ACCESS NATIONAL CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - ACCESS NATIONAL CORP	ancx033117ex-321.htm
EX-31.2 - EXHIBIT 31.2 - ACCESS NATIONAL CORP	ancx033117ex-312.htm
EX-31.1 - EXHIBIT 31.1 - ACCESS NATIONAL CORP	ancx033117ex-311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

[ ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number: 000-49929

ACCESS NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)



Virginia (State or other jurisdiction of incorporation or organization)	82-0545425 (I.R.S. Employer Identification No.)
1800 Robert Fulton Drive, Suite 300, Reston, Virginia (Address of principal executive offices)	20191 (Zip Code)

(703) 871-2100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed from 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 þ	No o



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).	Yes þ	No o

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	o	Accelerated filer	þ
Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company	o
Emerging growth company	o



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.	o



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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 20,306,337 shares of Common Stock as of May 19, 2017.

ACCESS NATIONAL CORPORATION

FORM 10-Q

INDEX



Part I. Financial Information			Page No.

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Balance Sheets, March 31, 2017 and December 31, 2016	3

		Consolidated Statements of Income, three months ended March 31, 2017 and 2016	4

		Consolidated Statements of Comprehensive Income, three months ended March 31, 2017 and 2016	5

		Consolidated Statements of Changes in Shareholders’ Equity, three months ended March 31, 2017 and 2016	6

		Consolidated Statements of Cash Flows, three months ended March 31, 2017 and 2016	7

		Notes to Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial
		Condition and Results of Operations	33

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45

	Item 4.	Controls and Procedures	45


Part II. Other Information

	Item 1.	Legal Proceedings	46

	Item 1A.	Risk Factors	46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

	Item 3.	Defaults upon Senior Securities	47

	Item 4.	Mine Safety Disclosures	47

	Item 5.	Other Information	47

	Item 6.	Exhibits	48

Signatures			49

Table of Contents


ITEM 1.	FINANCIAL STATEMENTS

PART I



ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share and Per Share Data)

	March 31,			December 31,
	2017			2016
	(Unaudited)
ASSETS
Cash and due from banks	$	11,740		$	9,186
Interest-bearing balances and federal funds sold	31,866			81,873
Total cash and cash equivalents	43,606			91,059
Investment securities:
Available-for-sale, at fair value	190,129			194,090
Held-to-maturity, at amortized cost (fair value of $9,273 and $9,293, respectively)	9,186			9,200
Total investment securities	199,315			203,290
Restricted stock, at amortized cost	6,324			10,092
Loans held for sale, at fair value	36,299			35,676
Loans held for investment, net of allowance for loan losses of $13,727 and $16,008, respectively	1,059,064			1,033,690
Premises, equipment and land, net	7,097			7,084
Other assets	49,642			49,817
Total assets	$	1,401,347		$	1,430,708
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand deposits	$	376,674		$	362,036
Savings and interest-bearing deposits	472,105			440,585
Time deposits	308,211			251,706
Total deposits	1,156,990			1,054,327
Short-term borrowings	61,827			186,009
Long-term borrowings	50,000			60,000
Other liabilities and accrued expenses	8,358			9,842
Total liabilities	1,277,175			1,310,178
SHAREHOLDERS' EQUITY
Common stock $0.835 par value; 60,000,000 shares authorized; 10,787,490 and 10,636,242 issued and outstanding, respectively	9,008			8,881
Additional paid-in capital	24,254			21,779
Retained earnings	92,436			91,439
Accumulated other comprehensive loss, net	(1,526		)	(1,569		)
Total shareholders' equity	124,172			120,530
Total liabilities and shareholders' equity	$	1,401,347		$	1,430,708

See accompanying notes to the consolidated financial statements (unaudited).



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except for Share and Per Share Data)
(Unaudited)
	For the Three Months Ended March 31,
	2017		2016
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	12,199	$	10,876
Interest on federal funds sold and bank balances	131		70
Interest and dividends on securities	1,224		1,035
Total interest and dividend income	13,554		11,981
INTEREST EXPENSE
Interest on deposits	1,502		1,150
Interest on other borrowings	362		281
Total interest expense	1,864		1,431
Net interest income	11,690		10,550
Provision for loan losses	1,400		—
Net interest income after provision for loan losses	10,290		10,550
NONINTEREST INCOME
Service charges and fees	280		260
Gains on sales of loans held for sale	3,345		3,830
Other income	2,378		2,729
Total noninterest income	6,003		6,819
NONINTEREST EXPENSE
Salaries and employee benefits	8,040		7,668
Occupancy and equipment	820		761
Other operating expenses	3,335		2,700
Total noninterest expense	12,195		11,129
Income before income taxes	4,098		6,240
Income tax expense	1,491		2,145
NET INCOME	$	2,607	$	4,095
Earnings per common share:
Basic	$	0.24	$	0.39
Diluted	$	0.24	$	0.39
Average outstanding shares:
Basic	10,724,798		10,553,150
Diluted	10,857,235		10,606,359

See accompanying notes to the consolidated financial statements (unaudited).



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)
	For the Three Months Ended March 31,
	2017			2016

Net income	$	2,607		$	4,095
Other comprehensive income:
Unrealized holding gains arising during the period	66			3,037
Reclassification adjustment for gains included in net income	—			(57		)
Tax effect	(23		)	(1,043		)
Total other comprehensive income	43			1,937
Total comprehensive income	$	2,650		$	6,032

See accompanying notes to the consolidated financial statements (unaudited).



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands, Except for Share and Per Share Data)
(Unaudited)


	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance December 31, 2015	$	8,805	$	19,953	$	81,385		$	(1,005	)	$	109,138

Net income	—		—		4,095			—			4,095
Other comprehensive income	—		—		—			1,937			1,937
Cash dividends ($0.15 per share)	—		—		(1,583		)	—			(1,583		)
Exercise of stock options (19,100 shares)	16		226		—			—			242
Issuance of restricted common stock (6,205 shares)	5		123		—			—			128
Stock-based compensation	—		84		—			—			84
Balance March 31, 2016	$	8,826	$	20,386	$	83,897		$	932		$	114,041

Balance December 31, 2016	$	8,881	$	21,779	$	91,439		$	(1,569	)	$	120,530

Net income	—		—		2,607			—			2,607
Other comprehensive income	—		—		—			43			43
Cash dividends ($0.15 per share)	—		—		(1,610		)	—			(1,610		)
Exercise of stock options (118,693 shares)	99		1,560		—			—			1,659
Dividend reinvestment plan shares issued from reserve (28,006 shares)	24		695		—			—			719
Issuance of restricted common stock (4,549 shares)	4		125		—			—			129
Stock-based compensation	—		95		—			—			95
Balance March 31, 2017	$	9,008	$	24,254	$	92,436		$	(1,526	)	$	124,172

See accompanying notes to the consolidated financial statements (unaudited).



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)

	For the Three Months Ended
	March 31,
(In Thousands)	2017			2016
Cash Flows From Operating Activities
Net income	$	2,607		$	4,095
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	145			120
Provision for loan losses	1,400			—
Originations of loans held for sale	(94,500		)	(106,489		)
Proceeds from sales of loans held for sale	94,406			101,054
Increase in valuation of loans held for sale	(529		)	(407		)
Gains on sales of securities available-for-sale	—			(57		)
Deferred tax benefit	550			(9		)
Valuation allowance on derivatives	220			(256		)
Amortization (accretion) on securities, net	569			(137		)
Stock-based compensation	95			84
Income from bank owned life insurance	(184		)	(114		)
Changes in assets and liabilities:
Increase in other assets	(532		)	(2,195		)
Increase (decrease) in other liabilities	(1,408		)	64
Net cash provided by (used in) operating activities	$	2,839		$	(4,247	)
Cash Flows from Investing Activities
Proceeds from prepayments of securities available-for-sale	$	3,458		$	1,747
Proceeds from sales of available-for-sale securities	—			8,033
Purchases of securities available-for-sale	—			(9,171		)
Proceeds from maturities and calls of securities held-to-maturity	14			5,000
(Purchases) redemption of restricted stock, net	3,768			100
Purchases of premises, equipment and land, net	(136		)	(274		)
Increase in loans, net	(26,774		)	(27,282		)
Net cash used in investing activities	$	(19,670	)	$	(21,847	)
Cash Flows from Financing Activities
Increase in demand, interest-bearing demand and savings deposits	$	46,158		$	42,696
Increase in time deposits	56,505			4,016
Increase (decrease) in securities sold under agreements to repurchase	(182		)	(8,662		)
Decrease in short-term borrowings	(124,000		)	(5,000		)
Decrease in long-term borrowings	(10,000		)	—
Payment of dividends on common stock	(1,610		)	(1,583		)
Proceeds from issuance of common stock	2,507			370
Net cash provided by financing activities	$	(30,622	)	$	31,837
Increase (decrease) in cash and cash equivalents	(47,453		)	5,743
Cash and cash equivalents at beginning of the period	91,059			35,889
Cash and cash equivalents at end of the period	$	43,606		$	41,632
Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,860		$	1,409
Income taxes	$	12		$	237
Supplemental Disclosure of Non-Cash Transactions
Unrealized gains (losses) on securities available for sale	$	66		$	2,980
Transfer of loans held for investment to other real estate owned	$	—		$	129

See accompanying notes to the consolidated financial statements (unaudited).

Table of Contents

ACCESS NATIONAL CORPORATION

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation

Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national banking association. The Bank has three active wholly owned subsidiaries: Access Real Estate LLC (“Access Real Estate”), a real estate company; ACME Real Estate LLC, a real estate holding company of foreclosed property; and Access Capital Management Holding LLC (“ACM”), a holding company for Capital Fiduciary Advisors, L.L.C., Access Investment Services, L.L.C., and Access Insurance Group, L.L.C.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”). The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. No reclassifications were significant and there was no effect on net income. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2016, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

The Corporation has evaluated subsequent events for potential recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these consolidated financial statements were issued.

Note 2. Stock-Based Compensation Plan

During the first three months of 2017, the Corporation granted 120,600 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “Plan”). Options granted under the Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest over various periods ranging from 2.5 years to 4.0 years and expire one year after the full vesting date. Stock-based compensation expense recognized in other operating expense during the first three months of 2017 and 2016 was $95 thousand and $84 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing model with the assumptions noted below.

Total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Plan as of March 31, 2017 was $1.1 million. The cost is expected to be recognized over a weighted average period of 1.37 years.

A summary of stock option activity under the Plan for the three months ended March 31, 2017 and 2016 is presented as follows:



	For the Three Months Ended March 31,
	2017			2016
Expected life of options granted, in years	4.90			4.81
Risk-free interest rate	1.48		%	1.28		%
Expected volatility of stock	30.00		%	30.00		%
Annual expected dividend yield	3.00		%	3.00		%
Fair value of granted options	$	746,577		$	405,646
Non-vested options	310,821			298,976

The following table summarizes options outstanding under the for the three months ended March 31, 2017 and 2016:



	March 31, 2017
	Number of Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at beginning of year	481,381		$	16.52	2.50	$	5,412,143
Granted	120,600		27.82		4.90	—
Exercised	(118,693	)	13.99		1.20	1,552,993
Lapsed or canceled	(993	)	13.28		1.53	—
Outstanding March 31, 2017	482,295		$	19.97	3.20	$	4,845,236
Exercisable at March 31, 2017	171,474		$	16.48	1.97	$	2,322,399



	March 31, 2016
	Number of Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at beginning of year	407,832		$	15.33	2.81	$	2,091,196
Granted	115,050		18.32		4.81	—
Exercised	(19,100	)	12.70		1.63	(98,889		)
Lapsed or canceled	(7,650	)	16.16		3.16	—
Outstanding March 31, 2016	496,132		$	16.12	3.11	$	1,845,492
Exercisable at March 31, 2016	197,156		$	14.14	2.08	$	1,120,324

Note 3. Securities

The following tables provide the amortized costs and fair values of securities held-to-maturity at March 31, 2017 and December 31, 2016. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premium and accretion of discounts.



