Xenith Bankshares, Inc. - FORM 10-Q

Xenith Bankshares, Inc. - FORM 10-Q - August 8, 2014

Attached files

Attached files

Xenith Bankshares, Inc. Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Xenith Bankshares, Inc.	Financial_Report.xls
EX-31.1 - EX-31.1 - Xenith Bankshares, Inc.	d771923dex311.htm
EX-10.1 - EX-10.1 - Xenith Bankshares, Inc.	d771923dex101.htm
EX-32.2 - EX-32.2 - Xenith Bankshares, Inc.	d771923dex322.htm
EX-31.2 - EX-31.2 - Xenith Bankshares, Inc.	d771923dex312.htm
EX-32.1 - EX-32.1 - Xenith Bankshares, Inc.	d771923dex321.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 June 30, 2014

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-53380

Xenith Bankshares, Inc.

(Exact name of registrant as specified in its charter)


Virginia		80-0229922
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One James Center 901 E. Cary Street, Suite 1700 Richmond, Virginia		23219
(Address of principal executive offices)		(Zip Code)

(804) 433-2200

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The number of shares of Common Stock, par value $1.00 per share, outstanding at August 1, 2014 was 12,039,898.

TABLE OF CONTENTS


	Page
PART I - FINANCIAL INFORMATION

Item 1 Financial Statements		1

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		28

Item 3 Quantitative and Qualitative Disclosures About Market Risk		51

Item 4 Controls and Procedures		51

PART II - OTHER INFORMATION

Item 1 Legal Proceedings		52

Item 1A Risk Factors		52

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		52

Item 6 Exhibits		52

SIGNATURES

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2014 AND DECEMBER 31, 2013


(in thousands, except share data)	(Unaudited) June 30, 2014			December 31, 2013
Assets
Cash and cash equivalents
Cash and due from banks	$	36,862		$	24,944
Federal funds sold		37,499			5,749

Total cash and cash equivalents		74,361			30,693
Securities available for sale, at fair value		73,852			69,185
Securities held to maturity, at cost (fair value - $9,542)		9,283			—
Loans, net of allowance for loan and lease losses, 2014 - $6,016; 2013 - $5,305		666,221			536,500
Premises and equipment, net		8,218			5,069
Other real estate owned, net		1,298			199
Goodwill and other intangible assets, net		16,372			15,624
Accrued interest receivable		3,809			2,403
Deferred tax asset		6,201			4,345
Bank owned life insurance		13,904			9,690
Other assets		9,864			6,188

Total assets	$	883,383		$	679,896

Liabilities and Shareholders’ Equity
Deposits
Demand and money market	$	431,214		$	359,455
Savings		12,531			4,785
Time		313,466			204,958

Total deposits		757,211			569,198
Accrued interest payable		262			215
Federal funds purchased and borrowed funds		20,000			20,000
Supplemental executive retirement plan		2,241			—
Other liabilities		4,228			2,797

Total liabilities		783,942			592,210

Shareholders’ equity
Preferred stock, $1.00 par value, $1,000 liquidation value, 25,000,000 shares authorized as of June 30, 2014 and December 31, 2013; 8,381 shares issued and outstanding as of June 30, 2014 and December 31, 2013		8,381			8,381
Common stock, $1.00 par value, 100,000,000 shares authorized as of June 30, 2014 and December 31, 2013; 12,035,248 shares issued and outstanding as of June 30, 2014 and 10,437,630 shares issued and outstanding as of December 31, 2013		12,035			10,438
Additional paid-in capital		80,958			71,797
Accumulated deficit		(1,750	)		(1,758	)
Accumulated other comprehensive loss, net of tax		(183	)		(1,172	)

Total shareholders’ equity		99,441			87,686

Total liabilities and shareholders’ equity	$	883,383		$	679,896

See notes to consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2014 AND 2013

(Unaudited)


(in thousands, except per share data)	June 30, 2014			June 30, 2013
Interest income
Interest and fees on loans	$	6,287		$	5,758
Interest on securities		356			270
Interest on federal funds sold and deposits in other banks		67			76

Total interest income		6,710			6,104

Interest expense
Interest on deposits		513			535
Interest on time certificates of $100,000 and over		351			223
Interest on federal funds purchased and borrowed funds		97			93

Total interest expense		961			851

Net interest income		5,749			5,253
Provision for loan and lease losses		602			4

Net interest income after provision for loan and lease losses		5,147			5,249

Noninterest income
Service charges on deposit accounts		128			105
Gain on sales of securities		22			132
Bargain purchase gain		32			—
Increase in cash surrender value of bank owned life insurance		77			23
Other		3			113

Total noninterest income		262			373

Noninterest expense
Compensation and benefits		2,784			2,790
Occupancy		366			370
FDIC insurance		126			109
Bank franchise taxes		191			216
Technology		558			432
Communications		79			59
Insurance		72			74
Professional fees		492			256
Amortization of intangible assets		91			91
Guaranteed student loan servicing		168			—
Other		679			396

Total noninterest expense		5,606			4,793

(Loss) income before income tax		(197	)		829
Income tax expense		8			277

Net (loss) income		(205	)		552

Preferred stock dividend		(21	)		(21	)

Net (loss) income available to common shareholders	$	(226	)	$	531

(Loss) earnings per common share (basic and diluted):	$	(0.02	)	$	0.05

See notes to consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(Unaudited)


(in thousands, except per share data)	June 30, 2014			June 30, 2013
Interest income
Interest and fees on loans	$	12,181		$	11,618
Interest on securities		727			520
Interest on federal funds sold and deposits in other banks		134			154

Total interest income		13,042			12,292

Interest expense
Interest on deposits		992			1,115
Interest on time certificates of $100,000 and over		640			489
Interest on federal funds purchased and borrowed funds		196			186

Total interest expense		1,828			1,790

Net interest income		11,214			10,502
Provision for loan and lease losses		830			415

Net interest income after provision for loan and lease losses		10,384			10,087

Noninterest income
Service charges on deposit accounts		262			199
Net (loss) gain on sale and write-down of other real estate owned and other collateral		(39	)		346
Gain on sales of securities		22			291
Bargain purchase gain		32			—
Increase in cash surrender value of bank owned life insurance		160			23
Other		143			175

Total noninterest income		580			1,034

Noninterest expense
Compensation and benefits		5,607			5,748
Occupancy		720			734
FDIC insurance		240			207
Bank franchise taxes		381			413
Technology		962			819
Communications		156			121
Insurance		144			148
Professional fees		909			510
Amortization of intangible assets		182			182
Guaranteed student loan servicing		323			—
Other		1,074			747

Total noninterest expense		10,698			9,629

Income before income tax		266			1,492
Income tax expense		216			522

Net income		50			970

Preferred stock dividend		(42	)		(42	)

Net income available to common shareholders	$	8		$	928

Earnings per common share (basic and diluted):	$	0.00		$	0.09

See notes to consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(Unaudited)


	For the Three Months Ended June 30,
(in thousands)	2014			2013
Net (loss) income	$	(205	)	$	552
Other comprehensive income (loss), before taxes:
Securities available for sale:
Unrealized gain (loss) arising during the year		552			(2,115	)
Reclassification adjustment for losses (gains) included in net income		22			(132	)

Unrealized gain (loss) on available-for-sale securities		574			(2,247	)

Securities held to maturity:
Amortization of unrealized loss transferred from available for sale		15			—

Unrealized loss on held-to-maturity securities		15			—

Unrealized loss on derivative:
Unrealized (loss) gain arising during the year		(284	)		193
Reclassification adjustment for losses included in net income		36			34

Unrealized (loss) gain on derivative		(248	)		227

Other comprehensive income (loss), before taxes		341			(2,020	)

Income tax (expense) benefit related to other comprehensive income		(116	)		687

Comprehensive income (loss)	$	20		$	(781	)


	For the Six Months Ended June 30,
(in thousands)	2014			2013
Net income	$	50		$	970
Other comprehensive income (loss), before taxes:
Securities available for sale:
Unrealized gain (loss) arising during the year		2,248			(2,496	)
Reclassification adjustment for losses (gains) included in net income		22			(291	)

Unrealized gain (loss) on available-for-sale securities		2,270			(2,787	)

Securities held to maturity:
Unrealized loss transferred to held to maturity		(518	)		—
Amortization of unrealized loss transferred from available for sale		23			—

Unrealized loss on held-to-maturity securities		(495	)		—

Unrealized loss on derivative:
Unrealized (loss) gain arising during the year		(348	)		192
Reclassification adjustment for losses included in net income		72			66

Unrealized (loss) gain on derivative		(276	)		258

Other comprehensive income (loss), before taxes		1,499			(2,529	)

Income tax (expense) benefit related to other comprehensive income		(510	)		860

Comprehensive income (loss)	$	1,039		$	(699	)

See notes to consolidated financial statements.

XENITH BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(Unaudited)


(in thousands)	June 30, 2014			June 30, 2013
Cash flows from operating activities
Net income	$	50		$	970
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan and lease losses		830			415
Depreciation and amortization		518			613
Net amortization of securities		180			355
Accretion of acquisition accounting adjustments		(278	)		(999	)
Deferred tax (benefit) expense		(464	)		333
Gain on sales of securities		(22	)		(291	)
Share-based compensation expense		514			332
Bargain purchase gain		(32	)		—
Net loss (gain) on sale and write-down of other real estate owned and other collateral		39			(346	)
Increase in cash surrender value of bank owned life insurance		(160	)		(23	)
Change in operating assets and liabilities:
Accrued interest receivable		(1,087	)		104
Other assets		(1,226	)		384
Accrued interest payable		8			(2	)
Other liabilities		738			(217	)

Net cash (used in) provided by operating activities		(392	)		1,628

Cash flows from investing activities
Cash and cash equivalents acquired in bank acquisition		12,560			—
Proceeds from sales, maturities and calls of securities		5,105			20,152
Purchases of securities		—			(37,508	)
Net (increase) decrease in loans		(60,214	)		5,016
Net proceeds from sale of other real estate owned and other collateral		—			346
Purchases of bank owned life insurance		—			(9,500	)
Net purchase of premises and equipment		(146	)		(339	)
Sale (purchase) of FRB and FHLB stock		14			(289	)

Net cash used in investing activities		(42,681	)		(22,122	)

Cash flows from financing activities
Net increase in demand and savings deposits		22,100			1,662
Net increase in time deposits		64,928			9,783
Net increase in federal funds purchased and borrowed funds		—			5,000
Issuance of common stock		20			—
Repurchase of common stock		(265	)		—
Preferred stock dividend		(42	)		(42	)

Net cash provided by financing activities		86,741			16,403

Net increase (decrease) in cash and cash equivalents		43,668			(4,091	)
Cash and cash equivalents
Beginning of period		30,693			12,363

End of period	$	74,361		$	8,272

Supplementary disclosure of cash flow information
Cash payments for:
Interest	$	1,820		$	1,791

Income taxes	$	700		$	175

Transactions related to bank acquisition
Assets acquired	$	114,385		$	—

Liabilities assumed	$	103,863		$	—

See notes to consolidated financial statements.

