently when economic or market conditions warrant such an evaluation. In determining 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 OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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 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.

Maturities of Investment Securities
 
The following table presents the amortized cost and fair value by contractual maturity of investment securities available for sale as of the dates stated. Expected maturities may differ from contractual maturities, as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities that are not due at a single maturity date and equity securities that do not have contractual maturities are shown separately.

17

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
March 31, 2017
 
December 31, 2016
 
Amortized
 
 
 
Amortized
 
 

Cost
 
Fair Value
 
Cost
 
Fair Value
Due in one year or less
$
259

 
$
258

 
$
502

 
$
502

Due after one year
 
 
 
 
 
 
 
but less than five years
12,050

 
11,850

 
11,300

 
11,072

Due after five years
 
 
 
 
 
 
 
but less than ten years
68,556

 
65,934

 
69,900

 
66,880

Due after ten years
4,128

 
3,988

 
4,141

 
3,977

Mortgage-backed securities
 
 
 
 
 
 
 
   Agencies
139,616

 
139,454

 
135,054

 
134,890

   Collateralized
62,075

 
61,110

 
63,837

 
62,753

Collateralized mortgage obligations
18,181

 
18,332

 
19,626

 
19,810

Corporate Bonds
981

 
981

 
983

 
984

Asset-backed securities
14,868

 
14,759

 
14,866

 
14,758

Equity securities
969

 
2,075

 
969

 
1,817

Total securities available for sale
$
321,683

 
$
318,741

 
$
321,178

 
$
317,443


Restricted Equity Securities

The Company's holds stock in the Federal Home Loan Bank ("FHLB") in the amount of $5.1 million and $10.1 million at March 31, 2017 and December 31, 2016, respectively. 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 March 31, 2017, recorded an annualized dividend rate of 4.77%. 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.  
 
The Company holds stock in the Federal Reserve Bank ("FRB") in the amount of $14.0 million at March 31, 2017 and at December 31, 2016. FRB stock 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 remaining restricted stock held by the Company, in the amount of $178 thousand at March 31, 2017 and December 31, 2016, is stock in other banks with which the Bank conducts or has the ability to conduct correspondent activity. These investments are also carried at cost as there is no readily available market for these securities.


18

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - Loans and Allowance for Loan Losses
 
Loans are carried at their unpaid principal amount outstanding net of unamortized fees and origination costs, partial charge-offs, if any, and in the case of acquired loans, unaccreted fair value or purchase accounting adjustments. 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. 

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 fair value adjustment for GSLs that reduced the carrying amount in the GSLs to approximate the guaranteed portion of the loans. In the three-month period ended March 31, 2017, the Company sold a portion of the GSLs. The proceeds from the sale were $9.9 million, and the gain on the sale was $19 thousand, which is recorded in noninterest income on the Company's consolidated statements of income.

The following table presents the Company's composition of loans as of the dates stated:

March 31, 2017
 
December 31, 2016
Commercial & Industrial
$
787,443

 
$
895,952

Construction
255,309

 
257,712

Commercial real estate
591,739

 
585,727

Residential real estate
391,971

 
405,291

Consumer
296,781

 
274,008

Guaranteed student loans
32,533

 
44,043

Deferred loan fees and related costs
1,032

 
1,323

Total loans
$
2,356,808

 
$
2,464,056


As of March 31, 2017 and December 31, 2016, the Company had $577.8 million and $625.0 million, respectively, of loans pledged to the FRB and the FHLB as collateral for borrowings.

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 deterioration in credit quality subsequent to acquisition for these loans is reflected in the allowance for loan losses at such time the remaining purchase accounting adjustment (discount) for the acquired loans is inadequate to cover the allowance needs of these loans.

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

19

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). A portion of the loans acquired in the Merger were deemed to be purchased credit-impaired loans qualifying for accounting under ASC 310-30.

In applying ASC 310-30 to acquired loans, the Company must estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including default rates, the amount and timing of prepayments, and the value and timing of the liquidation of underlying collateral, in addition to other factors.

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 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 March 31, 2017, impairment of $9 thousand 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 type for the periods stated:
 
Three Months Ended March 31,

2017
 
2016
Balance at beginning of period
$
21,940

 
$
23,157

Charge-offs:
 
 
 
  Commercial & Industrial
2,787

 
258

  Construction
55

 
312

  Commercial real estate
720

 
540

  Residential real estate
240

 
1,603

  Consumer
664

 
19

  Guaranteed student loans

 

  Overdrafts
26

 
34

    Total charge-offs
4,492

 
2,766

Recoveries:
 
 
 
  Commercial & Industrial
127

 
89

  Construction
249

 
268

  Commercial real estate
193

 
222

  Residential real estate
221

 
220

  Consumer
28

 
10

  Guaranteed student loans

 

  Overdrafts

 

    Total recoveries
818

 
809

      Net charge-offs
3,674

 
1,957

Provision (benefit) for loan losses
9

 
(25
)
Balance at end of period
$
18,275

 
$
21,175



20

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has no allowance for loan losses on its guaranteed student loan portfolio. In allocating the consideration paid in the Merger, the Company recorded a fair value adjustment for GSLs, which reduced the carrying amount in the portfolio to an amount that approximates the portion of the loans subject to federal guarantee.