	March 31, 2017
(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-maturity
U.S. Government agencies	$	5,000	$	39	$	—		$	5,039
Municipals	4,186		67		(19		)	4,234
Total	$	9,186	$	106	$	(19	)	$	9,273



	December 31, 2016
(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-maturity
U.S. Government agencies	$	5,000	$	46	$	—		$	5,046
Municipals	4,200		66		(19		)	4,247
Total	$	9,200	$	112	$	(19	)	$	9,293

The amortized cost and fair value of securities held-to-maturity as of March 31, 2017 and December 31, 2016 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.



	March 31, 2017				December 31, 2016
(In Thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Held-to-maturity
U.S. Government agencies:
Due after one year through five years	$	5,000	$	5,039	$	5,000	$	5,046
Municipals:
Due after one year through five years	2,018		2,058		2,028		2,062
Due after five years through ten years	1,614		1,641		1,617		1,649
Due after ten years through fifteen years	554		535		555		536
Total	$	9,186	$	9,273	$	9,200	$	9,293

The following tables provide the amortized costs and fair values of securities available-for-sale. Available-for-sale securities are carried at estimated fair value with net unrealized gains or losses reported on an after tax basis as a component of accumulated other comprehensive income in shareholders' equity. The estimated fair value of available-for-sale securities is impacted by interest rates, credit spreads, market volatility, and liquidity.



	March 31, 2017
(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale
U.S. Government agencies	$	5,101	$	—	$	(52	)	$	5,049
Municipals	45,267		253		(1,125		)	44,395
Mortgage backed securities	117,284		131		(1,117		)	116,298
Asset backed securities	12,803		—		(386		)	12,417
Corporate bonds	8,546		38		—			8,584
Certificate of deposit	1,976		24		—			2,000
CRA mutual fund	1,500		—		(114		)	1,386
Total	$	192,477	$	446	$	(2,794	)	$	190,129



	December 31, 2016
(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale
U.S. Government agencies	$	5,106	$	—	$	(112	)	$	4,994
Municipals	45,392		172		(1,205		)	44,359
Mortgage backed securities	120,794		177		(1,164		)	119,807
Asset backed securities	13,105		17		(258		)	12,864
Corporate bonds	8,631		35		—			8,666
Certificates of deposit	1,976		33		—			2,009
CRA mutual fund	1,500		—		(109		)	1,391
Total	$	196,504	$	434	$	(2,848	)	$	194,090

The amortized cost and fair value of securities available-for-sale as of March 31, 2017 and December 31, 2016 by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.



	March 31, 2017				December 31, 2016
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In Thousands)
Available-for-sale:
U.S. Government agencies:
Due after one year through five years	$	5,101	$	5,049	$	5,106	$	4,994
Municipals:
Due after one year through five years	3,421		3,489		3,442		3,500
Due after five years through ten years	7,320		7,081		5,025		4,888
Due after ten years through fifteen years	18,094		18,181		20,463		20,300
Due after fifteen years	16,432		15,644		16,462		15,671
Mortgage backed securities:
Due after one year through five years	40,733		40,725		24,959		24,916
Due after five years through ten years	14,733		14,629		24,996		24,895
Due after ten years through fifteen years	12,218		11,963		12,861		12,555
Due after fifteen years	49,600		48,981		57,978		57,441
Asset backed securities:
Due after five years through ten years	3,075		3,056,000		3,080		3,001
Due after ten years through fifteen years	1,204		1,166
Due after fifteen years	8,524		8,195		10,025		9,863
Corporate bonds:
Due in one year or less	4,094		4,096		4,141		4,144
Due after one year through five years	4,452		4,488		4,490		4,522
Certificates of deposit:
Due after one year through five years	1,976		2,000		1,976		2,009

CRA mutual fund	1,500		1,386		1,500		1,391
Total	$	192,477	$	190,129	$	196,504	$	194,090

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, credit lines with the Federal Reserve Bank ("FRB"), and debtor-in-possession accounts amounted to $140.8 million and $178.7 million at March 31, 2017 and December 31, 2016, respectively.

Securities available-for-sale and held-to-maturity that had an unrealized loss position at March 31, 2017 and December 31, 2016 are as follow:



(In Thousands)	Less than Twelve Months					Twelve Months or Greater					Total
March 31, 2017	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Held-to-maturity
Municipals	$	535	$	(19	)	$	—	$	—		$	535	$	(19	)

Available-for-sale
U.S. Government agencies	$	5,049	$	(52	)	$	—	$	—		$	5,049	$	(52	)
Municipals	24,735		(1,125		)	—		—			24,735		(1,125		)
Mortgage backed securities	60,544		(496		)	18,738		(621		)	79,282		(1,117		)
Asset backed securities	5,422		(266		)	6,995		(120		)	12,417		(386		)
CRA mutual funds	—		—			1,386		(114		)	1,386		(114		)
Total	$	95,750	$	(1,939	)	$	27,119	$	(855	)	$	122,869	$	(2,794	)



(In Thousands)	Less than Twelve Months					Twelve Months or Greater					Total
December 31, 2016	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Held-to-maturity
Municipals	$	536	$	(19	)	$	—	$	—		$	536	$	(19	)

Available-for-sale
U.S. Government agencies	$	4,994	$	(112	)	$	—	$	—		$	4,994	$	(112	)
Municipals	28,147		(1,205		)	—		—			28,147		(1,205		)
Mortgage backed securities	62,145		(541		)	19,768		(623		)	81,913		(1,164		)
Asset backed securities	1,286		(37		)	7,077		(221		)	8,363		(258		)
CRA mutual fund	—		—			1,391		(109		)	1,391		(109		)
Total	$	96,572	$	(1,895	)	$	28,236	$	(953	)	$	124,808	$	(2,848	)

The Corporation evaluates securities for other-than-temporary impairment ("OTTI") on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as: the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit quality for the issuer. When analyzing an issuer's financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent downgrades by bond rating agencies have occurred.

At March 31, 2017, there were 62 available-for-sale securities with unrealized losses totaling $2.8 million and one held-to-maturity security with an unrealized loss of $19 thousand. The Corporation evaluated the investment portfolio for possible other-than-temporary impairment losses and concluded the unrealized losses were caused by interest rate fluctuations with no adverse change in cash flows noted. Based on this analysis and because the Corporation does not intend to sell securities in an unrealized loss position and it is more likely than not the Corporation will not be required to sell any securities before recovery of amortized cost basis, which may be at maturity, the Corporation does not consider any portfolio securities to be other-than-temporarily impaired.

Restricted stock

The Corporation’s investment in the Federal Home Loan Bank of Atlanta ("FHLB") stock totaled $5.3 million and $9.1 million at March 31, 2017 and December 31, 2016, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted security which is carried at cost because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2017, and no impairment has been recognized. FHLB stock is shown in restricted stock on the consolidated balance sheets.

The Corporation also has an investment in FRB stock which totaled $1.0 million at March 31, 2017 and December 31, 2016, respectively. The investment in FRB stock is a required investment and is carried at cost since there is no ready market. The Corporation does not consider this investment to be other-than-temporarily impaired at March 31, 2017, and no impairment has been recognized. FRB stock is shown in restricted stock on the consolidated balance sheets.

Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is classified as a short-term borrowing in the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial institution in the Corporation’s custodial account. The Corporation

has the right to sell or repledge the investment securities. The risks and rewards associated with the investment securities pledged as collateral (e.g. a decline or rise in the fair value of the investments) remains with the Corporation. As of March 31, 2017 and December 31, 2016, the obligations outstanding under these repurchase agreements totaled $16.8 million and $17.0 million, respectively, and were comprised of overnight sweep accounts. The fair value of the securities pledged in connection with these repurchase agreements at March 31, 2017 was $22.4 million in total and consisted of $11.3 million in municipal securities, $6.7 million in mortgage backed securities, $1.8 million in corporate bonds, $1.2 million in certificates of deposit, and $1.4 million in the CRA mutual fund. The fair value of the securities pledged in connection with these repurchase agreements at December 31, 2016 was $21.4 million in total and consisted of $4.7 million in municipal securities, $6.9 million in mortgage backed securities, $5.9 million in corporate bonds, $2.5 million in asset backed securities and $1.4 million in the CRA mutual fund.

Note 4. Loans

The following table presents the composition of the loans held for investment portfolio at March 31, 2017 and December 31, 2016:



	March 31, 2017				December 31, 2016
(In Thousands)	Outstanding Amount		Percent of Total Portfolio		Outstanding Amount		Percent of Total Portfolio
Commercial real estate - owner occupied	$	262,431	24.46	%	$	250,440	23.87	%
Commercial real estate - nonowner occupied	205,452		19.15		184,688		17.59
Real estate construction	91,614		8.54		91,822		8.75
Residential real estate	212,007		19.76		204,413		19.47
Commercial	294,451		27.45		311,486		29.67
Consumer	6,836		0.64		6,849		0.65
Total loans	$	1,072,791	100.00	%	$	1,049,698	100.00	%
Less allowance for loan losses	13,727				16,008
Net loans	$	1,059,064			$	1,033,690

Unearned income and net deferred loan fees and costs totaled $2.6 million and $2.4 million at March 31, 2017 and December 31, 2016, respectively. Loans pledged to secure borrowings at the FHLB totaled $233.7 million and $266.6 million at March 31, 2017 and December 31, 2016, respectively.

Loans are considered past due if a contractual payment is not made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the portfolio is shown below as of March 31, 2017 and December 31, 2016. Loans that were on non-accrual status are not included in any past due amounts.



	March 31, 2017
(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Non-accrual loans		Current Loans		Total Loans
Commercial real estate - owner occupied	$	—	$	—	$	—	$	—	$	—	$	262,431	$	262,431
Commercial real estate - nonowner occupied	—		—		—		—		—		205,452		205,452
Real estate construction	270		—		—		270		940		90,404		91,614
Residential real estate	983		—		—		983		946		210,078		212,007
Commercial	—		—		—		—		3,358		291,093		294,451
Consumer	—		—		—		—		—		6,836		6,836
Total	$	1,253	$	—	$	—	$	1,253	$	5,244	$	1,066,294	$	1,072,791



	December 31, 2016
(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Non-accrual loans		Current Loans		Total Loans
Commercial real estate - owner occupied	$	—	$	—	$	—	—		$	—	$	250,440	250,440
Commercial real estate - non-owner occupied	—		—		—		—		—		184,688		184,688
Real estate construction	—		—		—		—		940		90,882		91,822
Residential real estate	—		97		—		97		431		203,885		204,413
Commercial	438		—		—		438		5,551		305,497		311,486
Consumer	—		—		—		—		—		6,849		6,849
Total	$	438	$	97	$	—	$	535	$	6,922	$	1,042,241	$	1,049,698

Loans listed as non-performing are also placed on non-accrual status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual status if the borrower shows renewed willingness and ability to repay under the terms of the loan agreement. The risk profile based upon payment activity is shown below.



	March 31, 2017						December 31, 2016
(In Thousands)	Non-performing		Performing		Total Loans		Non-performing		Performing		Total Loans
Commercial real estate - owner occupied	$	—	$	262,431	$	262,431	$	—	$	250,440	$	250,440
Commercial real estate - nonowner occupied	—		205,452		205,452		—		184,688		184,688
Real estate construction	940		90,674		91,614		940		90,882		91,822
Residential real estate	946		211,061		212,007		431		203,982		204,413
Commercial	3,358		291,093		294,451		5,551		305,935		311,486
Consumer	—		6,836		6,836		—		6,849		6,849
Total	$	5,244	$	1,067,547	$	1,072,791	$	6,922	$	1,042,776	$	1,049,698

Identifying and Classifying Portfolio Risks by Risk Rating

At origination, loans are categorized into risk categories based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings are consistent with the bank regulatory rating system.