Xenith Bankshares, Inc. and Subsidiary

Notes to Unaudited Consolidated Financial Statements

June 30, 2014

Note 1. Organization

General

Xenith Bankshares, Inc. (“Xenith Bankshares” or the “company”) is the bank holding company for Xenith Bank (the “Bank”), a Virginia-based institution headquartered in Richmond, Virginia. As of June 30, 2014, the company, through the Bank, operates eight full-service branches: one branch in Tysons Corner, Virginia, two branches in Richmond, Virginia, three branches in Suffolk, Virginia, and, as a result of the acquisition of Colonial Virginia Bank (“CVB”) that was completed on June 30, 2014, discussed below, two branches in Gloucester, Virginia. Additionally, the Bank operates one loan production office in York County, Virginia, as a result of the acquisition of CVB.

Background

In December 2009, First Bankshares, Inc. (“First Bankshares”), the bank holding company for SuffolkFirst Bank, and Xenith Corporation completed the merger of Xenith Corporation with and into First Bankshares (the “merger”), with First Bankshares being the surviving entity in the merger. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank. Although the merger was structured as a merger of Xenith Corporation with and into First Bankshares, with First Bankshares being the surviving entity for legal purposes, Xenith Corporation was treated as the acquirer for accounting purposes.

Effective on July 29, 2011, the Bank completed the acquisition of select loans totaling $58.3 million and related assets associated with the Richmond, Virginia branch office of Paragon Commercial Bank, a North Carolina banking corporation, and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the branch office (the “Paragon Transaction”).

Also effective on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (the “FDIC”) acted as receiver of VBB. The Bank acquired total assets of $92.9 million, including $70.9 million in loans, and assumed liabilities of $86.9 million, including $77.5 million in deposits. Under the terms of the VBB Acquisition agreement, the Bank received a discount of $23.8 million on the net assets and did not pay a deposit premium. The VBB Acquisition was completed without any shared-loss agreement with the FDIC.

On June 30, 2014, the company completed the merger of CVB with and into the Bank (the “CVB Acquisition”), with the Bank being the surviving bank. The CVB Acquisition was completed in accordance with the terms of the Agreement of Merger, dated as of March 20, 2014, and the related Plan of Merger (the “Merger Agreement”), among the company, the Bank and CVB.

Pursuant to the terms of the Merger Agreement, each share of CVB common stock outstanding immediately prior to the effective time of the CVB Acquisition was converted into the right to receive 2.65 shares of Xenith Bankshares common stock (the “Exchange Ratio”) without interest and less applicable amounts for taxes. All fractional shares of Xenith Bankshares common stock that a CVB shareholder would otherwise have been entitled to receive as a result of the CVB Acquisition was aggregated and, if a fractional share resulted from such aggregation, such holder received, instead of the fractional share, an amount in cash equal to $6.40 multiplied by the fraction of a share of Xenith Bankshares common stock to which such holder would otherwise have been entitled. Based on the Exchange Ratio, an aggregate of 1,618,186 shares of Xenith Bankshares common stock was issued and $658 in cash was paid to the former shareholders of CVB in exchange for their shares of CVB common stock.

Options to purchase shares of CVB common stock outstanding at the effective time of the CVB Acquisition were converted into options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. Based on the Exchange Ratio, an aggregate of 39,004 options to purchase shares of CVB common stock were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock.

Pursuant to the CVB Acquisition, the company acquired $114.4 million of assets, including approximately $70 million in loans and assumed $103.9 million in liabilities, including approximately $101 million of deposits. Such amounts include preliminary estimated fair value adjustments, which are subject to change. CVB operated two full-services branches in Gloucester, Virginia, and one loan production office in York County, Virginia. The CVB branches will continue doing business as Colonial Virginia Bank for an undetermined period of time.

Note 2. Basis of Presentation

The consolidated financial statements include the accounts of Xenith Bankshares and its wholly-owned subsidiary, Xenith Bank. All significant intercompany accounts have been eliminated.

In management’s opinion, the accompanying unaudited consolidated financial statements, which have been prepared in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim period reporting, and reflect all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the financial positions at June 30, 2014 and December 31, 2013, the results of operations and comprehensive income for the three and six months ended June 30, 2014 and 2013, and the statements of cash flows for the three and six months ended June 30, 2014 and 2013. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2014. The unaudited consolidated financial statements and accompanying notes should be read in conjunction with the company’s consolidated financial statements and the accompanying notes to consolidated financial statements included in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

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

Revision of Financial Statements

During the second quarter of 2014, the company determined that loans held pursuant to a warehouse lending program in which the Bank participates should be classified as loans held for investment. Prior to the second quarter of 2014, these loans were classified as loans held for sale on the company’s consolidated balance sheets. All prior periods presented have been revised to reflect this classification. The reclassification in prior periods does not affect reported earnings, total loans, total assets or total shareholders’ equity. The reclassification does affect amounts previously reported as cash flows provided by (used in) operating activities and cash flows provided by (used in) investing activities, as purchases and sales of loans held for sale are reported as cash flows from operating activities, whereas increases and decreases in loans held for investment are reported as cash flows from investing activities. Management has evaluated the effect of the incorrect presentation in prior periods and has concluded that previously issued financial statements were not materially misstated.

The effect of the revision on the line items within the company’s consolidated balance sheet as of December 31, 2013 is as follows:


	December 31, 2013
	As Reported		Revisions			As Revised
Loans held for sale	$	3,363	$	(3,363	)	$	—
Loans held for investment, net of allowance for loan and lease losses		533,137		3,363			536,500

The effect of the revision on the line items within the company’s consolidated statements of cash flows for the period ended June 30, 2013 is as follows:


	June 30, 2013
	As Reported			Revisions			As Revised
Change in operating assets and liabilities:
Originations of loans held for sale	$	(340,646	)	$	340,646		$	—
Proceeds from sales of loans held for sale		359,652			(359,652	)		—
Net cash provided by operating activities		20,634			(19,006	)		1,628
Cash flows from investing activities:
Net (increase) decrease in loans held for investment	$	(13,990	)	$	19,006		$	5,016
Net cash used in investing activities		(41,128	)		19,006			(22,122	)

Note 3. Business Combination

The company has accounted for the CVB Acquisition under the acquisition method of accounting, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations”, whereby the acquired assets and assumed liabilities are recorded by the company at their estimated fair values as of the acquisition date, which was June 30, 2014. Fair value estimates, as of June 30, 2014, were based on management’s assessment of the best information available and are preliminary and subject to change. The final determination of estimated fair values of assets and liabilities will be made when all necessary information becomes available and management has completed its analysis. The company’s consolidated statements of operations for the three and six-month periods ended June 30, 2014 include no income from the operations of CVB, as the transaction was completed after the close of business on June 30, 2014.

In accordance with the framework established by FASB ASC Topic 820, “Fair Value Measurements and Disclosure” (“Topic 820”), the company used a fair value hierarchy to prioritize the information used to form assumptions and estimates in determining fair values. These fair value hierarchies are further discussed in Note 18 – Fair Value Measurements.

The CVB Acquisition provides the opportunity for growth in one of the Bank’s target markets and allows the Bank to leverage its existing infrastructure.

The following table presents the preliminary allocation of the consideration paid to the acquired assets and assumed liabilities in the CVB Acquisition as of the acquisition date. The preliminary allocation results in an after tax bargain purchase gain of $21 thousand.


Fair value of assets acquired:
Cash and cash equivalents	$	12,560
Securities available for sale		17,439
Loans		70,048
Premises and equipment		3,338
Other real estate owned		1,137
Core deposit intangible		930
Accrued interest receivable		318
Deferred tax asset		1,903
Bank owned life insurance		4,054
Other assets		2,658

Total assets	$	114,385

Fair value of liabilities assumed:
Deposits	$	100,985
Accrued interest payable		39
Other liabilities		2,839

Total liabilities	$	103,863


Net identifiable assets acquired	$	10,522

Consideration:
Company’s common shares issued		1,618,186
Purchase price per share (1)	$	6.40

Value of common stock issued		10,356
Estimated fair value of stock options		133
Cash in lieu of fractional shares		1

Total consideration	$	10,490


Bargain purchase gain	$	32
Deferred tax liability		(11	)

Bargain purchase gain, net of tax	$	21

(1)	The value of the shares of common stock exchanged for shares of CVB common stock was based upon the closing price of the company’s common stock at June 27, 2014, the last trading day prior to the date of completion of the CVB Acquisition.

Management has not yet determined which loans will be designated as purchased performing and purchased credit-impaired loans receivable in the CVB Acquisition. The estimated fair value adjustment recorded on acquired loans as of the date of acquisition was $3.1 million.

The following table presents the effect of the CVB Acquisition on the company as if the merger had occurred at the beginning of the three and six-month periods ended June 30, 2014 and 2013, on a pro forma basis. Merger-related costs of $428 thousand and $634 thousand for the three and six months ended June 30, 2014, respectively, which are included in the company’s consolidated statements of operations, are not included in the pro forma information below. CVB’s merger-related costs of $270 thousand and $407 thousand for the three and six months ended June 30, 2014, respectively, are not included in the company’s consolidated statements of operations, and are also not included in the pro forma information below. Net income includes pro forma adjustments for the amortization of core deposit intangibles. An effective income tax rate of 34% was used in determining pro forma net income.


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Revenue (net interest income plus noninterest income)	$	7,369	$	6,816	$	14,330	$	13,935
Net income	$	247	$	638	$	820	$	1,214
Earnings per common share (basic and diluted)	$	0.02	$	0.05	$	0.06	$	0.10

Note 4. Restrictions of Cash

To comply with regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement based on the weeks closest to June 30, 2014 and December 31, 2013 was $4.9 million and $8.5 million, respectively.