21

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:
 
March 31, 2017
 
 
 
 Individually Evaluated
 
 Collectively Evaluated

 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
9

 
9

 

    Consumer

 

 

      Total purchased credit-impaired loans
9

 
9

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
4,250

 
2,324

 
1,926

    Construction
1,130

 
73

 
1,057

    Commercial real estate
1,747

 

 
1,747

    Residential real estate
4,456

 
1,445

 
3,011

    Consumer
1,463

 
40

 
1,423

    Guaranteed student loans

 

 

    Unallocated qualitative
5,220

 

 
5,220

      Total originated and other purchased loans
18,266

 
3,882

 
14,384

        Total allowance for loan losses
$
18,275

 
$
3,891

 
$
14,384

Loan balances applicable to:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$
865

 
$
865

 
$

    Construction
978

 
978

 

    Commercial real estate
1,050

 
1,050

 

    Residential real estate
2,101

 
2,101

 

    Consumer
54

 
54

 

      Total purchased credit-impaired loans
5,048

 
5,048

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
786,578

 
20,856

 
765,722

    Construction
254,331

 
7,162

 
247,169

    Commercial real estate
590,689

 
7,417

 
583,272

    Residential real estate
389,870

 
12,276

 
377,594

    Consumer
296,727

 
882

 
295,845

    Guaranteed student loans
32,533

 

 
32,533

  Deferred loan fees and related costs
1,032

 

 
1,032

      Total originated and other purchased loans
2,351,760

 
48,593

 
2,303,167

        Total loans
$
2,356,808

 
$
53,641

 
$
2,303,167



22

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2016
 
 
 
 Individually Evaluated
 
 Collectively Evaluated

 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
5,816

 
3,327

 
2,489

    Construction
1,551

 
161

 
1,390

    Commercial real estate
2,410

 
734

 
1,676

    Residential real estate
5,205

 
1,275

 
3,930

    Consumer
1,967

 
606

 
1,361

    Guaranteed student loans

 

 

    Unallocated qualitative
4,991

 

 
4,991

      Total originated and other purchased loans
21,940

 
6,103

 
15,837

        Total allowance for loan losses
$
21,940

 
$
6,103

 
$
15,837

Loan balances applicable to:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$
897

 
$
897

 
$

    Construction
992

 
992

 

    Commercial real estate
1,090

 
1,090

 

    Residential real estate
2,122

 
2,122

 

    Consumer
55

 
55

 

      Total purchased credit-impaired loans
5,156

 
5,156

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
895,055

 
24,052

 
871,003

    Construction
256,720

 
7,982

 
248,738

    Commercial real estate
584,637

 
9,184

 
575,453

    Residential real estate
403,169

 
12,637

 
390,532

    Consumer
273,953

 
1,551

 
272,402

    Guaranteed student loans
44,043

 

 
44,043

  Deferred loan fees and related costs
1,323

 

 
1,323

      Total originated and other purchased loans
2,458,900

 
55,406

 
2,403,494

        Total loans
$
2,464,056

 
$
60,562

 
$
2,403,494







23

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 
March 31, 2017

 Recorded Investment
 
 Unpaid Principal Balance
 
 Related Allowance
With no related allowance recorded:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$
865

 
$
1,254

 
$

    Construction
978

 
1,433

 

    Commercial real estate
1,050

 
1,471

 

    Residential real estate
2,047

 
2,823

 

    Consumer
54

 
90

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
13,362

 
14,844

 

    Construction
6,962

 
16,370

 

    Commercial real estate
7,417

 
10,176

 

    Residential real estate
6,182

 
6,874

 

    Consumer
804

 
1,342

 

With an allowance recorded:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial

 

 

    Construction

 

 

    Commercial real estate

 

 

    Residential real estate
54

 
73

 
9

    Consumer

 

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
7,494

 
7,494

 
2,324

    Construction
200

 
200

 
73

    Commercial real estate

 

 

    Residential real estate
6,094

 
6,094

 
1,445

    Consumer
78

 
78

 
40

      Total loans individually evaluated for impairment
$
53,641

 
$
70,616

 
$
3,891



24

XENITH BANKSHARES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2016

 Recorded Investment
 
 Unpaid Principal Balance
 
 Related Allowance
With no related allowance recorded:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial
$
897

 
$
1,298

 
$

    Construction
992

 
1,448

 

    Commercial real estate
1,090

 
1,520

 

    Residential real estate
2,122

 
2,989

 

    Consumer
55

 
92

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
12,809

 
14,185

 

    Construction
7,078

 
16,327

 

    Commercial real estate
7,131

 
9,214

 

    Residential real estate
7,038

 
7,816

 

    Consumer
8

 
28

 

With an allowance recorded:
 
 
 
 
 
  Purchased credit-impaired loans
 
 
 
 
 
    Commercial & Industrial

 

 

    Construction

 

 

    Commercial real estate

 

 

    Residential real estate

 

 

    Consumer

 

 

  Originated and other purchased loans
 
 
 
 
 
    Commercial & Industrial
11,243

 
16,297

 
3,327

    Construction
904

 
1,054

 
161

    Commercial real estate
2,053

 
2,053

 
734

    Residential real estate
5,599

 
5,631

 
1,275

    Consumer
1,543

 
1,546

 
606

      Total loans individually evaluated for impairment
$
60,562

 
$
81,498

 
$
6,103