A loan may have portions of its balance in one rating and other portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist for part, but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has provided a guaranty that partially covers a loan.

For clarity of presentation, the Corporation’s loan portfolio is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

Pass: The condition of the borrower and the performance of the loan are satisfactory or better.

Special Mention: Loans with one or more potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the borrower's credit position at some future date.

Substandard: Loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans are considered uncollectible and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, and a partial recovery may be effected in the future. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.

The following tables present the recorded investment of loans that have been risk rated in accordance with the internal classification system:



March 31, 2017
(In Thousands)	Real Estate Construction			Commercial Real Estate Owner Occupied			Commercial Real Estate Non-Owner Occupied			Residential Real Estate			Commercial			Consumer		Total
Pass	$	91,056		$	259,123		$	205,862		$	210,086		$	276,262		$	6,835	$	1,049,224
Special Mention	—			785			295			2,043			3,584			—		6,707
Substandard	940			3,108			—			—			15,362			—		19,410
Doubtful	—			—			—			—			—			—		—
Loss	—			—			—			—			—			—		—
Unearned income	(382		)	(585		)	(705		)	(122		)	(757		)	1		(2,550		)
Ending Balance	$	91,614		$	262,431		$	205,452		$	212,007		$	294,451		$	6,836	$	1,072,791



December 31, 2016
(In Thousands)	Real Estate Construction			Commercial Real Estate Owner Occupied			Commercial Real Estate Non-Owner Occupied			Residential Real Estate			Commercial			Consumer		Total
Pass	$	91,296		$	247,001		$	185,020		$	202,762		$	287,978		$	6,848	$	1,020,905
Special Mention	—			1,213			300			932			4,544			—		6,989
Substandard	940			2,807			—			878			19,561			—		24,186
Doubtful	—			—			—			—			—			—		—
Loss	—			—			—			—			—			—		—
Unearned income	(414		)	(581		)	(632		)	(159		)	(597		)	1		(2,382		)
Ending Balance	$	91,822		$	250,440		$	184,688		$	204,413		$	311,486		$	6,849	$	1,049,698

Impaired Loans

A loan is classified as impaired when it is deemed probable by management’s analysis that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, or the recorded investment in the impaired loan is greater than the present value of expected future cash flows, discounted at the loan's effective interest rate. In the case of an impaired loan, management conducts an analysis which identifies if a quantifiable potential loss exists, and takes the necessary steps to record that loss when it has been identified as uncollectible.

As the ultimate collectability of the total principal of an impaired loan is in doubt, the loan is placed on non-accrual status with all payments applied to principal under the cost-recovery method. As the Bank does not utilize the cash-basis method of accounting for impaired loans, the Bank did not recognize interest income in association with its impaired loans during 2017.

The table below shows the results of management’s analysis of impaired loans as of March 31, 2017 and December 31, 2016:



	March 31, 2017
(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific related allowance recorded:
Commercial real estate - owner occupied	$	—	$	—	$	—
Commerical real estate - nonowner occupied	—		—		—
Real estate construction	—		—		—
Residential real estate	528		528		—
Commercial	1,779		2,095		—
Consumer	—		—		—
Total with no specific related allowance	$	2,307	$	2,623	$	—
With a specific related allowance recorded:
Commercial real estate loans - owner occupied	$	—	$	—	$	—
Commercial real estate loans - nonowner occupied	—		—		—
Real estate construction	940		994		221
Residential real estate	—		—		—
Commercial loans	1,997		3,270		509
Consumer loans	—		—		—
Total with a specific related allowance	$	2,937	$	4,264	$	730
Total	$	5,244	$	6,887	$	730



	December 31, 2016
(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific related allowance recorded:
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - nonowner occupied	—		—		—
Real estate construction	—		—		—
Residential real estate	431		431		—
Commercial	2,748		3,771		—
Consumer	—		—		—
Total with no specific related allowance	$	3,179	$	4,202	$	—
With a specific related allowance recorded:
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - nonowner occupied	—		—		—
Real estate construction	940		994		221
Residential real estate	—		—		—
Commercial	2,803		2,900		2,805
Consumer	—		—		—
Total with a specific related allowance	$	3,743	$	3,894	$	3,026
Total	$	6,922	$	8,096	$	3,026

The table below shows the average recorded investment in impaired loans by class of loan:



	Average Recorded Investment
	March 31, 2017		December 31, 2016
(In Thousands)
Commercial real estate - owner occupied	$	—	$	59
Commercial real estate - nonowner occupied	—		2,099
Real estate construction	940		1,009
Residential real estate	440		120
Commercial	3,981		4,885
Consumer	—		—
Total	$	5,361	$	8,172

The “Recorded Investment” amounts in the table above represent the outstanding principal balance net of charge-offs and non-accrual payments to principal on each loan represented in the table. The “Unpaid Principal Balance” represents the outstanding principal balance on each loan represented in the table plus any amounts that have been charged-off on each loan and non-accrual payments applied to principal.

Troubled Debt Restructurings ("TDR")

A TDR is a formal restructure of a loan when the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to a borrower. The Bank classifies these transactions as a TDR if the transaction meets the following conditions: an existing credit agreement must be formally renewed, extended and/or modified; the borrower must be experiencing financial difficulty; and the Bank has granted a concession that it would not otherwise consider.

Once identified as a TDR, a loan is considered to be impaired, and an impairment analysis is performed for the loan individually, rather than under a general loss allowance based on the loan type and risk rating. Any resulting shortfall is charged-off. This method is used consistently for all segments of the portfolio.

Normally, loans identified as TDRs would be placed on non-accrual status and considered non-performing until sufficient history of timely collection or payment has occurred that allows them to return to performing status, generally six months.

No loans were modified in connection with a TDR during the three month periods ended March 31, 2017 and 2016.

The total balance of TDRs at March 31, 2017 and December 31, 2016 was $2.1 million and $4.1 million, respectively. The amount of the specific valuation allowance related to TDRs was $457 thousand and $2.2 million as of March 31, 2017 and December 31, 2016, respectively.

There were no outstanding commitments to lend additional amounts to TDR borrowers at March 31, 2017 or December 31, 2016.

There were no TDR payment defaults during three months ended March 31, 2017 and 2016. For purposes of this disclosure, a TDR payment default occurs when, within twelve months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 or more past due.

Note 5. Allowance for Loan Losses

The allowance for loan losses totaled $13.7 million and $16.0 million at March 31, 2017 and December 31, 2016, respectively. The allowance for loan losses was equivalent to 1.28% and 1.53% of total loans held for investment at March 31, 2017 and December 31, 2016, respectively. Adequacy of the allowance is assessed and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible.

The methodology by which we systematically determine the amount of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis are documented, reviewed, and approved by the Board of Directors no less than quarterly.

The level of the allowance for loan losses is determined by management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk rating scale and definitions commonly adopted by the federal banking

agencies is contained within the framework prescribed by the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve may be assigned if the loan is deemed to be impaired.

During the risk rating verification process, each loan identified as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.

For the remaining loans in each segment, the Bank calculates the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer. Management calculates the historical loss rate in each group by risk rating using a period of at least six years. This historical loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.

Once complete, management compares the condition of the portfolio using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis, management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but is deemed necessary to absorb additional losses in the portfolio.

Management and the Board of Directors subject the reserve adequacy and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have not resulted in any material adjustment to the allowance.

The following tables provide detailed information about the allowance for loan losses as of and for the periods indicated.



	March 31, 2017
(In Thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial			Consumer			Total
Allowance for loan losses:
Balance at December 31, 2016	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053		$	80		$	16,008
Charge-offs	—		—			—		—			(3,703		)	—			(3,703		)
Recoveries	—		—			—		7			15			—			22
Provision	34		(147		)	26		(66		)	1,561			(8		)	1,400
Balance at March 31, 2017	$	1,311	$	2,796		$	2,171	$	2,451		$	4,926		$	72		$	13,727
Ending allowance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	221	$	—		$	—	$	—		$	509		$	—		$	730
Collectively evaluated for impairment	1,090		2,796			2,171		2,451			4,417			72			12,997
Total ending allowance balance	$	1,311	$	2,796		$	2,171	$	2,451		$	4,926		$	72		$	13,727
Loans:
Individually evaluated for impairment	$	940	$	333		$	—	$	1,118		$	3,980		$	—		$	6,371
Collectively evaluated for impairment	90,674		262,098			205,452		210,889			290,471			6,836			1,066,420
Total ending loans balance	$	91,614	$	262,431		$	205,452	$	212,007		$	294,451		$	6,836		$	1,072,791



	December 31, 2016
(In thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,056	$	3,042		$	1,862	$	2,862		$	4,612	$	129		$	13,563
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		40			285		—			325
Provision	221		(99		)	283		(392		)	2,156		(49		)	2,120
Ending balance	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053	$	80		$	16,008
Ending allowance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	221	$	—		$	—	$	—		$	2,805	$	—		$	3,026
Collectively evaluated for impairment	1,056		2,943			2,145		2,510			4,248		80			12,982
Total ending allowance balance	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053	$	80		$	16,008
Loans:
Individually evaluated for impairment	$	940	$	335		$	—	$	606		$	6,182	$	—		$	8,063
Collectively evaluated for impairment	90,882		250,105			184,688		203,807			305,304		6,849			1,041,635
Total ending loans balance	$	91,822	$	250,440		$	184,688	$	204,413		$	311,486	$	6,849		$	1,049,698



	March 31, 2016
(In thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial		Consumer			Total
Allowance for loan losses:
Beginning balance	$	1,056	$	3,042		$	1,862	$	2,862		$	4,612	$	129		$	13,563
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		11			40		—			51
Provision	58		(89		)	58		(42		)	17		(2		)	—
Ending balance	$	1,114	$	2,953		$	1,920	$	2,831		$	4,669	$	127		$	13,614
Ending allowance:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	185	$	—		$	—	$	—		$	—	$	—		$	185
Collectively evaluated for impairment	929		2,953			1,920		2,831			4,669		127			13,429
Total ending allowance balance	$	1,114	$	2,953		$	1,920	$	2,831		$	4,669	$	127		$	13,614
Loans:
Individually evaluated for impairment	$	1,031	$	348		$	5,486	$	214		$	1,327	$	—		$	8,406
Collectively evaluated for impairment	71,024		217,606			147,947		202,644			257,193		9,862			906,276
Total ending loans balance	$	72,055	$	217,954		$	153,433	$	202,858		$	258,520	$	9,862		$	914,682

Note 6. Earnings Per Share

The following table shows the calculation of both basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2017 and 2016, respectively. The numerator of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding used as the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive common stock options utilizing the treasury stock method.



	For the Three Months Ended March 31,
	2017		2016
(In thousands, except for share and per share data)
Basic earnings per share:
Net income	$	2,607	$	4,095
Weighted average shares outstanding	10,724,798		10,553,150
Basic earnings per share	$	0.24	$	0.39
Diluted earnings per share:
Net income	$	2,607	$	4,095
Weighted average shares outstanding	10,724,798		10,553,150
Stock options	132,437		53,209
Weighted average diluted shares outstanding	10,857,235		10,606,359
Diluted earnings per share	$	0.24	$	0.39

None of the stock options were considered anti-dilutive as of March 31, 2017 and 2016.

Note 7. Segment Reporting

The Corporation has three reportable segments: traditional commercial banking, mortgage banking, and wealth management. Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income. Wealth management operating revenues consist principally of transactional fees charged to clients as well as fees for portfolio asset management.

The commercial banking segment provides the mortgage banking segment (“Mortgage Division”) with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the prime rate. These transactions are eliminated in the consolidation process.