Note 5. Securities

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


	June 30, 2014
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Securities available for sale:
Agencies	$	5,913	$	—	$	—		$	5,913
Mortgage-backed securities
- Fixed rate		44,217		671		(208	)		44,680
- Variable rate		4,556		92		(26	)		4,622
Municipals - fixed rate
- Tax exempt		5,031		3		—			5,034
- Taxable		853		—		—			853
Collateralized mortgage obligations - fixed rate		12,807		96		(153	)		12,750

Total securities available for sale		73,377		862		(387	)		73,852

Securities held to maturity:
Municipals - fixed rate
- Taxable		9,283		259		—			9,542

Total securities held to maturity		9,283		259		—			9,542

Total securities	$	82,660	$	1,121	$	(387	)	$	83,394


	December 31, 2013
			Gross Unrealized
	Book Value		Gains		(Losses)			Fair Value
Mortgage-backed securities
- Fixed rate	$	45,693	$	368	$	(724	)	$	45,337
- Variable rate		4,903		77		(128	)		4,852
Municipals - fixed rate
- Taxable		9,810		—		(840	)		8,970
- Tax exempt		1,634		—		(61	)		1,573
Collateralized mortgage obligations - fixed rate		8,940		57		(544	)		8,453

Total securities available for sale	$	70,980	$	502	$	(2,297	)	$	69,185

As of June 30, 2014 and December 31, 2013, the company had securities with a fair value of $8.9 million and $6.3 million, respectively, pledged as collateral for public deposits.

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


	June 30, 2014
	Available for Sale				Held to Maturity
	Book Value		Fair Value		Book Value		Fair Value
Due within one year	$	—	$	—	$	—	$	—
Due after one year through five years		1,184		1,184		—		—
Due after five years through ten years		32,984		33,383		8,346		8,563
Due after ten years		39,209		39,285		937		979

Total securities available for sale	$	73,377	$	73,852	$	9,283	$	9,542

The following tables present fair values and the related unrealized losses in the company’s securities portfolio, with the information aggregated by investment category and by the length of time that individual securities have been in continuous unrealized loss positions, as of the dates stated. The number of loss securities in each category is also noted.


	June 30, 2014
			Less than 12 months					More than 12 months					Total
	Number		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Securities available for sale:
Mortgage-backed securities
- Fixed rate		5	$	4,367	$	(17	)	$	11,560	$	(191	)	$	15,927	$	(208	)
- Variable rate		1		—		—			3,157		(26	)		3,157		(26	)
Collateralized mortgage obligations - fixed rate		2		—		—			4,035		(153	)		4,035		(153	)

Total securities available for sale		8		4,367		(17	)		18,752		(370	)		23,119		(387	)

Total securities		8	$	4,367	$	(17	)	$	18,752	$	(370	)	$	23,119	$	(387	)


	December 31, 2013
			Less than 12 months					More than 12 months					Total
	Number		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Mortgage-backed securities
- Fixed rate		10	$	26,610	$	(724	)	$	—	$	—		$	26,610	$	(724	)
- Variable rate		2		3,214		(128	)		—		—			3,214		(128	)
Municipals - fixed rate
- Taxable		5		8,069		(697	)		901		(143	)		8,970		(840	)
- Tax exempt		1		1,573		(61	)		—		—			1,573		(61	)
Collateralized mortgage obligations - fixed rate		3		6,361		(544	)		—		—			6,361		(544	)

Total securities		21	$	45,827	$	(2,154	)	$	901	$	(143	)	$	46,728	$	(2,297	)

All securities held as of June 30, 2014 were investment grade. The unrealized loss positions at June 30, 2014 were directly related to interest rate movements, and management believes there is minimal credit risk exposure in these investments. There is no intent to sell investments that were in an unrealized loss position at June 30, 2014, and it is more likely than not that the company will not be required to sell these investments before a recovery of unrealized losses. These investments were not considered to be other-than-temporarily impaired at June 30, 2014; therefore, no impairment has been recognized.

Note 6. Loans


	June 30, 2014						December 31, 2013
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	288,465			42.92	%	$	249,687			46.08	%
Commercial real estate		219,908			32.71	%		172,711			31.88	%
Residential real estate		64,882			9.65	%		22,004			4.06	%
Consumer		6,461			0.96	%		3,191			0.59	%
Guaranteed student loans		92,435			13.75	%		94,028			17.36	%
Overdrafts		86			0.01	%		184			0.03	%

Total loans	$	672,237			100.00	%	$	541,805			100.00	%
Allowance for loan and lease losses		(6,016	)					(5,305	)

Total loans, net of allowance	$	666,221					$	536,500

Loans, excluding guaranteed student loans, include unearned fees net of capitalized origination costs, of $178 thousand and $244 thousand, as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014, $215.3 million of loans were pledged to the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank as collateral for borrowing capacity.

During the third quarter of 2013, the Bank began purchasing guaranteed student loans, which were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, these loans are substantially guaranteed by a guarantee agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers under defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders.

As of June 30, 2014, the company had $92.4 million of guaranteed student loans on its consolidated balance sheet. This balance includes premium and acquisition costs of $2.5 million and $1.4 million, respectively, which are amortized into interest income on the effective interest method. The guaranteed student loans carry an approximate 98% federal government guaranty as to the payment of principal and accrued interest.

The following table presents the company’s loans by regulatory risk ratings classification and by loan type as of the dates stated. As defined by the Federal Reserve and adopted by the company, “special mention” loans are defined as having potential weaknesses that deserve management’s close attention; “substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any; and “doubtful” loans have all the weaknesses inherent in substandard loans, with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans not categorized as special mention, substandard or doubtful are classified as “pass.” The company’s risk ratings, which are assigned to loans, are embedded within these categories.


	June 30, 2014
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Commercial and industrial	$	281,429	$	1,209	$	5,827	$	—	$	288,465
Commercial real estate		210,477		3,668		5,763		—		219,908
Residential real estate		60,558		2,691		1,625		8		64,882
Consumer		4,721		832		908		—		6,461
Guaranteed student loans		92,435		—		—		—		92,435
Overdrafts		86		—		—		—		86

Total loans	$	649,706	$	8,400	$	14,123	$	8	$	672,237


	December 31, 2013
	Pass		Special Mention		Substandard		Doubtful		Total Loans
Commercial and industrial	$	242,018	$	1,990	$	5,679	$	—	$	249,687
Commercial real estate		166,398		2,366		3,947		—		172,711
Residential real estate		21,014		132		858		—		22,004
Consumer		2,849		—		342		—		3,191
Guaranteed student loans		94,028		—		—		—		94,028
Overdrafts		184		—		—		—		184

Total loans	$	526,491	$	4,488	$	10,826	$	—	$	541,805

Allowance for Loan and Lease Losses

The allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to FASB ASC Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.” A loan is impaired when, based on current information and events, it is probable that all amounts due (principal and interest) according to the contractual terms of the loan agreement will not be collected.

The allowance for loan and lease losses is determined based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that are originated by the company. In evaluating the loan portfolio, qualitative factors, such as general economic conditions, nationally and in the company’s target markets, are considered, as well as threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors and estimates may be subject to significant change. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in the consolidated statements of operations. Loans or portions of loans deemed to be uncollectible are charged against the allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses.

The company’s allowance for loan and lease losses related to guaranteed student loans is based on historical and expected default rates for similar types of loans applied to the portion of carrying value in these loans that is not subject to federal guaranty.

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


	For the Three Months Ended June 30,
	2014			2013
Balance at beginning of period	$	5,414		$	5,099
Charge-offs:
Commercial and industrial		—			—
Commercial real estate		—			211
Residential real estate		—			25
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		13			1

Total charge-offs		13			237

Recoveries:
Commercial and industrial		—			—
Commercial real estate		4			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		1			—

Total recoveries		5			—

Net charge-offs		8			237

Provision for loan and lease losses		602			4
Amount for unfunded commitments		10			16
Other (1)		(2	)		—

Balance at end of period	$	6,016		$	4,882

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


	For the Six Months Ended June 30,
	2014			2013
Balance at beginning of period	$	5,305		$	4,875
Charge-offs:
Commercial and industrial		—			1
Commercial real estate		—			370
Residential real estate		35			25
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		14			2

Total charge-offs		49			398

Recoveries:
Commercial and industrial		1			—
Commercial real estate		4			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		1			1

Total recoveries		6			1

Net charge-offs		43			397

Provision for loan and lease losses		830			415
Amount for unfunded commitments		(10	)		(11	)
Other (1)		(66	)		—

Balance at end of period	$	6,016		$	4,882

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

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


	June 30, 2014
	Total Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses applicable to:
Commercial and industrial	$	1,731	$	243	$	1,488
Commercial real estate		3,067		250		2,817
Residential real estate		446		285		161
Consumer		35		—		35
Guaranteed student loans		737		—		737

Total allowance for loan and lease losses	$	6,016	$	778	$	5,238

Loan balances applicable to:
Commercial and industrial	$	288,465	$	4,213	$	284,252
Commercial real estate		219,908		5,255		214,653
Residential real estate		64,882		1,781		63,101
Consumer		6,547		—		6,547
Guaranteed student loans		92,435		—		92,435

Total loans	$	672,237	$	11,249	$	660,988


	December 31, 2013
	Total Amount		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Allowance for loan losses applicable to:
Commercial and industrial	$	2,148	$	292	$	1,856
Commercial real estate		2,756		298		2,458
Residential real estate		194		10		184
Consumer		12		—		12
Guaranteed student loans		195		—		195

Total allowance for loan and lease losses	$	5,305	$	600	$	4,705

Loan balances applicable to:
Commercial and industrial	$	249,687	$	5,526	$	244,161
Commercial real estate		172,711		4,875		167,836
Residential real estate		22,004		632		21,372
Consumer		3,375		8		3,367
Guaranteed student loans		94,028		—		94,028

Total loans	$	541,805	$	11,041	$	530,764

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


	June 30, 2014
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	2,763	$	3,855	$	—	$	2,839	$	43
Commercial real estate		1,496		2,482		—		1,541		—
Residential real estate		193		193		—		199		—
Consumer		—		—		—		—		—
With an allowance recorded:
Commercial and industrial		1,450		1,477		243		1,468		22
Commercial real estate		3,759		4,116		250		3,753		116
Residential real estate		1,588		1,601		285		1,570		—
Consumer		—		—		—		—		—

Total loans individually evaluated for impairment	$	11,249	$	13,724	$	778	$	11,370	$	181


	December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	3,413	$	4,484	$	—	$	3,342	$	159
Commercial real estate		2,075		3,002		—		2,719		—
Residential real estate		444		474		—		447		8
Consumer		8		8		—		10		1
With an allowance recorded:
Commercial and industrial		2,113		2,194		292		2,220		50
Commercial real estate		2,800		3,085		298		2,934		197
Residential real estate		188		198		10		190		2
Consumer		—		—		—		—		—

Total loans individually evaluated for impairment	$	11,041	$	13,445	$	600	$	11,862	$	417

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

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that all contractually required principal and interest payments will not be collected are accounted for under FASB ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). A portion of the loans acquired in the VBB Acquisition were deemed by management to be credit-impaired loans qualifying for accounting under ASC 310-30. As of June 30, 2014, management has not completed the determination of which of the loans acquired in the CVB Acquisition meet the requirements to be accounted for under ASC 310-30.

In July 2011, the loans acquired in the Paragon Transaction and the VBB Acquisition were adjusted to estimated fair value by recording a discount of $1.8 million and $14.0 million, respectively. Of the $14.0 million discount recorded on the VBB Acquisition, $12.7 million related to $40.2 million of purchased credit-impaired loans. The remaining fair value adjustment on the purchased credit-impaired loans, as of June 30, 2014, was $2.8 million. The carrying value of purchased impaired loans, as of June 30, 2014, was approximately $8.9 million, which is net of any impairment charges recorded subsequent to acquisition.

For purchased credit-impaired loans, the excess of cash flows expected to be collected over the estimated fair value is referred to as the accretable yield and accreted into interest income over the remaining life of the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference. Management has not yet determined the amount of accretable and nonaccretable yield resulting from the loans acquired in the CVB Acquisition.

In applying ASC 310-30 to acquired loans, the company must periodically estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including default rates, the amount and timing of prepayments and the liquidation value and timing of underlying collateral, in addition to other factors. Decreases in expected cash flows attributable to credit will generally result in an impairment charge to earnings such that the initial accretable yield remains unchanged. Increases in expected cash flows will result in an increase in the accretable yield, which is a reclassification from the nonaccretable difference. The increased accretable yield is recognized in income over the remaining period of expected cash flows from the loan.

During the second quarter of 2014, as a result of the periodic re-evaluation of expected cash flows, the company recorded a net impairment charge of $25 thousand due to the deterioration in the timing and/or amount of cash flows of certain purchased credit-impaired loans. Impairments and reversals of impairments are recorded in the provision for loan and lease losses in the consolidated statements of operations, and as a component of the allowance for loan and lease losses in the consolidated balance sheets.

The following table presents the accretion activity related to acquired loans as of the dates stated. Additions in the period ended June 30, 2014 relate to the CVB Acquisition.


	June 30, 2014			December 31, 2013
Balance at beginning of period	$	4,441		$	8,133
Additions		3,050
Accretion (1)		(278	)		(2,644	)
Disposals (2)		—			(1,048	)
Other (3)		66			—

Balance at end of period	$	7,279		$	4,441

(1)	Accretion amounts are reported in interest income.

(2)	Disposals represent the reduction of purchase accounting adjustments due to the resolution of acquired loans at amounts less than the contractually-owed receivable. Of the 2013 amount, $85 thousand relates to loans reclassified as other real estate owned (“OREO”).

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

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


	June 30, 2014
	30-89 days Past Due		90+ days Past Due		Total Past Due
Commercial and industrial	$	270	$	1,216	$	1,486
Commercial real estate		1,347		44		1,391
Residential real estate		678		1,666		2,344
Consumer		207		—		207
Guaranteed student loans		7,669		31,553		39,222

Total	$	10,171	$	34,479	$	44,650


	December 31, 2013
	30-89 days Past Due		90+ days Past Due		Total Past Due
Commercial and industrial	$	1,034	$	781	$	1,815
Commercial real estate		—		17		17
Residential real estate		228		385		613
Consumer		4		—		4
Guaranteed student loans		43,875		—		43,875

Total	$	45,141	$	1,183	$	46,324

The following table presents nonaccrual loans and OREO as of the dates stated. A loan is considered nonaccrual if it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of June 30, 2014, there were no loans, other than guaranteed student loans, past due 90 days or greater for which interest was accruing. Accrued interest on guaranteed student loans is subject to the guaranty and is payable under the claim to the time the claim is satisfied.


	June 30, 2014		December 31, 2013
Commercial and industrial	$	2,382	$	2,386
Commercial real estate		1,468		883
Residential real estate		1,345		553
Consumer		1,932		—

Total nonaccrual loans	$	7,127	$	3,822
Other real estate owned		1,298		199

Total nonperforming assets	$	8,425	$	4,021

In accordance with Accounting Standards Update (“ASU”) No. 2011-02, “Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” the company assesses all restructurings for potential identification as troubled debt restructurings (“TDR”). A modification of a loan’s terms constitutes a TDR, if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Modifications of terms for loans that are included as TDRs may involve either an increase or reduction of the interest rate, extension of the term of the loan, or deferral of principal payments, regardless of the period of the modification.

For loans classified as TDRs, the company further evaluates the loans as performing or nonperforming. If at the time of restructure the loan is on accrual status, it will be classified as performing and will continue to be classified as performing as long as the borrower continues making payments in accordance with the restructured terms. A modified loan will be classified as nonaccrual, if the loan becomes 90 days delinquent, or when collectability is in doubt. TDRs originally considered nonaccrual will be classified as nonperforming, but may be classified as performing TDRs, if subsequent to restructure the loan experiences payment performance according to the restructured terms for a consecutive six-month period.

The following table presents performing and nonperforming loans identified as TDRs, by loan type, as of the dates stated:


	June 30, 2014		December 31, 2013
Performing:
Commercial and industrial	$	397	$	1,030
Commercial real estate		900		908
Residential real estate		—		—
Consumer		—		—

Total performing TDRs	$	1,297	$	1,938

Nonperforming:
Commercial and industrial	$	1,864	$	1,940
Commercial real estate		14		17
Residential real estate		218		120
Consumer		—		—

Total nonperforming TDRs	$	2,096	$	2,077

Total TDRs	$	3,393	$	4,015

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


	June 30, 2014
	Number of Loans Modified		Rate Modification (1)		Term Extension and/or Other Concessions		Total
Commercial and industrial		6	$	1,111	$	1,150	$	2,261
Commercial real estate		3		900		14		914
Residential real estate		2		89		129		218
Consumer		—		—		—		—

Total TDRs		11	$	2,100	$	1,293	$	3,393

(1)	Restructured loans that had a modification of the loan’s contractual interest rate may also have had an extension of the loan’s contractual maturity date.


	December 31, 2013
	Number of Loans Modified		Rate Modification (1)		Term Extension and/or Other Concessions		Total
Commercial and industrial		8	$	1,159	$	1,812	$	2,971
Commercial real estate		3		908		17		925
Residential real estate		1		—		119		119
Consumer		—		—		—		—

Total TDRs		12	$	2,067	$	1,948	$	4,015

(1)	Restructured loans that had a modification of the loan’s contractual interest rate may also have had an extension of the loan’s contractual maturity date.

Note 7. Goodwill and Other Intangible Assets

As part of the purchase price allocation of consideration paid in the CVB Acquisition, the company recorded an estimated fair value amount of $930 thousand of core deposit intangibles. Core deposit intangible assets are being amortized over a 10-year period on a straight-line basis.

The following table presents goodwill and other intangible assets as of the dates stated:


	June 30, 2014			December 31, 2013
Amortizable core deposit intangibles:
Gross carrying value	$	4,640		$	3,710
Accumulated amortization		(1,257	)		(1,075	)

Net core deposit intangibles		3,383			2,635

Unamortizable goodwill		12,989			12,989

Total goodwill and other intangible assets, net	$	16,372		$	15,624

The following table presents the estimated future amortization expense for core deposit intangibles:


Year	Core Deposit Intangibles
2014	$	229
2015		458
2016		458
2017		458
2018		458
Thereafter		1,322

Total	$	3,383

Note 8. Deposits

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


	June 30, 2014		December 31, 2013
Noninterest-bearing demand deposits	$	123,792	$	116,083
Interest-bearing:
Demand and money market		307,422		243,372
Savings deposits		12,531		4,785
Time deposits of $100,000 or more		232,300		146,834
Other time deposits		81,166		58,124

Total deposits	$	757,211	$	569,198

Note 9. Derivatives

Cash Flow Hedges

The company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements. The company is a party to three interest rate swap agreements. Pursuant to one of the agreements, the company pays fixed amounts to a counterparty in exchange for receiving LIBOR-based variable payments over the life of the agreement without exchange of the underlying notional amount of $20 million. Pursuant to the other agreements, the company has minimized its exposure to interest rate movements by exchanging variable for fixed interest payments beginning at a specified future date without exchange of underlying notional amounts of $17.5 million. As of June 30, 2014, the company’s three interest rate swaps were designated as cash flow hedges, in accordance with FASB ASC Topic 815, “Derivatives and Hedging.”

The effective portion of changes in the fair value of derivatives designated as cash flow hedges is recorded in accumulated other comprehensive income (“AOCI”) and is subsequently reclassified into net income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. For the three-month period ended June 30, 2014, the ineffective portion was insignificant. The amount reported in AOCI as of June 30, 2014 was a loss of $169 thousand, net of a tax benefit of $87 thousand. As of June 30, 2014, a liability of $275 thousand was recorded in other liabilities on the consolidated balance sheet related to these derivatives. Additionally, the company has minimum collateral requirements with its counterparty, and as of June 30, 2014, $250 thousand has been pledged as collateral under the agreements, as the valuation of one of the derivatives has surpassed the contractually specified minimum transfer amount of $250 thousand. If the company is not in compliance with the terms of the derivative agreements, it could be required to settle its obligations under the agreements at termination value.

Non-hedge Derivatives

Derivatives not designated as hedges are not speculative and result from a service the company provides to certain customers. The company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the company executes with third parties, thus minimizing its net exposure from such transactions. These derivatives do not meet hedge accounting requirements; therefore, changes in the fair value of both the customer derivative and the offsetting derivative are recognized in earnings. As of June 30, 2014, $610 thousand was recorded in other assets and $630 thousand was recorded in other liabilities related to non-designated hedges. For the three-month periods ended June 30, 2014 and 2013, $50 thousand of expense and $43 thousand of income, respectively, were recorded in net income related to non-designated hedges. For the six-month periods ended June 30, 2014 and 2013, $38 thousand and $46 thousand of income, respectively, were recorded in net income related to non-designated hedges. As of June 30, 2014, the company had $790 thousand pledged as collateral with respect to non-hedge derivatives.

Note 10. Bank Owned Life Insurance

The Bank invests in bank owned life insurance (“BOLI”), which is life insurance purchased by the Bank on a chosen group of employees. The Bank is the owner and primary beneficiary of the policies. BOLI is carried at the cash surrender value of the underlying policies. Earnings from the increase in cash surrender value of the policies are included in noninterest income on the statements of operations. The Bank has rights under the insurance contracts to redeem them for book value at any time. As of June 30, 2014, the company had $13.9 million of BOLI recorded in its consolidated balance sheets, of which $4.1 million was acquired in the CVB Acquisition.