The “Other” column in the following table includes the operations of the Corporation and Access Real Estate. The primary source of income for the Corporation is derived from dividends from the Bank and its primary expense relates to costs incurred by the Corporation in connection with its annual audits and directors fees. The primary source of income for Access Real Estate is derived from rents received from the Bank.

The following table presents segment information as of and for the three months ended March 31, 2017 and 2016:



	March 31, 2017
(In Thousands)	Commercial Banking		Wealth Management			Mortgage Banking		Other			Eliminations			Consolidated
Revenues:
Interest income	$	13,394	$	—		$	250	$	6		$	(96	)	$	13,554
Gain on sales of loans	—		—			3,345		—			—			3,345
Other revenues	765		754			1,126		336			(323		)	2,658
Total revenues	14,159		754			4,721		342			(419		)	19,557
Expenses:
Interest expense	1,870		—			27		63			(96		)	1,864
Salaries and employee benefits	4,418		591			3,031		—			—			8,040
Other expenses	3,527		239			841		1,271			(323		)	5,555
Total operating expenses	9,815		830			3,899		1,334			(419		)	15,459
Income (loss) before income taxes	$	4,344	$	(76	)	$	822	$	(992	)	$	—		$	4,098
Total assets	$	1,351,257	$	2,739		$	52,447	$	20,657		$	(25,753	)	$	1,401,347



	March 31, 2016
(In Thousands)	Commercial Banking		Wealth Management			Mortgage Banking		Other			Eliminations			Consolidated
Revenues:
Interest income	$	11,756	$	—		$	344	$	4		$	(123	)	$	11,981
Gain on sales of loans	—		—			3,830		—			—			3,830
Other revenues	936		778			1,247		347			(319		)	2,989
Total revenues	12,692		778			5,421		351			(442		)	18,800
Expenses:
Interest expense	1,436		—			51		67			(123		)	1,431
Salaries and employee benefits	3,923		560			3,185		—			—			7,668
Other expenses	1,840		291			1,069		580			(319		)	3,461
Total operating expenses	7,199		851			4,305		647			(442		)	12,560
Income (loss) before income taxes	$	5,493	$	(73	)	$	1,116	$	(296	)	$	—		$	6,240
Total assets	$	1,185,681	$	2,686		$	32,716	$	17,283		$	(21,331	)	$	1,217,035

Note 8. Fair Value Measurements

Fair value pursuant to FASB ASC 820-10, Fair Value Measurements and Disclosures, is the exchange price, in an orderly transaction that is not a forced liquidation or distressed sale, between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or liability. FASB ASC 820-10 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity specific inputs. In addition, FASB ASC 820-10 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Transfers between levels of the fair value hierarchy are recognized on the actual dates of the event or circumstances that caused the transfer, which generally coincides with the Corporation’s monthly and/or quarterly valuation process.

The standard describes three levels of inputs that may be used to measure fair values:


Level 1.	Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.


Level 2.	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.


Level 3.	Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods to determine the fair value of each type of financial instrument:

Investment securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating.

Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2). For securities not traded in active markets, the Corporation utilizes the services of an independent valuation firm (Level 3).

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Derivative financial instruments: Derivative instruments are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward commitments to sell mortgage loans and mortgage backed securities as further described in Note 7. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for interest rate lock commitments (Level 3).

Impaired loans: The fair values of impaired loans are measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The use of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral (Level 3).

Other real estate owned: The fair value of other real estate owned, which consists of real estate that has been foreclosed, is recorded at the lower of fair value less selling expenses or the book balance prior to foreclosure. Write downs are provided for subsequent declines in value and are recorded in other operating expenses (Level 2).

Assets and liabilities measured at fair value under FASB ASC 820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected the fair value option as of March 31, 2017 and December 31, 2016 are summarized below:



(In Thousands)	March 31, 2017
Description	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets - Recurring
Available-for-sale investment securities
U.S. Government agencies	$	5,049	$	—	$	5,049	$	—
Municipals	44,395		—		44,395		—
Mortgage backed securities	116,298		—		116,298		—
Asset backed securities	12,417		—		8,161		4,256
Corporate bonds	8,584		—		8,584		—
Certificates of deposit	2,000		—		2,000		—
CRA mutual fund	1,386		—		1,386		—
Total available-for-sale investment securities	190,129		—		185,873		4,256

Residential loans held for sale	36,299		—		36,299		—
Derivative assets	697		—		—		697
Total Financial Assets - Recurring	$	227,125	$	—	$	222,172	$	4,953

Financial Liabilities - Recurring
Derivative liabilities	$	249	$	—	$	—	$	249

Financial Assets - Non-Recurring
Impaired loans ⁽¹⁾	$	5,244	$	—	$	—	$	5,244


(1)	Represents the carrying value of loans for which adjustments are based on the appraised value of the collateral, if collateral dependent, or the present value of expected future cash flows, discounted at the loan's effective interest rate.



(In Thousands)	December 31, 2016
Description	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets - Recurring
Available-for-sale investment securities
U.S. Government agencies	$	4,994	$	—	$	4,994	$	—
Municipals	44,359		—		44,359		—
Mortgage backed securities	119,807		—		119,807		—
Asset backed securities	12,864		—		8,364		4,500
Corporate bonds	8,666		—		8,666		—
Certificate of deposit	2,009		—		2,009		—
CRA mutual fund	1,391		—		1,391		—
Total available-for-sale investment securities	194,090		—		189,590		4,500

Residential loans held for sale	35,676		—		35,676		—
Derivative assets	993		—		—		993
Total Financial Assets - Recurring	$	230,759	$	—	$	225,266	$	5,493

Financial Liabilities - Recurring
Derivative liabilities	$	325	$	—	$	—	$	325

Financial Assets - Non-Recurring
Impaired loans (1)	$	6,922	$	—	$	—	$	6,922


(1)	Represents the carrying value of loans for which adjustments are based on the appraised value of the collateral, if collateral dependent, or the present value of expected future cash flows, discounted at the loan's effective interest rate.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the three month periods ended March 31, 2017 and 2016:



	Net Derivatives			Securities Available-for-Sale			Total
	(In Thousands)

Balance, January 1, 2017	$	668		$	4,500		$	5,168
Realized and unrealized gains (losses) included in earnings	(220		)	—			(220		)
Unrealized gains (losses) included in other comprehensive income	—			(244		)	(244		)
Purchases, settlements, paydowns, and maturities	—			—			—
Transfer into Level 3	—			—			—
Balance, March 31, 2017	$	448		$	4,256		$	4,704

	Net Derivatives			Securities Available-for-Sale			Total
	(In Thousands)

Balance, January 1, 2016	$	273		$	—		$	273
Realized and unrealized gains (losses) included in earnings	256			—			256
Unrealized gains (losses) included in other comprehensive income	—			—			—
Purchases, settlements, paydowns, and maturities	—			—			—
Transfer into Level 3	—			—			—
Balance, March 31, 2016	$	529		$	—		$	529

The following tables present quantitative information as of March 31, 2017 and December 31, 2016 about level 3 fair value measurements for assets measured at fair value:



	March 31, 2017
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(In Thousands)
Financial Assets - Recurring
Asset backed securities	$	4,256	Valuation service	Discounted cash flows	3% - 6% (5%)
Derivative assets	$	697	Market pricing (3)	Estimated pullthrough	75% - 90% (84.3%)
Derivative liabilities	$	249	Market pricing (3)	Estimated pullthrough	75% - 90% (84.3%)

Financial Assets - Non-recurring
Impaired loans - Real estate secured	$	1,477	Appraisal of collateral (1)	Liquidation expenses (2)	0% - 20% (10%)
Impaired loans - Non-real estate secured	$	3,767	Cash flow basis	Liquidation expenses (2)	0% - 20% (10%)


(1)	Fair value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which generally include various level 3 inputs which are not identifiable.


(2)	Valuations of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal.


(3)	Market pricing on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and liabilities that will create a realized gain or loss. The range and weighted average of estimated pull-through is presented.



	December 31, 2016
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(In Thousands)
Financial Assets - Recurring
Asset backed securities	$	4,500	Valuation service	Discounted cash flows	3% - 6% (5%)
Derivative assets	$	993	Market pricing (3)	Estimated pullthrough	75% - 90% (89.0%)
Derivative liabilities	$	325	Market pricing (3)	Estimated pullthrough	75% - 90% (89.0%)

Financial Assets - Non-recurring
Impaired loans - Real estate secured	$	1,371	Appraisal of collateral (1)	Liquidation expenses (2)	0% - 20% (10%)
Impaired loans - Non-real estate secured	$	5,551	Cash flow basis	Liquidation expenses (2)	0% - 20% (5%)


(1)	Fair value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which generally include various level 3 inputs which are not identifiable.


(2)	Valuations of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal.


(3)	Market pricing on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and liabilities that will create a realized gain or loss. The range and weighted average of estimated pull-through is presented.

Financial instruments recorded using FASB ASC 825-10

Under FASB ASC 825-10, the Corporation may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made.

The following tables reflect the difference between the fair value carrying amount of residential mortgage loans held for sale, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.



	March 31, 2017
(In Thousands)	Aggregate Fair Value		Difference		Contractual Principal
Residential mortgage loans held for sale	$	36,299	$	1,532	$	34,767



	December 31, 2016
(In Thousands)	Aggregate Fair Value		Difference		Contractual Principal
Residential mortgage loans held for sale	$	35,676	$	1,004	$	34,672

The Corporation has elected to account for residential loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments (not previously described) for which it is practicable to estimate that value:

Cash and Short-Term Investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value. As such they are classified as Level 1 for noninterest-bearing deposits and Level 2 for interest-bearing deposits due from banks or federal funds sold.

Restricted Stock

It is not practical to determine the fair value of restricted stock due to the restrictions placed on its transferability.

Loans, Net of Allowance

For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics resulting in a Level 3 classification. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities resulting in a Level 3 classification.

Deposits and Borrowings

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities also resulting in a Level 1 classification. The fair value of all other deposits and borrowings is determined using the discounted cash flow method thereby resulting in a Level 2 classification. The discount rate was equal to the rate currently offered on similar products.

Accrued Interest

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the level of the asset or liability, with which, the accrual is associated.

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed interest rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2017 and December 31, 2016, the majority of off-balance-sheet items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair value of these items is largely based on fees, which are nominal and immaterial.

Fair Value of Financial Instruments

The estimated fair values, and related carrying amounts, of the Corporation's financial instruments are as follows:



	March 31, 2017				December 31, 2016

	Carrying Amount		Total Fair Value		Carrying Amount		Total Fair Value
	(In Thousands)
Financial assets:
Cash and short-term investments	$	43,606	$	43,606	$	91,059	$	91,059
Securities held-to-maturity	9,186		9,273		9,200		9,293
Securities available-for-sale	190,129		388,180		194,090		194,090
Restricted stock	6,324		190,129		10,092		10,092
Loans, net	1,095,363		1,103,226		1,069,366		1,080,820
Derivatives	697		697		993		993
Total financial assets	$	1,345,305	$	1,735,111	$	1,374,800	$	1,386,347

Financial liabilities:
Deposits	$	1,156,990	$	1,140,349	$	1,054,327	$	1,040,402
Short-term borrowings	61,827		60,928		186,009		185,910
Long-term borrowings	50,000		48,990		60,000		59,954
Derivatives	249		249		325		325
Total financial liabilities	$	1,269,066	$	1,250,516	$	1,300,661	$	1,286,591

Note 9. Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by the Corporation upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally consists of real property, liquid assets or business assets. The Corporation had $16.9 million and $25.1 million in outstanding commitments at March 31, 2017 and December 31, 2016, respectively.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Corporation had $337.4 million and $330.0 million in unfunded lines of credit whose contract amounts represent credit risk at March 31, 2017 and December 31, 2016, respectively.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby letters of credit outstanding in the amount of $14.6 million and $9.6 million at March 31, 2017 and December 31, 2016, respectively.