Note 11. Income Taxes

Net deferred tax assets as of June 30, 2014 and December 31, 2013 were $6.2 million and $4.3 million, respectively. The following table presents the statutory tax rate reconciled to the company’s effective tax rate for the dates stated:


	For the Six Months Ended June 30, 2014						December 31, 2013
	Tax			Rate			Tax			Rate
Income tax expense at statutory rate	$	91			34.00	%	$	1,037			34.00	%
Meals and entertainment		5			1.99	%		9			0.31	%
Share-based compensation		36			13.68	%		86			2.80	%
Transaction-related expenses		129			48.28	%		—			0.00	%
Tax exempt income		(58	)		-21.83	%		(67	)		-2.21	%
Other		13			4.90	%		—			0.00	%

Income tax expense reported	$	216			81.02	%	$	1,065			34.90	%

Note 12. Earnings per Common Share

The following table summarizes basic and diluted earnings per common share calculations for the periods stated:


	For the Three Months Ended June 30,
	2014			2013
Net (loss) income	$	(205	)	$	552
Preferred stock dividend		(21	)		(21	)

Net (loss) income available to common shareholders	$	(226	)	$	531

Weighted average shares outstanding, basic (1)		10,498			10,497
Dilutive shares		132			31

Weighted average shares outstanding, diluted		10,630			10,528

(Loss) earnings per common share, basic	$	(0.02	)	$	0.05

(Loss) earnings per common share, diluted	$	(0.02	)	$	0.05

(1)	Includes vested restricted stock units.


	For the Six Months Ended June 30,
	2014			2013
Net income	$	50		$	970
Preferred stock dividend		(42	)		(42	)

Net (loss) income available to common shareholders	$	8		$	928

Weighted average shares outstanding, basic (1)		10,485			10,493
Dilutive shares		123			28

Weighted average shares outstanding, diluted		10,608			10,521

Earnings per common share, basic	$	0.00		$	0.09

Earnings per common share, diluted	$	0.00		$	0.09

(1)	Includes vested restricted stock units.

Note 13. Share Repurchase Program

In July 2013, the company’s board of directors authorized a share repurchase program permitting the company to repurchase in the open market or otherwise up to 210,000 shares, or approximately 2% of shares of the company’s then outstanding common stock. The authorization has no time limit. There is no guarantee as to the number of shares that will be repurchased by the company, and the company may discontinue the program at any time.

The company repurchased the following shares of common stock pursuant to the repurchase program for the periods stated. The repurchases were made using available cash resources and occurred in the open market.


	Three Months Ended June 30, 2014		Six Months Ended June 30, 2014
Shares of common stock repurchased		—		43,900
Price paid for common stock repurchased	$	—	$	265
Average price paid per common share	$	—	$	6.04

Note 14. Share-based Compensation

In connection with the CVB Acquisition, the company adopted the 2004 Equity Compensation Plan of CVB (the “CVB Equity Plan”), which was for key employees and directors of CVB. An aggregate of 39,004 options to purchase shares of CVB common stock outstanding at the effective date of the CVB Acquisition were converted into an aggregate of 103,355 options to purchase shares of

Xenith Bankshares common stock based on the Exchange Ratio. All options were fully vested at the effective date of the CVB Acquisition. These stock options remained outstanding following the CVB Acquisition and are exercisable for shares of the company’s common stock. The company does not intend to grant any additional awards under the CVB Equity Plan.

Note 15. Pension Plan

In connection with the CVB Acquisition, the company assumed the Colonial Virginia Bank Executive Retirement Plan (“SERP”). The SERP provides for the payment of supplemental retirement benefits to three key former CVB executives. Benefits under the SERP accrue over the service period of the employees; however, upon a change of control, the employees become fully vested in the retirement benefit. The CVB Acquisition constituted a change of control; therefore, all benefits to the employees became fully vested and payments may begin six months following the employee’s termination, as defined by the SERP. One former CVB employee is currently receiving payments under the SERP. As of June 30, 2014, a $2.2 million liability was recorded on the company’s consolidated balance sheet related to the SERP.

The SERP also required, upon change of control, that a grantor trust (rabbi trust) be established as a source of funds to pay benefits under the SERP. As of June 30, 2014, $2.0 million in cash was held in the rabbi trust and is recorded in other assets on the company’s consolidated balance sheet. The rabbi trust assets are subject to the general unsecured creditors of the company.

Note 16. Senior Non-Cumulative Perpetual Preferred Stock

On September 21, 2011, as part of the Small Business Lending Fund (“SBLF”) of the U.S. Department of Treasury (“U.S. Treasury”), the company issued and sold 8,381 shares of non-cumulative perpetual preferred stock to the Secretary of the U.S. Treasury (the “SBLF Preferred Stock”) for a purchase price of $8.4 million. The SBLF Preferred Stock investment qualifies as Tier 1 capital. The SBLF Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis based upon changes in the level of “Qualified Small Business Lending” (as defined in the SBLF purchase agreement) by the Bank with the lowest rate of 1%. For the three-month periods ended June 30, 2014 and 2013, the company’s dividend was $21 thousand, representing an effective dividend rate of 1% for both periods. For the six-month periods ended June 30, 2014 and 2013, the company’s dividend was $42 thousand, representing an effective dividend rate of 1% for both periods.

Note 17. Commitment and Contingencies

In the normal course of business, the Bank has commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additionally, the Bank issues letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

The following table presents unfunded commitments outstanding as of the dates stated:


	June 30, 2014		December 31, 2013
Commercial lines of credit	$	121,718	$	74,419
Commercial real estate		33,848		44,324
Residential real estate		14,496		7,183
Consumer		1,836		481
Letters of credit		5,882		6,796

Total commitments	$	177,780	$	133,203

In addition, the Bank has a commitment to invest in a limited partnership that operates as a small business investment company. As of June 30, 2014, the Bank had invested $450 thousand. An additional $550 thousand will be funded at the request of the general partner of the partnership.

Note 18. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability.

FASB ASC Topic 820, “Fair Value Measurements and Disclosure” (“ASC 820”), establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

Under the guidance in ASC 820, the company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:


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

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

Level 3		Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The company evaluates its hierarchy disclosures each quarter, and, based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. An adjustment to the pricing method used within either Level 1 or Level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The company expects changes in classifications between levels will be rare.

Securities available for sale:

Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, collateralized mortgage obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Other real estate owned:

OREO is measured at the asset’s fair value less costs for disposal. The company estimates fair value at the asset’s liquidation value less disposal costs using management’s assumptions, which are based on current market analysis or recent appraisals. Other real estate owned is classified as a nonrecurring Level 3 valuation.

Impaired loans:

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. As of June 30, 2014, all of the impaired loans accounted for under ASC 310-30 were evaluated based on discounted cash flows or on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the company records the impaired loan as nonrecurring Level 2. When a current appraised value is not available, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or management evaluates fair value based on discounted cash flows, the company records the impaired loan as nonrecurring Level 3.

Derivatives:

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2014 and 2013, the company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

In conjunction with the FASB’s fair value measurement guidance, the company has elected to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Cash, cash equivalents and accrued interest:

The carrying value for cash and cash equivalents and accrued interest approximates fair value.

The methodology for measuring the fair value of other financial assets and financial liabilities that are not recorded at fair value on a recurring or nonrecurring basis are discussed below.

Securities held to maturity:

Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, collateralized mortgage obligations, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Performing loans:

For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms.

Deposit liabilities:

The balance of demand, money market and savings deposits approximates the fair value payable on demand to the accountholder. The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.

Borrowings:

The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses at the company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of long-term borrowings, for which interest rates reset quarterly or less, approximate their fair value.

Other commitments:

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date or “settlement date.”

As noted, certain assets and liabilities are measured at fair value on a recurring and nonrecurring basis. The following tables present assets measured at fair value on a recurring and nonrecurring basis as of the dates stated:


				Fair Value Measurements as of June 30, 2014 Using
	June 30, 2014 Balance			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Securities available for sale:
Agencies	$	5,913		$	—	$	5,913		$	—
Mortgage-backed securities
- Fixed rate		44,680			—		44,680			—
- Variable rate		4,622			—		4,622			—
Municipals		5,887			—		5,887			—
Collateralized mortgage obligations		12,750			—		12,750			—
Cash flow hedge - asset		—			—		—			—
Cash flow hedge - liability		(275	)		—		(275	)		—
Interest rate derivative - asset		610			—		610			—
Interest rate derivative - liability		(630	)		—		(630	)		—
Assets measured on a nonrecurring basis:
Impaired loans		11,249			—		—			11,249
Other real estate owned		1,298			—		—			1,298


				Fair Value Measurements as of December 31, 2013 Using
	December 31, 2013 Balance			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Assets and liabilities measured on a recurring basis:
Securities available for sale:
Mortgage-backed securities
- Fixed rate	$	45,337		$	—	$	45,337		$	—
- Variable rate		4,852			—		4,852			—
Municipals
- Taxable		8,970			—		8,970			—
- Tax exempt		1,573			—		1,573			—
Collateralized mortgage obligations		8,453			—		8,453			—
Cash flow hedge - asset		192			—		192			—
Cash flow hedge - liability		(191	)		—		(191	)		—
Interest rate derivative - asset		135			—		135			—
Interest rate derivative - liability		(113	)		—		(113	)		—
Assets measured on a nonrecurring basis:
Impaired loans		11,041			—		—			11,041
Other real estate owned		199			—		—			199

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


	June 30, 2014				Fair Value Measurements as of June 30, 2014 Using
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	36,862	$	36,862	$	36,862	$	—	$	—
Federal funds sold		37,499		37,499		—		37,499		—
Securities available for sale		73,852		73,852		—		73,852		—
Securities held to maturity		9,283		9,542		—		9,542		—
Loans, net		666,221		667,614		—		—		667,614
Interest rate derivative		610		610		—		610		—
Accrued interest receivable		3,809		3,809		—		3,809		—
Other assets		2,018		2,018		2,018		—		—
Financial liabilities:
Cash flow hedge	$	275	$	275	$	—	$	275	$	—
Interest rate derivative		630		630		—		630		—
Long-term borrowings		20,000		20,000		—		20,000		—
Deposits		757,211		756,321		—		756,321		—
Accrued interest payable		262		262		—		262		—


	December 31, 2013				Fair Value Measurements as of December 31, 2013 Using
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	24,944	$	24,944	$	24,944	$	—	$	—
Federal funds sold		5,749		5,749		—		5,749		—
Securities available for sale		69,185		69,185		—		69,185		—
Loans, net		536,500		537,595		—		—		537,595
Cash flow hedge		192		192		—		192		—
Interest rate derivative		135		135		—		135		—
Accrued interest receivable		2,403		2,403		—		2,403		—
Financial liabilities:
Cash flow hedge	$	191	$	191	$	—	$	191	$	—
Interest rate derivative		113		113		—		113		—
Long-term borrowings		20,000		20,000		—		20,000		—
Deposits		569,198		568,775		—		568,775		—
Accrued interest payable		215		215		—		215		—

Fair value estimates are made at a specific point in time and are based on relevant market information, as well as information about the financial instruments or other assets. These estimates do not reflect any premium or discount that could result from offering for sale the company’s entire holdings of a particular financial instrument at one time. Fair value estimates are based on judgments

regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets that are not considered financial assets include deferred tax assets, premises and equipment, and OREO. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Note 19. Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (ASU Subtopic 310-40), “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The amendments in this ASU are intended to clarify the terms defining when an in substance repossession or foreclosure occurs, which determines when the receivable should be derecognized and the real estate property recognized. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this standard is not expected to have a significant impact on the company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. Most revenue associated with financial instruments, including interest and loan origination fees, is outside the scope of the guidance. This ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with early adoption prohibited. The company is evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

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

The following is management’s discussion and analysis of the company’s consolidated financial condition, changes in financial condition, results of operations, liquidity, cash flows and capital resources. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q (“Form 10-Q”) and Part II, Item 8, “Financial Statements and Supplementary Data” in the company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”). The data presented as of June 30, 2014 and for the three and six-month periods ended June 30, 2014 and 2013 is derived from our unaudited interim financial statements and includes, in the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the data for such period. The data presented as of December 31, 2013 is derived from our audited financial statements as of and for the year ended December 31, 2013, which is included in the 2013 Form 10-K.