The Bank maintains a reserve for potential off-balance sheet credit losses that is included in other liabilities on the balance sheet. At March 31, 2017 and December 31, 2016 the balance in this reserve totaled $675 thousand and $750 thousand, respectively.

The Bank has a letter of credit agreement with the Commonwealth of Virginia Treasury Board pertaining to its public deposits program. Under the terms of the agreement, the Commonwealth of Virginia Treasury Board in accordance with the Security for Public Deposits Act has approved the use of a letter of credit issued by the FHLB as collateral by the Bank. The maximum amount available under the letter of credit is $35.0 million. The letter of credit expires in August 2017 with an automatic one year extension until August 2018.

The Mortgage Division of the Bank makes representations and warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations. The Mortgage Division maintains a reserve in other liabilities for potential losses on mortgage loans sold. Management performs a quarterly analysis to determine the adequacy of the reserve. At March 31, 2017 and December 31, 2016, the balance in this reserve totaled $1.0 million.

The following table shows the changes to the allowance for losses on mortgage loans sold.



	For the Three Months Ended March 31,				For the Year Ended
(In Thousands)	2017		2016		December 31, 2016
Balance, beginning of period	$	1,029	$	1,029	$	1,029
Provision charged to operating expenses	—		—		—
Recoveries	—		—		—
Charge-offs	—		—		—
Balance, end of period	$	1,029	$	1,029	$	1,029

Note 10. Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” as well as most industry-specific guidance. The amendments also create a new Subtopic 340-40 “Other Assets and Deferred Costs - Contracts with Customers”. In summary, entities are to 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 or services. The provisions of ASU 2014-09 were originally effective for annual periods beginning after December 15, 2016 and interim periods within 2017; however, a one

year deferral was issued which now makes the provisions effective for annual periods beginning after December 15, 2017 and interim periods within 2018. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810)”. This ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate consolidation of certain legal entities by reducing the number of consolidation models from four to two and is intended to improve current GAAP. The amendments in the ASU are effective beginning after December 15, 2016. The adoption of this guidance did not have a material effect on the Corporation’s financial condition or results of operations.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”. This ASU requires an acquirer retrospectively adjust provisional amounts recognized in a business combination during the measurement period, in the reporting period in which the adjustment is determined as well as present separately on the face of the income statement or as a disclosure in the notes to the financial statements the portion of the amount recorded in current period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in the ASU are effective beginning after December 15, 2015. The adoption of this guidance did not have a material effect on the Corporation’s financial condition or results of operations.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)”. This ASU requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The amendments in the ASU are effective beginning after December 15, 2017. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU specifies the accounting for leases in an effort to increase transparency and comparability among organizations. The amendments in the ASU are effective beginning after December 15, 2018. While the adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations, management has yet to quantify the impact of this ASU.

In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. This ASU simplifies the transition to the equity method of accounting by eliminating retroactive adjustment of the investment when an investment qualifies for use of the equity method, among other things. The amendments in the ASU are effective beginning after December 15, 2016 and for interim periods within that year. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” This ASU was issued to clarify certain principal versus agent considerations within the implementation guidance of ASC Topic 606, “Revenue from Contracts with Customers.” The effective date and transition of ASU 2016-08 is the same as the effective date and transition of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed above. We are currently evaluating the potential impact of ASU 2016-08 on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under this ASU all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The amendments in the ASU were effective beginning after December

15, 2016 and for interim periods within that year. The Corporation has chosen to continue estimating the number of awards that are expected to vest rather than accounting for forfeitures as they occur. During the first quarter of 2017, the adoption of this guidance did not have a material effect on the Corporation's financial condition or results of operations.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU was issued to clarify ASC Topic 606, “Revenue from Contracts with Customers” related to (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date and transition of ASU 2016-10 is the same as the effective date and transition of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” as discussed above. We are currently evaluating the potential impact of ASU 2016-10 on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities by eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities to reflect its current estimate of all expected credit losses. The amendments in the ASU are effective beginning after December 15, 2019 and for interim periods within that year. Early adoption is permitted beginning after December 15, 2018. Entities will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings in the first period effective. Management is currently evaluating the potential impact of ASU 2016-13 on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU was issued to reduce diversity in how certain cash receipts and cash payments are being presented and classified in the statement of cash flows. Guidance provided in the ASU are specific to eight cash flow issues being: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt or other debt instruments with interest rates that are insignificant to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds received from the settlement of life insurance claims; proceeds received from the settlement of bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and application of the predominance principle. The amendments in the ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied using a retrospective transition method to each period presented. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” Under current GAAP, recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to a third party. The amendments in this ASU eliminate the exception for an intra-entity transfer of an asset other than inventory thereby requiring an entity to recognize the income tax consequences when the transfer occurs. The amendments in the ASU are effective beginning after December 15, 2017 and for interim periods within that year. Early adoption is permitted. Entities will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings in the first period effective. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment to the Business Combinations Topic is intended to address concerns that the existing definition of a business has been applied too broadly and has resulted in many transactions being recorded as business acquisitions that in substance are more akin to asset acquisitions. The guidance will be effective for the Corporation for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Corporation does not expect these amendments to have a material effect on its consolidated financial statements.

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments-Equity Method and Joint Ventures Topics of the Accounting Standards Codification. ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investment - Equity Method and Joint Ventures (Topic 323) incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The ASU was effective upon issuance. The Corporation is currently evaluating the impact on additional disclosure requirements, however it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued with the intent to simplify goodwill impairment testing by eliminating the second step

of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Corporation on January 1, 2020. Early adoption is permitted. The Corporation does not expect the new guidance to have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, to clarify the scope of the guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments will be effective for the Corporation for reporting periods beginning after December 15, 2017. The Corporation does not expect these amendments to have a material effect on its consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs. ASU 2017-07 requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments will be effective for the Corporation for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The Corporation does not expect these amendments to have a material effect on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which is intended to enhance the accounting for the amortization of premiums for purchased callable debt securities. The amendments shorten the amortization period for the premium to the earliest call date. The amendments will be effective for the Corporation for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Corporation does not expect these amendments to have a material effect on its consolidated financial statements.

Note 11. Commitments and Contingent Liabilities

As part of its mortgage banking activities, the Mortgage Division enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Mortgage Division then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Mortgage Division determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Mortgage Division does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Mortgage Division does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Mortgage Division could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

Since the Mortgage Division’s derivative instruments are not designated as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. The Corporation has not elected to apply hedge accounting to the Mortgage Division’s derivative instruments as provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

At March 31, 2017 and December 31, 2016, the Mortgage Division had open forward contracts with a notional value of $42.8 million and $54.3 million, respectively. At March 31, 2017 and December 31, 2016, the Mortgage Division had no open mandatory

delivery contracts. The open forward delivery contracts are composed of forward sales of MBS. The fair value of these open forward contracts was $(245) thousand and $102 thousand at March 31, 2017 and December 31, 2016, respectively.

Interest rate lock commitments totaled $41.1 million and $37.9 million at March 31, 2017 and December 31, 2016, respectively, and included $9.3 million and $7.3 million that were made on a best efforts basis at March 31, 2017 and December 31, 2016, respectively. Fair values of these best efforts commitments were $106 thousand and $82 thousand at March 31, 2017 and December 31, 2016, respectively. The remaining hedged interest rate lock commitments totaling $31.8 million and $30.6 million at March 31, 2017 and December 31, 2016, respectively, had a fair value of $587 thousand and $484 thousand, respectively.

Included in other noninterest income for the three months ended March 31, 2017 and 2016 was a net loss of $132 thousand and a net gain of $324 thousand, respectively, relating to derivative instruments. The amount included in other noninterest income for the three months ended March 31, 2017 and 2016 pertaining to its hedging activities was a net realized gain of $71 thousand and a net realized loss of $596 thousand respectively.

Note 12. Low Income Housing Tax Credits

The Corporation has invested in two separate housing equity funds at March 31, 2017 and December 31, 2016. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were $664 thousand at March 31, 2017 and December 31, 2016, respectively. The expected terms of these investments and the related tax benefits run through 2033.

Note 13. Bank Owned Life Insurance

The Corporation had $26.5 million and $26.4 million in bank owned life insurance ("BOLI") at March 31, 2017 and December 31, 2016, respectively. The Corporation recognized interest income, which is included in other noninterest income of $184 thousand and $114 thousand for the three months ended March 31, 2017 and 2016, respectively.

Note 14. Mergers and Acquisitions

On April 1, 2017, the Corporation completed the acquisition of Middleburg Financial Corporation (“Middleburg”), a bank holding company based in Middleburg, Virginia, in an all-stock transaction. Middleburg’s common shareholders received 1.3314 shares of the Corporation’s common stock in exchange for each share of Middleburg’s common stock, resulting in the Corporation issuing 9,516,097 shares of common stock at a fair value of $285.7 million. In addition, holders of outstanding Middleburg stock options received cash for the difference between the strike price and ending share price of Middleburg stock immediately before the merger, being $40.04. A total of 23,362 shares were converted to cash for a total of $608 thousand. As a result of the transaction and on the same date, Middleburg’s former bank subsidiary, Middleburg Bank, became a division of the Corporation’s wholly-owned bank subsidiary, Access National Bank.

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. Management is in the process of assessing the assets purchased and liabilities assumed in connection with the merger.

Note 15. Other Expenses

The Corporation had the following other expenses for the three month periods ending March 31, 2017 and 2016.



	Three Months Ended March 31,
	2017		2016
	(In Thousands)
Merger related expenses	$	565	$	—
Data processing	255		197
Business and franchise tax	245		239
FDIC insurance	237		168
Consulting fees	224		109
Advertising and promotional	168		200
Accounting and auditing	153		153
Investor fees	135		137
Telephone	103		95
Regulatory examinations	102		69
Stock option	95		84
Director fees	93		93
Credit report	89		68
Legal fees	76		15
Insurance	68		52
Publication and subscription	59		76
Disaster recovery	53		61
Office supplies-stationary print	50		61
FRB and bank analysis charges	44		39
Dues and memberships	37		25
Management fees	35		142
Verification fees	34		27
Travel	33		36
SBA guarantee fee	33		35
Early payoff	28		49
Business development and meals	24		29
Automotive	15		12
Appraisal fee	15		10
Courier	14		15
Common stock	13		19
Education and training	12		16
Bank paid closing costs	12		15
Postage	10		28
Other	206		326
	$	3,335	$	2,700


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results for the year ending December 31, 2017 or any future period.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Examples of forward-looking statements include discussions as to our expectations,

Table of Contents

beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters discussed in this document. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar meaning. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding the Corporation’s beliefs regarding the future strength of the economy and labor markets and anticipated interest rates and the effect of such rates on the Corporation’s performance and net interest margin and the volume of future mortgage refinancing, as well as the Corporation’s expectations concerning operating losses and the profitability of its mortgage segment. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: collateral values, especially in the real estate market; continued challenging economic conditions or deterioration in general business and economic conditions and in the financial markets; mergers and acquisitions, including the degree of success in integrating operations following the Corporation's merger with Middleburg such as potential deposit attrition, higher than expected costs, customer loss and business disruption associated with the integration of Middleburg, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related-matters; the impact of any laws, regulations, policies or programs implemented pursuant to the Dodd-Frank Act or other legislation or regulation; unemployment levels; branch expansion plans; interest rates; general economic conditions; monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency (“Comptroller”), the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond; the economy of Northern Virginia, including governmental spending and real estate markets; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; the liquidity of the Corporation; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.

For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward looking statements, please see “Item 1A - Risk Factors” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Critical Accounting Policies

The Corporation’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Corporation’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Our significant accounting policies are presented in Note 1 to the consolidated financial statements. Management believes that the most significant subjective judgments that it makes include the following:

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) FASB ASC 450-10, which requires that losses be accrued when they are probable of occurring and can be estimated, and (ii) FASB ASC 310-10, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. An allowance for loan losses is established through a provision for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk inherent in the loan portfolio, and changes in the nature and volume of loan activity. Such evaluation considers, among other factors, the estimated market value of the underlying collateral and current economic conditions. For further information about our practices with respect to allowance for loan losses, please see Note 5 to the consolidated financial statements.

Other Than Temporary Impairment of Investment Securities

Securities in the Corporation’s securities portfolio are classified as either available-for-sale or held-to-maturity. At March 31, 2017, there were no non-agency mortgage backed securities or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component of other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary. Management evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms of each security. A decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the anticipated holding period of the

Table of Contents

investment will cause the security to be considered other than temporarily impaired. Other than temporary impairments result in reducing the security’s carrying value by the amount of the estimated credit loss. The credit component of the other than temporary impairment loss is realized through the statement of income and the remainder of the loss remains in other comprehensive income. At March 31, 2017, there were no securities with other than temporary impairment.

Income Taxes

The Corporation uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. The Corporation’s evaluation of the deductibility or taxability of items included in the Corporation’s tax returns has not resulted in the identification of any material, uncertain tax positions.

Fair Value

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. For additional information about our financial assets carried at fair value, please see Note 8 to the consolidated financial statements.

Acquisition of Middleburg Financial Corporation

On April 1, 2017, Access National Corporation (“Access”) completed its merger with Middleburg Financial Corporation (“Middleburg”). The merger of Middleburg with and into Access (the “Merger”) was effected pursuant to the terms and conditions of the Agreement and Plan of Reorganization, dated as of October 21, 2016, between Access and Middleburg, and a related Plan of Merger (together, the “Merger Agreement”).

Pursuant to the Merger Agreement, holders of shares of Middleburg common stock have a right to receive 1.3314 shares of Access common stock for each share of Middleburg common stock held immediately prior to the effective date of the Merger, plus cash in lieu of fractional shares. Each option to purchase shares of Middleburg common stock granted under a Middleburg equity-based compensation plan that was outstanding immediately prior to the effective date of the Merger was cancelled for a cash payment equal to the product of (i) the difference between the closing sale price of Middleburg common stock on the trading day immediately preceding the effective date of the Merger and the per share exercise price of the stock option, and (ii) the number of shares of Middleburg common stock subject to such stock option. Each restricted share of Middleburg common stock granted under a Middleburg equity compensation plan that was outstanding immediately prior to the effective date of the Merger was, pursuant to the terms of each such grant, vested in full immediately prior to the effective date of the Merger and converted into unrestricted shares of Access common stock based on the exchange ratio. Each share of Access common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Shortly after the effective time of the Merger, Middleburg Bank, Middleburg’s wholly-owned bank subsidiary, was merged with and into Access National Bank, Access’s wholly-owned bank subsidiary (“Access Bank”) with Access Bank surviving.

This description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is included as Exhibit 2.1 to this report and incorporated by reference herein.

Financial Condition

Executive Summary

At March 31, 2017, the Corporation’s assets totaled $1.40 billion, down $29.4 million, from $1.43 billion, at December 31, 2016. The decrease in assets was primarily due to a decrease in interest-bearing balances of $50.0 million as well as a decrease in investment securities of $4.0 million and was offset by a growth in loans held for investment of $23.1 million. The first three months of 2017 reflected growth in commercial real estate and residential real estate categories of loans held for investment from December 31, 2016. The $23.1 million increase in loans held for investment as compared to December 31, 2016 is primarily attributable to a $12.0 million or 4.79% growth in commercial real estate -owner occupied loans, a $20.8 million or 11.24% increase

Table of Contents

in commercial real estate - non-owner occupied loans, and a $7.6 million or 3.72% increase in residential real estate loans. At March 31, 2017, loans secured by real estate collateral comprised 71.91% of our total loan portfolio, with loans secured by commercial real estate contributing 43.61% of our total loan portfolio, loans secured by residential real estate contributing 19.76% and real estate construction loans contributing 8.54%. Loans held for sale totaled $36.3 million at March 31, 2017, compared to $35.7 million at December 31, 2016. Loans held for sale fluctuates with the volume of loans originated during any given month and the length of time the loans are held prior to selling them in the secondary market. Deposits totaled $1.16 billion at March 31, 2017, compared to $1.05 billion at December 31, 2016, an increase of $102.7 million. Noninterest-bearing deposits increased $14.6 million from $362.0 million at December 31, 2016 to $376.7 million at March 31, 2017. Savings and interest-bearing deposits increased $31.5 million from $440.6 million at December 31, 2016 to $472.1 million at March 31, 2017. Wholesale deposits increased from $132.6 million at December 31, 2016 to $194.6 million at March 31, 2017, an increase of $62.0 million.

Net income for the first quarter of 2017 totaled $2.6 million compared to $4.1 million for the same period in 2016, down $1.5 million due mainly to merger related costs of $565 thousand as well as an increase in the provision for loan losses of $1.4 million. Earnings per diluted share were $0.24 for the first quarter of 2017, compared to $0.39 per diluted share in the same period of 2016.

The banking segment had an increase in net interest income of $1.2 million, or 11.7%, when compared to the first quarter of 2016. This increase was offset by an increase in salaries and employee benefits of $495 thousand, due to an increase in commercial lending staffing when compared to the first quarter of 2016, as well as an increase in other non-provision related expenses of $287 thousand. The increase in other non-provision related expenses pertained to the increased rent expense related to the addition of the Alexandria, Virginia branch as well as increases in data processing and FDIC insurance expense.

Non-performing assets (“NPAs”) totaled $5.2 million, or 0.37%, of total assets at March 31, 2017, down from $6.9 million, or 0.48% of total assets as of December 31, 2016. The Corporation did not have other real estate owned at March 31, 2017. The allowance for loan loss was $13.7 million and $16.0 million at March 31, 2017 and December 31, 2016, respectively, and represented 1.28% and 1.53% of total loans held for investment at March 31, 2017 and December 31, 2016, respectively.

The unemployment rate for Fairfax County, Virginia was at 3.1% as of February 2017 and still well below the 3.8% unemployment rate for the state of Virginia at the end of March 2017 and 4.5% for the nation at the end of March 2017. Information reviewed at the Federal Open Market Committee’s (FOMC) March 2017 meeting indicated the labor market has continued to strengthen even as growth in economic activity slowed. The FOMC reaffirmed its view that the current target rate for the federal funds rate remains accommodative to support further improvement in labor market conditions and a return to 2% inflation and increased the rate by 25 basis points in March 2017. This is only the third interest rate hike since the financial crisis. The historically low interest rate environment continues to negatively impact yields of variable loans and the securities portfolio. The Corporation’s net interest margin for the three months ended March 31, 2017 decreased to 3.46% from the three months ended March 31, 2016 percentage of 3.61%. While there is no certainty to the magnitude of any impact, the continued extended period of low short-term interest rates, as presently forecasted by the Federal Reserve, will continue to have an adverse effect on the net interest margin.

The latest Case-Shiller Home Price data available shows home prices increased 5.9% for the twelve months ended February 2017 with home prices in the Washington Metropolitan area posting a 4.1% increase for the same period. The Consumer Confidence Index increased in March 2017 for the second straight month, reaching a 17-year high at 125.6. Retail sales for the first quarter 2017 were 3.9% greater than a year earlier. As such, we remain cautious and have generally retained more cautious loan underwriting criteria established during the financial crisis period of 2007 - 2009. In spite of these challenges, we are proactive in seeking new client relationships driven by our target market profile: business-to-business and business-to-government companies with annual revenue of $1 million to $100 million and the various banking services needed by the business and the professionals associated with the businesses. The Corporation is optimistic with a strong capital base and being positioned for continued growth.

Securities

The Corporation’s securities portfolio is comprised of U.S. government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, certificates of deposit, and asset backed securities as well as municipal bonds. The portfolio does not have any non-agency mortgage backed securities or trust preferred securities.

At March 31, 2017 the fair value of the securities portfolio totaled $199.4 million, compared to $203.4 million at December 31, 2016. Included in the fair value totals are held-to-maturity securities with an amortized cost of $9.2 million (fair value of $9.3 million) at March 31, 2017 and December 31, 2016. Securities classified as available-for-sale are accounted for at fair market value with unrealized gains and losses recorded directly to a separate component of shareholders' equity, net of associated tax effect while held-to-maturity securities are carried at amortized cost. Investment securities are used to provide liquidity, to generate income, and to temporarily supplement loan growth as needed.

Table of Contents

Restricted Stock

Restricted stock consists of FHLB stock and FRB stock. These stocks are classified as restricted stocks because their ownership is restricted to certain types of entities and they lack a market. Restricted stock is carried at cost on the Corporation’s financial statements. Dividends are paid semiannually on FRB stock and quarterly on FHLB stock.

Loans

The loan portfolio constitutes the largest component of earning assets and is comprised of commercial real estate - owner occupied, commercial real estate - non-owner occupied, residential real estate, commercial, real estate construction, and consumer loans. All lending activities of the Bank and its subsidiaries are subject to the regulations and supervision of the Comptroller. The loan portfolio does not have any pay option adjustable rate mortgages, loans with teaser rates or subprime loans or any other loans considered “high risk loans”. Loans totaled $1.07 billion at March 31, 2017 compared to $1.05 billion at December 31, 2016, an increase of $23.1 million or 8.8% on an annual basis. Comprising the growth, commercial real estate - owner occupied loans increased $12.0 million, commercial real estate - non-owner occupied increased $20.8 million, and residential real estate loans increased $7.6 million. Offsetting the growth was a decrease in commercial loans of $17.0 million. The overall increase in loans reflects results from our marketing outreach as well as continued improvement in loan demand by local businesses. Please see Note 4 to the consolidated financial statements for a table that summarizes the composition of the Corporation’s loan portfolio. The following is a summary of the loan portfolio at March 31, 2017.

Commercial Loans: Commercial loans represented the largest segment of the loan portfolio, totaling $294.5 million and representing 27.45% of the loan portfolio as of March 31, 2017. These loans are made to businesses or individuals within our target market for business purposes. Typically the loan proceeds are used to support working capital and the acquisition of fixed assets of an operating business. We underwrite these loans based upon our assessment of the obligor(s)’ ability to generate operating cash flows in the future necessary to repay the loan. To address the risks associated with the uncertainties of future cash flows, these loans are generally well secured by assets owned by the business or its principal shareholders/owners and the principal shareholders/owners are typically required to guarantee the loan.

Commercial Real Estate Loans - Owner Occupied: This category of loans represented the second largest segment of the loan portfolio and was comprised of owner occupied loans secured by the commercial property, totaling $262.4 million, representing 24.46% of the loan portfolio at March 31, 2017. Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.

Commercial Real Estate Loans - Non-Owner Occupied: This category of loans represented the fourth largest segment of the loan portfolio and was comprised of loans secured by income producing commercial property, totaling $205.5 million and representing 19.15% of the loan portfolio at March 31, 2017. Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.

Residential Real Estate Loans: This category represented the third largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family residential properties. This segment totaled $212.0 million and comprised 19.76% of the loan portfolio as of March 31, 2017. Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of March 31, 2017: home equity lines of credit, 20.1%; first trust mortgage loans, 74.0%; and junior trust loans, 5.9%.

Home equity lines of credit are extended to borrowers in our target market. Real estate equity is often the largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool allows the borrowers to access the equity in their homes or investment properties and use the proceeds for virtually any purpose. Home equity lines of credit are most frequently secured by a second lien on residential property. The proceeds of first trust mortgage loans are used to acquire or refinance the primary financing on owner occupied and residential investment properties. Junior trust loans are loans to consumers wherein the proceeds have been used for a stated consumer purpose. Examples of consumer purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in a single disbursement and repaid over a specified period of time. Loans in the residential real estate portfolio are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern, and stability.