All references to “Xenith Bankshares,” “our company,” “the company,” “we,” “our” or “us” are to Xenith Bankshares, Inc. and its wholly-owned subsidiary, Xenith Bank, collectively. All references to “the Bank” are to Xenith Bank.

All dollar amounts included in the tables in this discussion and analysis are in thousands, except per share data. Columns and rows of amounts presented in tables may not total due to rounding.

BUSINESS OVERVIEW

Xenith Bankshares, Inc. is a Virginia corporation that is the bank holding company for Xenith Bank, which is a Virginia banking corporation organized and chartered pursuant to the laws of the Commonwealth of Virginia and a member of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is a full-service, locally-managed commercial bank specifically targeting the banking needs of middle market and small businesses, local real estate developers and investors, private banking clients and select retail clients, which we refer to as our target customers. We are geographically focused on the Greater Washington, DC, Richmond, Virginia, and the Greater Hampton Roads, Virginia metropolitan statistical areas, which we refer to as our target markets. The Bank conducts its principal banking activities through its eight branches, with one branch located in Tysons Corner, Virginia, two branches located in Richmond, Virginia, three branches located in Suffolk, Virginia, and two branches located in Gloucester, Virginia. The Bank also has a loan production office in York County, Virginia. We acquired the three branches located in Suffolk in the merger of Xenith Corporation with and into First Bankshares, Inc., the parent company of its wholly-owned subsidiary SuffolkFirst Bank. Prior to the merger, SuffolkFirst Bank opened the first branch in Suffolk, Virginia in 2003 under the name of SuffolkFirst Bank. All of the SuffolkFirst Bank branches now operate under the name Xenith Bank. We acquired the two branches in Gloucester and the loan production office in the acquisition of Colonial Virginia Bank (“CVB”) on June 30, 2014, which is further discussed below. The acquired CVB branches will continue doing business as Colonial Virginia Bank for an undetermined period of time. As of June 30, 2014, we had total assets of $883.4 million, total loans, net of our allowance for loan and lease losses, of $666.2 million, total deposits of $757.2 million, and shareholders’ equity of $99.4 million.

Our services and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial and retail banking products, including commercial and industrial loans, commercial and residential real estate loans, and select consumer loans. We also offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, and Internet and mobile banking and bill pay service. We do not engage in any activities other than banking activities.

In July 2013, our board of directors authorized a share repurchase program under which we may repurchase in the open market or otherwise up to 210,000 shares of our outstanding common stock, or approximately 2% of outstanding shares at the time of the announcement of the program. There is no guarantee as to the number of shares that will be repurchased by the company, and the program can be discontinued at any time. In the three months ended June 30, 2014, the company did not purchase shares of its common stock. In the six months ended June 30, 2014, the company purchased 43,900 shares of its common stock at an average price of $6.04. For additional information regarding shares repurchased in the first quarter, see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

During the second quarter of 2014, we determined that loans held pursuant to a warehouse lending program in which the Bank participates should be classified as loans held for investment. Prior to the second quarter of 2014, these loans were classified as loans held for sale on the company’s consolidated balance sheets. All prior periods presented have been revised to reflect this classification. The reclassification in prior periods does not affect reported earnings, total loans, total assets or total shareholders’ equity. The reclassification does affect amounts previously reported as cash flows provided by (used in) operating activities and cash flows provided by (used in) investing activities, as purchases and sales of loans held for sale are reported as cash flows from operating activities, whereas increases and decreases in loans held for investment are reported as cash flows from investing activities. We evaluated the effect of the incorrect presentation in prior periods and concluded that previously issued financial statements were not materially misstated.

In the third quarter of 2013, we began purchasing rehabilitated student loans, a significant portion of which are guaranteed by the federal government. These loans were originated under the Federal Family Education Loan Program (“FFELP”), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, the student loans are substantially guaranteed by a guarantee

agency and reinsured by the U.S. Department of Education. The purchased loans were also part of the Federal Rehabilitated Loan Program (“FRLP”), under which borrowers on defaulted loans have the one-time opportunity to bring their loans current. These loans, which are then owned by an agency guarantor, are brought current and sold to approved lenders. We have an agreement with a third-party servicer of student loans that provides all day-to-day operational requirements for the servicing of these loans. As of June 30, 2014, guaranteed student loans were $92.4 million, which are classified as loans in our consolidated balance sheet. These loans carry a nearly 98% guaranty of principal and interest by a guarantee agency and are reinsured by the U.S. Department of Education.

The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on liabilities used to fund those assets. Interest-earning assets include loans, securities and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of noninterest income include service charges on deposit accounts, fees on treasury services, gains on the sale of securities and other assets, and other miscellaneous income. Deposits, Federal Home Loan Bank (“FHLB”) borrowed funds, and federal funds purchased are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits. Measures of our performance include net interest margin, return on average assets (“ROAA”), return on average equity (“ROAE”), and efficiency ratio. Such measures are common performance indicators in the banking industry.

The following tables present selected financial performance measures, for the dates stated:


	Three Months Ended June 30,
	2014			2013
Net interest margin (1)		3.37	%		3.90	%
Return on average assets (2)		-0.11	%		0.39	%
Return on average common equity (3)		-1.01	%		2.77	%
Efficiency ratio (4)		93	%		85	%


	Six Months Ended June 30,
	2014			2013
Net interest margin (1)		3.39	%		3.86	%
Return on average assets (2)		0.01	%		0.34	%
Return on average common equity (3)		0.12	%		2.44	%
Efficiency ratio (4)		91	%		83	%

(1)	Net interest margin is net interest income divided by average interest-earning assets. Average interest-earning assets are presented within the average balances, income and expenses, yields and rates table below.

(2)	ROAA is net income divided by average total assets. Average total assets are presented within the average balances, income and expenses, yields and rates table below.

(3)	ROAE is net income divided by average shareholders’ equity less average preferred stock. Average shareholders’ equity is presented within the average balances, income and expenses, yields and rates table below.

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

Merger of First Bankshares, Inc. and Xenith Corporation

First Bankshares, Inc. (“First Bankshares”) was incorporated in Virginia in 2008, and was the holding company for SuffolkFirst Bank, a community bank founded in the City of Suffolk, Virginia in 2002.

On December 22, 2009, First Bankshares and Xenith Corporation, a Virginia corporation, completed the merger of Xenith Corporation with and into First Bankshares (the “merger”), with First Bankshares being the surviving entity in the merger. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. Following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank.

Acquisitions

Acquisition was converted into the right to receive 2.65 shares of Xenith Bankshares common stock (the “Exchange Ratio”) without interest and less applicable amounts for taxes. All fractional shares of Xenith Bankshares common stock that a CVB shareholder would otherwise have been entitled to receive as a result of the CVB Acquisition was aggregated and, if a fractional share resulted from such aggregation, such holder received, instead of the fractional share, an amount in cash equal to $6.40 multiplied by the fraction of a share of Xenith Bankshares common stock to which such holder would otherwise have been entitled. Based on the Exchange Ratio, an aggregate of 1,618,186 shares of Xenith Bankshares common stock was issued and $658 in cash was paid to the former shareholders of CVB in exchange for their shares of CVB common stock. Options to purchase shares of CVB common stock outstanding at the effective time of the CVB Acquisition were converted into options to purchase shares of Xenith Bankshares common stock based on the Exchange Ratio. An aggregate of 39,004 options to purchase shares of CVB common stock were converted into an aggregate of 103,355 options to purchase shares of Xenith Bankshares common stock.

Effective on July 29, 2011, the Bank acquired select loans totaling $58.3 million and related assets associated with the Richmond, Virginia branch office of Paragon Commercial Bank, a North Carolina banking corporation, and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the branch office (the “Paragon Transaction”).

Also effective on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank (“VBB”), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the “VBB Acquisition”). The Federal Deposit Insurance Corporation (“FDIC”) acted as receiver of VBB. The Bank acquired total assets of $92.9 million, including $70.9 million in loans, and assumed liabilities of $86.9 million, including $77.5 million in deposits. Under the terms of the VBB Acquisition agreement, the Bank received a discount of $23.8 million on the net assets and did not pay a deposit premium. The VBB Acquisition was completed without any shared-loss agreement with the FDIC.

Industry Conditions

The economy showed signs of improvement in the first half of 2014, with a slight decline in unemployment, an improvement in consumer confidence, and some stabilization in housing markets. The national unemployment rate, seasonally adjusted and as published by the Bureau of Labor Statistics, for June 2014 was reported at 6.1%, a decline from 6.7% in December 2013. In the Fifth District of the Federal Reserve Bank (the “Fifth District”), which includes our target markets, the May 2014 unemployment rate was 5.8%, down from 6.2% at the end of 2013. More specifically, the unemployment rate in Virginia in May 2014 was 5.1%, based on data published by the Fifth District. Additionally as published by the Fifth District, in the last year, all industry sectors in the Fifth District grew except for the information sector, which showed only a modest decline.

The Federal Open Market Committee (the “FOMC”) stated in a July 30, 2014 release that growth in economic activity rebounded in the second quarter, and labor market conditions improved, with the unemployment rate continuing to decline. The FOMC stated household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.

The FOMC stated it will reduce the pace of its asset purchase program until the outlook for the labor market or inflation changes, with the future pace of the asset purchase program based on the efficacy and cost of the program. The FOMC stated it expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time. In determining how long to maintain the current 0 to ¹⁄₄% target range for the federal funds rate, the FOMC stated it will assess progress (both realized and expected) toward its objectives of maximum employment and 2% inflation. The FOMC currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the FOMC views as normal in the longer run.

Low interest rates and intense competition, due to limited business investment, in addition to other factors, have put pressure on net interest margins of banks, including the Bank. Banks with which we compete are offering aggressive terms and may be loosening credit underwriting standards. We anticipate intense competition in our markets until the economy shows stronger signs of improvement.