Real Estate Construction Loans: Real estate construction loans, also known as construction and land development loans represented the fifth largest segment of the loan portfolio and totaled $91.6 million and represented 8.54% of the loan portfolio as of March 31, 2017. These loans generally fall into one of three categories: first, loans to individuals that are ultimately used to acquire

Table of Contents

property and construct an owner occupied residence; second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board of Directors based upon an assessment of market conditions and updated from time to time. The loans typically carry recourse to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications and time frames.

Consumer Loans: Consumer loans, the smallest segment of the loan portfolio, totaled $6.8 million and represented 0.64% of the loan portfolio as of March 31, 2017. Most loans in this category are well secured with assets other than real estate, such as marketable securities or automobiles. Very few consumer loans are unsecured. As a matter of operation, management discourages unsecured lending. Loans in this category are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by management and the Board of Directors and takes into consideration repayment capacity, collateral value, savings pattern, credit history, and stability.

Loans Held for Sale (“LHFS”)

LHFS are residential mortgage loans originated by the Mortgage Division of the Bank to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans are sold with the servicing released to the investor. At March 31, 2017, LHFS at fair value totaled $36.3 million compared to $35.7 million at December 31, 2016.

The LHFS are closed by the Mortgage Division and held on average fifteen to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries of large financial institutions. During the first quarter of 2017 we originated $94.5 million of loans processed in this manner, compared to $106.6 million for the first quarter of 2016. Loans are sold without recourse and subject to industry standard representations and warranties that may require the repurchase by the Bank of loans previously sold. The repurchase risks associated with this activity center around early payment defaults and borrower fraud.

Allowance for Loan Losses

The allowance for loan losses totaled $13.7 million at March 31, 2017 compared to $16.0 million at December 31, 2016. The allowance for loan losses was equivalent to 1.28% and 1.53% of total loans held for investment at March 31, 2017 and December 31, 2016, respectively. Adequacy of the allowance is assessed and increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible. For additional information about the allowance for loan losses, please see Note 5 to the consolidated financial statements.

Non-performing Assets

At March 31, 2017 and December 31, 2016, the Bank had non-performing assets totaling $5.2 million and $6.9 million, respectively. Non-performing assets consist of non-accrual loans. All non-performing loans are carried at the expected liquidation value of the underlying collateral.

The following table is a summary of our non-performing assets at March 31, 2017 and December 31, 2016.

Table of Contents



	March 31,			December 31,
(In Thousands)	2017			2016
Nonaccrual loans:
Commercial real estate - owner occupied	$	—		$	—
Commercial real estate - non-owner occupied	—			—
Real estate construction	940			940
Residential real estate	946			431
Commercial	3,358			5,551
Total nonaccrual loans	5,244			6,922
Other real estate owned ("OREO")	—			—
Total non-performing assets	$	5,244		$	6,922

Restructured loans included above in non-accrual loans	$	3,385		$	1,046

Ratio of non-performing assets to:
Total loans plus OREO	0.49		%	0.66		%
Total assets	0.37		%	0.48		%

Accruing past due loans:
90 or more days past due	$	—		$	—

At March 31, 2017 and December 31, 2016, the Bank had no loans past due 90 days or more and still accruing interest.

Deposits

Deposits are the primary sources of funding loan growth. At March 31, 2017, deposits totaled $1.16 billion compared to $1.05 billion at December 31, 2016, an increase of $102.7 million or 9.7%. Noninterest-bearing deposits increased $14.6 million or 4.0% from $362.0 million at December 31, 2016 to $376.7 million at March 31, 2017. Savings and interest-bearing deposits increased $31.5 million or 7.2% from $440.6 million at December 31, 2016 to $472.1 million at March 31, 2017. Time deposits increased $56.5 million or 22.4% from $251.7 million at December 31, 2016 to $308.2 million at March 31, 2017.

Shareholders’ Equity

Shareholders’ equity totaled $124.2 million at March 31, 2017 compared to $120.5 million at December 31, 2016. The increase in shareholders’ equity is due mainly to net income and option exercises during the first quarter of 2017. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are classified as well capitalized, which is the highest rating.

The Corporation calculates its regulatory capital under the Basel III Final Rules. The following table outlines the regulatory components of the Corporation’s capital and risk based capital ratios under these new rules.

Table of Contents



	March 31,			December 31,
	2017			2016
	(In Thousands)
Tier 1 Capital:
Common stock	$	9,008		$	8,881
Additional paid in capital	24,254			21,779
Retained earnings	92,436			91,439
Less: Disallowed goodwill and other disallowed intangible assets	(1,432		)	(1,432		)
Less: Disallowed servicing assets and loss on equity security	(432		)	(350		)
Total Tier 1 capital	123,834			120,317

Allowance for loan losses	14,402			14,692

Total risk based capital	$	138,236		$	135,009

Risk weighted assets	$	1,185,772		$	1,173,330

Quarterly average assets	$	1,404,335		$	1,161,080
							Regulatory
							Minimum
Risk-Based Capital Ratios:
Common equity tier 1 capital ratio	10.44%			11.14%			5.25%
Tier 1 capital ratio	10.44%			11.14%			6.75%
Total capital ratio	11.66%			12.39%			8.75%
Leverage Capital Ratios:
Tier 1 leverage ratio	8.83%			9.34%			4.00%

RESULTS OF OPERATIONS

Summary

First quarter 2017 pretax earnings were $4.1 million, down $2.1 million from the first quarter of 2016 due mainly to merger related costs of $565 thousand as well as an increase in the provision for loan losses of $1.4 million. Net income totaled $2.6 million compared to $4.1 million for the same period in 2016. Earnings per diluted share were $0.24 for the first quarter of 2017, compared to $0.39 per diluted share in the same period of 2016. The banking segment had a decrease in pre-tax earnings when compared to the first quarter 2016 of $1.1 million, driven by an increase in the provision for loan loss over first quarter 2016 of $1.4 million. The banking segment’s net interest income increased $1.2 million when compared to first quarter 2016. This increase was offset by an increase in salaries and employee benefits of $495 thousand, due to an increase in commercial lending staffing when compared to the first quarter of 2016, as well as an increase in other non-provision related expenses of $287 thousand. The increase in other non-provision related expenses pertained to the increased rent expense related to the addition of the Alexandria, Virginia branch as well as increases in data processing and FDIC insurance expense.

Net Interest Income

Net interest income, the principal source of earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan losses totaled $11.7 million for the three months ended March 31, 2017 compared to $10.6 million for the same period in 2016. The annualized yield on earning assets was 4.01% for the quarter ended March 31, 2017 compared to 4.10% for the same period in 2016. The cost of interest-bearing deposits and borrowings increased to 0.80% for the quarter ended March 31, 2017 compared to the quarter ended March 31, 2016 at 0.73%. Net interest margin was 3.46% for the quarter ended March 31, 2017 compared to 3.61% for the same period in 2016.

Table of Contents

Volume and Rate Analysis

The following tables present the dollar amount of changes in interest income and interest expense for each category of interest earning assets and interest-bearing liabilities.



	Three Months Ended March 31,
	2017 compared to 2016
	Change Due To:
	Increase /
	(Decrease)			Volume			Rate
	(In Thousands)
Interest Earning Assets:
Investments	$	189		$	208		$	(19	)
Loans held for sale	(94		)	(103		)	9
Loans	1,417			1,665			(248		)
Interest-bearing deposits	61			18			43
Total increase (decrease) in interest income	1,573			1,788			(215		)

Interest-Bearing Liabilities:
Interest-bearing demand deposits	46			15			31
Money market deposit accounts	247			118			129
Savings accounts	43			38			5
Time deposits	16			(30		)	46
Total interest-bearing deposits	352			141			211
FHLB Short-term borrowings	12			3			9
Securities sold under agreements to repurchase	43			—			43
FHLB Long-term borrowings	26			(13		)	39
Total increase (decrease) in interest expense	433			131			302

Increase (decrease) in net interest income	$	1,140		$	1,657		$	(517	)

Table of Contents

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following tables present for the periods indicated the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in dollars and rates.



Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
Three Months Ended
	March 31, 2017						March 31, 2016
	Average			Income/		Yield /	Average			Income/		Yield /
(In Thousands)	Balance			Expense		Rate	Balance			Expense		Rate
Assets:
Interest-earning assets:
Securities	$	212,104		$	1,224	2.31%	$	176,332		$	1,035	2.35%
Loans held for sale	24,461			250		4.09%	34,607			344		3.98%
Loans ⁽¹⁾	1,052,167			11,949		4.54%	905,382			10,532		4.65%
Interest-bearing balances and federal funds sold	64,628			131		0.81%	52,862			70		0.53%
Total interest-earning assets	1,353,360			13,554		4.01%	1,169,183			11,981		4.10%
Noninterest-earning assets:
Cash and due from banks	11,700						11,707
Premises, land and equipment	7,102						6,676
Other assets	45,009						34,878
Less: allowance for loan losses	(15,519		)				(13,580		)
Total noninterest-earning assets	48,292						39,681
Total Assets	$	1,401,652					$	1,208,864

Liabilities and Shareholders' Equity:
Interest-bearing deposits:
Interest-bearing demand deposits	$	141,315		$	153	0.43%	$	124,982		$	107	0.34%
Money market deposit accounts	258,786			345		0.53%	142,221			98		0.28%
Savings accounts	61,001			90		0.59%	34,698			47		0.54%
Time deposits	299,973			914		1.22%	310,120			898		1.16%
Total interest-bearing deposits	761,075			1,502		0.79%	612,021			1,150		0.75%
Borrowings:
Securities sold under agreements to repurchase and federal funds purchased	28,367			16		0.23%	17,442			4		0.09%
FHLB short-term borrowings	86,200			166		0.77%	86,429			123		0.57%
FHLB long-term borrowings	59,555			180		1.21%	64,615			154		0.95%
Total borrowings	174,122			362		0.83%	168,486			281		0.67%
Total interest-bearing deposits and borrowings	935,197			1,864		0.80%	780,507			1,431		0.73%
Noninterest-bearing liabilities:
Demand deposits	335,234						308,507
Other liabilities	9,480						8,782
Total liabilities	1,279,911						1,097,796
Shareholders' Equity	121,741						111,068
Total Liabilities and Shareholders' Equity	1,401,652						1,208,864
Interest Spread ⁽²⁾						3.21%						3.37%
Net Interest Margin ⁽³⁾				$	11,690	3.46%				$	10,550	3.61%

(1) Loans placed on nonaccrual status are included in loan balances.

(2) Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.

(3) Net interest margin is net interest income, expressed as a percentage of average earning assets.

Noninterest Income

Noninterest income consists of revenue generated from financial services and activities other than lending and investing. The mortgage segment provides the most significant contributions to noninterest income. Total noninterest income was $6.0 million

Table of Contents

for the first quarter of 2017 compared to $6.8 million for the same period in 2016. Gains on the sale of loans originated by the Banks’s mortgage segment are the largest component of noninterest income. Gains on the sale of loans totaled $3.3 million for the three month period ended March 31, 2017, compared to $3.8 million for the same period of 2016. Gains on the sale of loans fluctuate with the volume of mortgage loans originated. During the three months ended March 31, 2017, the Bank’s mortgage segment originated $94.5 million in mortgage and brokered loans, down from $106.6 million for the same period in 2016.

Noninterest Expense

Noninterest expense totaled $12.2 million for the three months ended March 31, 2017, compared to $11.1 million for the same period in 2016, an increase of $1.1 million. Salaries and employee benefits totaled $8.0 million for the three months ended March 31, 2017, compared to $7.7 million for the same period in 2016. Other operating expenses totaled $3.3 million for the three months ended March 31, 2017, compared to $2.7 million for the same period in 2016.