Outlook

We believe we are well positioned to take advantage of competitive opportunities. We believe we will benefit from (1) our team of skilled bankers, (2) our advantageous market locations in our target markets, (3) our variety of banking services and products, and (4) our experienced management team. We intend to execute our business strategy by focusing on developing long-term relationships with our target customer base through a team of bankers with significant experience in our target markets.

Intense competition for quality loans in this low interest rate environment requires that we remain firm in applying our established credit underwriting practices, providing exceptional customer service, and offering competitive treasury services products, as well as continually monitoring our expenses.

In our continuing evaluation of our business strategy, we continue to believe that properly priced acquisitions can complement our organic growth. We may seek to acquire other financial institutions or branches or assets of those institutions. Although our principal acquisition focus will be to expand our presence in our target markets, we may also expand into new markets or related banking lines of business and related services and products. We evaluate potential acquisitions to determine what is in the best interest of our company and long-term strategy. Our goal in making these decisions is to maximize shareholder value.

Critical Accounting Policies

Our accounting policies are fundamental to an understanding of our consolidated financial position and consolidated results of operations. We believe that our accounting and reporting policies are in accordance with generally accepted accounting principles in the United States of America and conform to general practices within the banking industry. Our financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and the amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or results of operations or both our consolidated financial position and results of operations.

We consider a policy critical if (1) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate and (2) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that our most critical accounting policy relates to the allowance for loan and lease losses, which reflects our estimate of losses in the event of borrower default. An additional accounting policy that we deem critical using these criteria is our measurement of probable cash flows with respect to purchased credit-impaired loans accounted for under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Yield and impairment for purchased credit-impaired loans is based on management’s estimate of future cash flows, which are re-estimated on a periodic basis. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, adjustments to our estimates would be made and additional provisions for loan and lease losses could be required, which could have a material adverse impact on our results of operations and financial condition. Further discussion of the estimates used in determining the allowance for loan and lease losses is contained in the discussion under “—Financial Condition—Allowance for Loan and Lease Losses” below and in measuring impairment for purchased credit-impaired loans is contained under “—Financial Condition—Allowance for Loan and Lease Losses —Acquired Loans” below.

Our critical accounting policies are discussed in detail in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and “Summary of Significant Accounting Policies” in the notes to the consolidated financial statements in our 2013 Form 10-K. Since December 31, 2013, there have been no changes in these policies that have had or could reasonably be expected to have a material effect on our results of operations or financial condition.

RESULTS OF OPERATIONS

Net Income

For the three months ended June 30, 2014, net loss was $205 thousand compared to net income of $552 thousand for the three months ended June 30, 2013. Loss before income tax expense was $197 thousand for the three months ended June 30, 2014 compared to income before income tax expense of $829 thousand for the same period in 2013. For the six months ended June 30, 2014, net income was $50 thousand compared to net income of $970 thousand for the six months ended June 30, 2013. Income before income tax expense was $266 thousand for the six months ended June 30, 2014 compared to $1.5 million for the same period in 2013.

In the three and six months ended June 30, 2014, income before income tax expense included $428 thousand and $634 thousand, respectively, of costs related to the CVB Acquisition. Additionally, in the second quarter of 2014, the Bank experienced a $205 thousand loss resulting from an unauthorized automated clearing house (“ACH”) transaction originated on our on-line banking platform, which was recorded in pretax income. This unauthorized activity is under investigation by relevant authorities, and we are pursuing recovery of the loss, net of deductible, under our insurance policies. We cannot predict the outcome or timing of a recovery, if any, and as such, any recovery will be recognized in the period of receipt.

Income tax expense in the three and six months ended June 30, 2014 reflects the non-deductibility of a significant portion of CVB Acquisition-related costs.

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


	Three Months Ended June 30,
	2014			2013
Net (loss) income	$	(205	)	$	552

Preferred stock dividend		(21	)		(21	)

Net (loss) income available to common shareholders	$	(226	)	$	531

(Loss) earnings per common share, basic and diluted	$	(0.02	)	$	0.05


	Six Months Ended June 30,
	2014			2013
Net income	$	50		$	970

Preferred stock dividend		(42	)		(42	)

Net income available to common shareholders	$	8		$	928

Earnings per common share, basic and diluted	$	0.00		$	0.09

Net Interest Income

For the three months ended June 30, 2014, net interest income was $5.7 million compared to $5.3 million for the three months ended June 30, 2013. Higher net interest income in the 2014 period was primarily due to higher average balances of loans, including guaranteed student loans, and lower costs of deposits, partially offset by lower yields on loans and higher average balances of deposits. Lower yields on loans were partially due to lower accretion on acquired loans in the 2014 period compared to the 2013 period, as further discussed below. As presented in the table below, our net interest margin for the three-month period ended June 30, 2014 was 3.37%, a 53 basis point decrease from 3.90% for the same period in 2013. Excluding the effect of purchase accounting adjustments, net interest margin declined 24 basis points for the three-month period ended June 30, 2014 compared to the same period of 2013. The continued low interest rate environment and competition for quality borrowers have put pressure on our net interest margin. Lower yields on guaranteed student loans have also negatively affected our net interest margin, as these loans earn lower yields than our originated and acquired loans; however, we believe these loans, which carry a federal guarantee and reprice quarterly, offer attractive risk-adjusted returns.

Average interest-earning assets increased $143.6 million, while related interest income increased $606 thousand, for the three-month period ended June 30, 2014 compared to the same period in 2013. Of the increase in average interest-earning assets, 65% of the growth is due to our investment in guaranteed student loans; the remainder being primarily growth in loans held for investment. Average interest-bearing liabilities increased $129.7 million, while related interest expense increased $110 thousand, for the three-month period ended June 30, 2014 compared to the same period in 2013. The CVB Acquisition had minimal effect on average balances as the acquisition occurred on June 30, 2014. Yields on interest-earning assets decreased 60 basis points to 3.93%, and costs of interest-bearing liabilities decreased 13 basis points to 0.72%, when comparing the three-month period ended June 30, 2014 to the same period in 2013. Average interest-earning assets as a percentage of total assets were 93.9% for the three-month period ended June 30, 2014, a decline from 94.4% for the same period in 2013. The decrease in the percentage of interest-earning assets to total assets in the 2014 period was primarily due to our investment in bank owned life insurance (“BOLI”) in June 2013.

For the six months ended June 30, 2014, net interest income was $11.2 million compared to $10.5 million for the six months ended June 30, 2013. Higher net interest income was primarily due to higher average balances of loans and lower costs of interest-bearing deposits, partially offset by lower yields on loans held for investment and higher average balances of deposits. Also in the six-month period ended June 30, 2014, lower accretion on loans affected yields and net interest margin, as further discussed below. As presented in the table below, net interest margin for the six months ended June 30, 2014 was 3.39%, a 47 basis point decrease from 3.86% for the same period in 2013.

Average interest-earning assets increased $117.3 million, and related interest income increased $750 thousand, for the six-month period ended June 30, 2014 compared to the same period in 2013. Average interest-bearing liabilities increased $102.0 million, and related interest expense increased $38 thousand, for the six-month period ended June 30, 2014 compared to the same period in 2013. Yields on interest-earning assets decreased 57 basis points to 3.95%, and costs of interest-bearing liabilities decreased 16 basis points to 0.72%, when comparing the six-month period ended June 30, 2014 to the same period in 2013. Average interest-earning assets as a percentage of total assets was 93.7% for the six-month period ended June 30, 2014 compared to 94.8% for the same period in 2013, also affected by our investment in BOLI.

Our loan portfolios acquired in the merger with First Bankshares, the Paragon Transaction and VBB Acquisition were discounted to estimated fair value (for credit and interest rates) as of the acquisition dates. A portion of the discounts taken to record

the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans or the period of expected cash flows from the loans. Amounts received in excess of the carrying value of loans accounted for on cost recovery are also accreted into interest income at the time of recovery. Loans acquired in the CVB Acquisition were also discounted to estimated fair value as of the acquisition date. The preliminary estimated fair value adjustment on the loans acquired in the CVB Acquisition, as of June 30, 2014, was $3.1 million and is subject to change, as we finalize our analysis of the loan portfolio. Loan discount accretion was $139 thousand for the three months ended June 30, 2014 compared to $498 thousand for the period ended June 30, 2013. For the six-month periods ended June 30, 2014 and June 30, 2013, loan discount accretion was $278 thousand and $999 thousand, respectively. Loan accretion recognized in these periods does not include any accretion from discounts recorded on the loans acquired in the CVB Acquisition.

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


	Three Months Ended June 30,
	2014			2013
Net interest margin		3.37	%		3.90	%
Purchase accounting adjustments impact (1)		0.08	%		0.37	%
Net interest margin excluding the impact of purchase accounting adjustments		3.29	%		3.53	%


	Six Months Ended June 30,
	2014			2013
Net interest margin		3.39	%		3.86	%
Purchase accounting adjustments impact (1)		0.08	%		0.37	%
Net interest margin excluding the impact of purchase accounting adjustments		3.31	%		3.49	%

(1)	Purchase accounting adjustments include accretion of discounts on acquired loans.

The following tables provide an analysis of the effective yields and rates on average interest-earning assets and average interest-bearing liabilities as of and for the periods stated. The average balances and other statistical data used in this table were calculated using daily average balances. Tax-exempt income is reported on a taxable equivalent basis. Assets acquired and liabilities assumed in the CVB Acquisition are included in the average balances; however, the effect of these is minimal as the transaction occurred on June 30, 2014. No interest income or interest expense is included from the CVB assets and liabilities as the transition was completed after the close of business on June 30, 2014.