The table below provides the composition of other operating expenses.



	Three Months Ended March 31,
	2017		2016
	(In Thousands)
Merger related expenses	$	565	$	—
Data processing	255		197
Business and franchise tax	245		239
FDIC insurance	237		168
Consulting fees	224		109
Advertising and promotional	168		200
Accounting and auditing	153		153
Investor fees	135		137
Telephone	103		95
Regulatory examinations	102		69
Stock option	95		84
Director fees	93		93
Credit report	89		68
Legal fees	76		15
Insurance	68		52
Publication and subscription	59		76
Disaster recovery	53		61
Office supplies-stationary print	50		61
FRB and bank analysis charges	44		39
Dues and memberships	37		25
Management fees	35		142
Verification fees	34		27
Travel	33		36
SBA guarantee fee	33		35
Early payoff	28		49
Business development and meals	24		29
Automotive	15		12
Appraisal fee	15		10
Courier	14		15
Common stock	13		19
Education and training	12		16
Bank paid closing costs	12		15
Postage	10		28
Other	206		326
	$	3,335	$	2,700

Table of Contents

Liquidity Management

Liquidity is the ability of the Corporation to meet current and future cash flow requirements. The liquidity of a financial institution reflects its ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Corporation’s ability to meet the daily cash flow requirements of both depositors and borrowers. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts. Asset and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Corporation’s customers, but also to maintain an appropriate balance between interest sensitive assets and interest sensitive liabilities so that the Corporation can earn an appropriate return for its shareholders.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and maturities of investment securities. Other short-term investments such as federal funds sold and interest-bearing deposits with other banks provide an additional source of liquidity funding. At March 31, 2017, overnight interest-bearing balances totaled $31.9 million and unpledged available-for-sale investment securities totaled approximately $58.3 million.

The Bank proactively manages a portfolio of short-term time deposits issued to local municipalities and wholesale depositors in order to fund loans held for sale and short-term investments. As of March 31, 2017, the portfolio of CDARS deposits, Insured Cash Sweep (ICS) deposits, and wholesale time deposits totaled $194.6 million compared to $132.6 million at December 31, 2016, respectively.

The liability portion of the balance sheet provides liquidity through various interest-bearing and noninterest-bearing deposit accounts, federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings. At March 31, 2017, the Bank had a line of credit with the FHLB totaling $429.2 million and had outstanding $45.0 million in short-term borrowings at a weighted average fixed rate of 0.81%, $50.0 million in long-term loans at a weighted average fixed rate of 1.23%, and a $35.0 million public deposit letter of credit from the Commonwealth of Virginia Treasury Board. In addition to the line of credit at the FHLB, the Bank issues repurchase agreements. As of March 31, 2017, outstanding repurchase agreements totaled $16.8 million. The interest rates on these instruments are variable and subject to change daily. The Bank also maintains federal funds lines of credit with its correspondent banks and, at March 31, 2017, these lines totaled $62.4 million and were available as an additional funding source.

The following table presents the composition of borrowings at March 31, 2017 and December 31, 2016 as well as the average balances for the three months ended March 31, 2017 and the twelve months ended December 31, 2016.



Borrowed Funds Distribution
(In Thousands)	March 31, 2017			December 31, 2016
Borrowings:
FHLB short-term borrowings	$	45,000		$	129,000
Securities sold under agreements to repurchase and federal funds purchased	16,827			57,009
FHLB long-term borrowings	50,000			60,000
Total	$	111,827		$	246,009

	March 31, 2017			December 31, 2016
Borrowings - Average Balances:
FHLB short-term borrowings	$	86,200		$	40,252
Securities sold under agreements to repurchase and federal funds purchased	28,367			16,038
FHLB long-term borrowings	59,555			68,525
Total	$	174,122		$	125,047

Average rate paid on all borrowed funds	0.83		%	0.91		%

Management believes the Corporation is well positioned with liquid assets, the ability to generate liquidity through liability funding and the availability of borrowed funds, to meet the liquidity needs of depositors and customers’ borrowing needs. The Corporation’s

Table of Contents

ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on the Corporation’s liquidity levels, its capital position, conditions in the capital markets and other factors, the Corporation may from time to time consider the issuance of debt, equity or other securities, or other possible capital markets transactions, the proceeds of which could provide additional liquidity for its operations.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the

Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation’s market risk is composed primarily of interest rate risk. The Funds Management Committee is responsible for reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate the Corporation’s sources, uses and pricing of funds.

Interest Rate Sensitivity Management

The Corporation uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities. The table below reflects the outcome of these analyses at March 31, 2017 and December 31, 2016, assuming budgeted growth in the balance sheet. According to the model run for the three month period ended March 31, 2017, and projecting forward over a twelve month period, an immediate 100 basis point increase in interest rates would result in a decrease in net interest income of 0.30%. Modeling for an immediate 100 basis point decrease in interest rates has been suspended due to the current rate environment. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to mitigate any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

The following table reflects the Corporation’s earnings sensitivity profile.



Increase in Federal Funds Target Rate	Hypothetical Percentage Change in Net Interest Income March 31, 2017	Hypothetical Percentage Change in Net Interest Income December 31, 2016
3.00%	(0.92)%	2.63%
2.00%	(0.59)%	1.80%
1.00%	(0.30)%	0.90%

The Corporation’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Corporation manages its exposure to fluctuations in interest rates through policies established by its Funds Management Committee. The Funds Management Committee meets periodically and has responsibility for formulating and implementing strategies to improve balance sheet positioning and earnings and reviewing interest rate sensitivity.

The Mortgage Division is party to mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed

(locked) by both the Mortgage Division and the borrower for specified periods of time. When the borrower locks his or her interest rate, the Mortgage Division effectively extends a put option to the borrower, whereby the borrower is not obligated to enter into the loan agreement, but the Mortgage Division must honor the interest rate for the specified time period. The Mortgage Division is exposed to interest rate risk during the accumulation of interest rate lock commitments and loans prior to sale. The Mortgage Division utilizes either a best efforts sell forward or a mandatory sell forward commitment to economically hedge the changes in fair value of the loan due to changes in market interest rates. Failure to effectively monitor, manage, and hedge the interest rate risk associated with the mandatory commitments subjects the Mortgage Division to potentially significant market risk.

Throughout the lock period the changes in the market value of interest rate lock commitments, best efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are included in the consolidated statement of income under other noninterest income. The Mortgage Division utilizes a third party and its proprietary simulation model to assist in identifying and managing the risk associated with this activity.

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Corporation’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation did not maintain effective controls and procedures over financial reporting as of March 31, 2017 resulting in a material weakness. The material weakness was related to controls surrounding the accounting for the Corporation’s business acquisition of Middleburg, in particular the recognition of investment banking fees as of March 31, 2017 when in fact the merger was not effective until April 1, 2017 at 12:01 a.m. Specifically, this material weakness resulted in material misstatements and adjustments to accrued liabilities as well as merger related expenses in connection with the consolidated financial statements for the interim period ended March 31, 2017. Except as described below, there were no changes in the Corporation’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Remediation Plan for Material Weakness in Internal Control Over Financial Reporting

In response to the material weakness identified above, the Corporation has made changes to its internal control over financial reporting such as implementing specific review procedures including the enhanced involvement of outside independent consulting services to review the accounting entries pertaining to the business acquisition of Middleburg.

The Corporation’s enhanced procedures will be in place during the second quarter of 2017. The material weakness cannot be considered remediated until the control has operated for a sufficient period of time and until management has concluded, through testing, that the control is operating effectively. Our goal is to remediate this material weakness by the end of 2017.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Corporation and the Bank are from time to time parties to legal proceedings arising in the ordinary course of business. Management is of the opinion that these legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations. From time to time the Bank and the Corporation may initiate legal actions against borrowers in connection with collecting defaulted loans. Such actions are not considered material by management unless otherwise disclosed.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table details the Corporation’s purchases of its common stock during the first quarter of 2017 pursuant to a Share Repurchase Program announced on March 20, 2007. On June 22, 2010 the number of shares authorized for repurchase under the share repurchase program was increased from 2,500,000 to 3,500,000. The Share Repurchase Program does not have an expiration date.




(In thousands, except for per share amounts)	Total number of shares purchased	Average price paid per share ($)		Total number of shares purchased as part of a publicly announced plan	Maximum number of shares that may yet be purchased under the plan
January 1, 2017 - January 31, 2017	—	$	—	—	$	768,781
February 1, 2017 - February 28, 2017	—	$	—	—	$	768,781
March 1, 2017 - March 31, 2017	—	$	—	—	$	768,781
Total	—	$	—	—	$	768,781

Table of Contents

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

The Corporation has postponed the planned date of its 2017 Annual Meeting of Shareholders (“Annual Meeting”), which would customarily be held in May. The 2017 Annual Meeting has been scheduled for October 26, 2017.

The expected meeting date for the 2017 Annual Meeting represents a change of more than thirty days from the anniversary of the Corporation’s 2016 Annual Meeting. Accordingly, the Corporation has set a new deadline for the receipt of shareholder proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (“Exchange Act”) for inclusion in the Corporation’s proxy materials for the 2017 Annual Meeting. In order to be considered timely, such proposals must be submitted to the Corporate Secretary at our principal executive offices no later than August 17, 2017.

Additionally, the deadline for the receipt of notice by a shareholder of a proposal submitted for consideration at the 2017 Annual Meeting but not submitted for inclusion in our Proxy Statement for our 2017 Annual Meeting pursuant to Rule 14a-8 under the Exchange Act, including shareholder nominations for candidates for election as directors, is also August 17, 2017. Accordingly, in order to be considered timely, such notice must be submitted to the Corporate Secretary at our principal executive offices no later than August 17, 2017.

Table of Contents

ITEM 6. EXHIBITS



2.1	Agreement and Plan of Reorganization, dated as of October 21, 2016, between Access National Corporation and Middleburg Financial Corporation (incorporated by reference to Exhibit 2.1 to Form 8-K filed October 25, 2016 (file number 000-49929))
3.1	Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed July 18, 2006 (file number 000-49929))
3.1.1	Articles of Amendment to Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1.1 to Form 10-Q filed August 15, 2011 (file number 000-49929))
3.2	Amended and Restated Bylaws of Access National Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K filed October 24, 2007 (file number 000-49929)) Certain instruments relating to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of Access National Corporation's total assets have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
10.5	Annual Compensation of Non-Employee Directors (incorporated by reference to Exhibit 10.5 to Form 10-K filed March 16, 2017 (file number 000-49929))
10.6	Base Salaries for Executive Officers (incorporated by reference to Exhibit 10.6 to Form 10-K filed March 16, 2017 (file number 000-49929))
10.2	Employment Agreement, dated as of October 21, 2016 and effective April 1, 2017, between Access National Bank and Middleburg Investment Group/Middleburg Trust Company and Gary R. Shook (incorporated by reference to Exhibit 10.20 to Access’s Registration Statement on Form S-4 filed December 12, 2016 (file number 333-215054))
10.2	Employment Agreement, dated as of October 21, 2016 and effective April 1, 2017, between Access National Bank and Jeffrey H. Culver (incorporated by reference to Exhibit 10.21 to Access’s Registration Statement on Form S-4 filed December 12, 2016 (file number 333-215054))
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer
32*	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350)
101	The following materials from Access National Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 formatted in Extensible Business Reporting Language (XBRL), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited).
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	XBRL Taxonomy Extension Definition Linkbase
101.LAB*	XBRL Taxonomy Extension Label Linkbase
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

*filed herewithin

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		ACCESS NATIONAL CORPORATION
		(Registrant)
Date:	May 19, 2017	/s/ Michael W. Clarke
		Michael W. Clarke
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	May 19, 2017	/s/ Margaret M. Taylor
		Margaret M. Taylor
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Attached files

Stock widget

Investing forum

ACCESS NATIONAL CORP Reports