	Average Balances, Income and Expenses, Yields and Rates
	As of and For the Three Months Ended June 30,
																	2014 vs. 2013
	Average Balances (1)						Yield / Rate						Income / Expense (7)(8)				Increase			Change due to (2)
	2014			2013			2014			2013			2014		2013		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	10,322		$	2,490			0.21	%		0.24	%	$	5	$	1	$	4		$	—		$	4
Interest-earning deposits		15,431			31,679			0.27	%		0.33	%		11		26		(15	)		(3	)		(12	)
Investments		71,629			64,767			2.29	%		1.97	%		411		319		92			56			36
Guaranteed student loans, gross		92,826			—			3.27	%		0.00	%		759		—		759			—			759
Loans held for investment, gross (3) (9)		492,476			440,146			4.49	%		5.23	%		5,528		5,758		(230	)		(870	)		640

Total interest-earning assets		682,684			539,082			3.93	%		4.53	%		6,714		6,104		610			(817	)		1,427

Allowance for loan and lease losses		(5,597	)		(5,004	)
Noninterest-earning assets:
Cash and due from banks		9,433			5,637
Premises and fixed assets		4,989			5,404
Other assets		35,469			25,872

Total noninterest-earning assets		49,891			36,913

Total assets	$	726,978		$	570,991

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	27,077		$	15,346			0.20	%		0.25	%	$	13	$	10	$	3		$	(3	)	$	6
Savings and money market deposits		226,109			224,310			0.58	%		0.58	%		326		326		(0	)		(3	)		3
Time deposits		254,692			141,778			0.82	%		1.19	%		525		422		103			(158	)		261
Federal funds purchased and borrowed funds		23,759			20,460			1.63	%		1.82	%		97		93		4			(11	)		15

Total interest-bearing liabilities		531,637			401,894			0.72	%		0.85	%		961		851		110			(175	)		285

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		102,919			78,855
Other liabilities		2,953			2,089

Total noninterest-bearing liabilities		105,872			80,944

Shareholders’ equity		89,469			88,153

Total liabilities and shareholders’ equity	$	726,978		$	570,991

Interest rate spread (4)								3.21	%		3.68	%

Net interest income (5)													$	5,753	$	5,253	$	500		$	(642	)	$	1,142


Net interest margin (6)								3.37	%		3.90	%

(1)	Average balances are computed on a daily basis.

(2)	Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

(3)	Nonaccrual loans have been included in the average balances. Guaranteed student loans are excluded.

(4)	Interest rate spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.

(5)	Net interest income is interest income less interest expense.

(6)	Net interest margin is net interest income divided by average interest-earning assets.

(7)	Tax-exempt interest income is stated on a taxable equivalent basis.

(8)	Interest income from loans held for investment in 2014 and 2013 includes $139 thousand and $498 thousand, respectively, in accretion related to acquired loans.

(9)	Balances previously reported as loans held for sale have been reclassified as loans held for investment, gross.


	Average Balances, Income and Expenses, Yields and Rates
	As of and For the Six Months Ended June 30,
																	2014 vs. 2013
	Average Balances (1)						Yield / Rate						Income / Expense (7)(8)				Increase			Change due to (2)
	2014			2013			2014			2013			2014		2013		(Decrease)			Rate			Volume
Assets
Interest-earning assets:
Federal funds sold	$	8,296		$	3,481			0.21	%		0.22	%	$	9	$	4	$	5		$	—		$	5
Interest-earning deposits		13,201			37,646			0.29	%		0.28	%		19		53		(34	)		2			(36	)
Investments		72,559			62,115			2.32	%		1.99	%		840		617		223			111			112
Guaranteed student loans, gross		93,260			—			3.24	%		0.00	%		1,513		—		1,513			—			1,513
Loans held for investment, gross (3) (9)		473,921			440,663			4.50	%		5.27	%		10,669		11,618		(949	)		(1,783	)		834

Total interest-earning assets		661,237			543,905			3.95	%		4.52	%		13,050		12,292		758			(1,670	)		2,428

Allowance for loan and lease losses		(5,493	)		(5,034	)
Noninterest-earning assets:
Cash and due from banks		9,879			5,149
Premises and fixed assets		4,999			5,408
Other assets		35,018			24,575

Total noninterest-earning assets		49,896			35,132

Total assets	$	705,640		$	574,003

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Demand deposits	$	28,468		$	14,876			0.19	%		0.25	%	$	27	$	18	$	9		$	(5	)	$	14
Savings and money market deposits		221,747			233,182			0.55	%		0.60	%		605		700		(95	)		(62	)		(33	)
Time deposits		232,365			137,986			0.86	%		1.28	%		1,000		886		114			(357	)		471
Federal funds purchased and borrowed funds		26,044			20,566			1.51	%		1.81	%		196		186		10			(35	)		45

Total interest-bearing liabilities		508,624			406,610			0.72	%		0.88	%		1,828		1,790		38			(459	)		497

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		104,676			77,093
Other liabilities		3,282			2,270

Total noninterest-bearing liabilities		107,958			79,363

Shareholders’ equity		89,058			88,030

Total liabilities and shareholders’ equity	$	705,640		$	574,003

Interest rate spread (4)								3.23	%		3.64	%

Net interest income (5)													$	11,222	$	10,502	$	720		$	(1,211	)	$	1,931


Net interest margin (6)								3.39	%		3.86	%

(1)	Average balances are computed on a daily basis.

(2)	Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

(3)	Nonaccrual loans have been included in the average balances. Guaranteed student loans are excluded.

(4)	Interest rate spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.

(5)	Net interest income is interest income less interest expense.

(6)	Net interest margin is net interest income divided by average interest-earning assets.

(7)	Tax-exempt interest income is stated on a taxable equivalent basis.

(8)	Interest income from loans held for investment in 2014 and 2013 includes $278 thousand and $999 thousand, respectively, in accretion related to acquired loans.

(9)	Balances previously reported as loans held for sale have been reclassified as loans held for investment, gross.

Provision for Loan and Lease Losses

For the three months ended June 30, 2014, our provision for loan and lease losses was $602 thousand compared to $4 thousand for the same period of 2013. For the six months ended June 30, 2014, provision expense was $830 thousand compared to $415 thousand for the same period of 2013. Higher loan loss provision in the 2014 periods was primarily due to greater loan growth, including the addition of guaranteed student loans in the second half of 2014, for which we increased provision expense in the second quarter of 2014 based on higher levels of past due loans in this portfolio.

Noninterest Income

For the three months ended June 30, 2014, noninterest income was $262 thousand compared to $373 thousand for the same period of 2013. Lower noninterest income in the 2014 period, compared to the 2013 period, was primarily due to lower gains on sales of securities and lower income from derivatives, partially offset by higher service charges and fees on deposit accounts and earnings on BOLI.

For the six months ended June 30, 2014, noninterest income was $580 thousand compared to $1.0 million for the six months ended June 30, 2013. In the 2013 period, noninterest income includes a gain of $346 thousand on the sale of collateral related to an impaired loan acquired in the VBB Acquisition and higher gains on the sale of securities compared to the 2014 period. Noninterest income in the six months ended June 30, 2014 included higher service charges and fees on deposit accounts and higher earnings on BOLI.

In both the three and six months ended June 30, 2014, we recorded a bargain purchase gain of $32 thousand on the allocation of the purchase consideration to the assets acquired and liabilities assumed in the CVB Acquisition. The amount of bargain purchase gain is subject to change, as we finalize the estimated fair value adjustments required under purchase accounting. Any adjustment to the bargain purchase gain will be recorded in the period(s) in which purchase accounting adjustments are finalized.

Noninterest Expense

For the three-month period ended June 30, 2014, noninterest expense was $5.6 million, an $813 thousand increase from $4.8 million for the same period of 2013. Noninterest expense in the 2014 period includes $428 thousand of costs related to the CVB Acquisition, primarily recorded in professional fees and technology expenses, and a $205 thousand loss incurred on the unauthorized ACH transaction recorded as other noninterest expense on our consolidated statements of operations.

For the six-month period ended June 30, 2014, noninterest expense was $10.7 million, a $1.1 million increase from $9.6 million for the same period of 2013. Noninterest expense in the 2014 period includes $634 thousand of costs related to the CVB Acquisition, primarily recorded in professional fees and technology expenses, and the $205 thousand loss discussed above. Noninterest expenses for the three and six-month periods ended June 30, 2014 include $168 thousand and $323 thousand, respectively, of expenses related to the servicing of our guaranteed student loans, which we purchased in the second half of 2013.

Income Taxes

For the three months ended June 30, 2014 and 2013, income tax expense was $8 thousand and $277 thousand, respectively. For the six months ended June 30, 2014 and 2013, income tax expense was $216 thousand and $522, respectively. Income tax expense and our effective tax rate in the 2014 periods reflects the non-deductibility of certain transaction costs related to the CVB Acquisition, partially offset by the addition of BOLI, the earnings on which are tax exempt. Our net deferred tax asset as of June 30, 2014 and December 31, 2013 was $6.2 million and $4.3 million, respectively. Our net deferred tax asset as of June 30, 2014 includes $1.9 million due to the CVB Acquisition, of which $835 thousand resulted from the allocation of purchase consideration, and the remainder was the net deferred tax asset of CVB at June 30, 2014.

BUSINESS COMBINATION

The CVB Acquisition was accounted for in accordance with FASB ASC Topic 805, “Business Combinations”, whereby the acquired assets and assumed liabilities are recorded by the company at their estimated fair values as of the acquisition date, which was June 30, 2014. Fair value estimates were based on our assessment of the best information available and are subject to change. The final determination of estimated fair values of assets and liabilities will be made when all necessary information becomes available, and we have completed our analysis.

The following table presents the preliminary allocation of the consideration received to the assets acquired and liabilities assumed in the CVB Acquisition as of the acquisition date. Our preliminary allocation results in an after tax bargain purchase gain of $21 thousand.


Fair value of assets acquired:
Cash and cash equivalents	$	12,560
Securities available for sale		17,439
Loans		70,048
Premises and equipment		3,338
Other real estate owned		1,137
Core deposit intangible		930
Accrued interest receivable		318
Deferred tax asset		1,903
Bank owned life insurance		4,054
Other assets		2,658

Total assets	$	114,385

Fair value of liabilities assumed:
Deposits	$	100,985
Accrued interest payable		39
Other liabilities		2,839

Total liabilities	$	103,863


Net identifiable assets acquired	$	10,522

Consideration:
Company’s common shares issued		1,618,186
Purchase price per share (1)	$	6.40

Value of common stock issued		10,356
Estimated fair value of stock options		133
Cash in lieu of fractional shares		1

Total consideration	$	10,490


Bargain purchase gain	$	32
Deferred tax liability		(11	)

Bargain purchase gain, net of tax	$	21

(1)	The value of the shares of common stock exchanged for shares of CVB common stock was based upon the closing price of the company’s common stock at June 27, 2014, the last trading day prior to the date of completion of the CVB Acquisition.

FINANCIAL CONDITION

Securities

The following tables present information about our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated. The decline in the fair value of our investment portfolio is primarily due to the recent rise in longer term interest rates. During the first quarter of 2014, we reclassified certain nonamortizing, fixed-rate securities to held to maturity.


	June 30, 2014
	Book Value		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available for sale:
Agencies	$	5,913	$	5,913		0.48		1.39	%
Mortgage-backed securities
- Fixed rate		44,217		44,680		4.15		2.09	%
- Variable rate		4,556		4,622		10.79		1.90	%
Municipals - fixed rate
- Taxable		853		853		4.85		3.30	%
- Tax exempt (1)		5,031		5,034		5.85		3.16	%
Collateralized mortgage obligations - fixed rate		12,807		12,750		4.05		2.11	%

Total securities available for sale		73,377		73,852		4.38		2.11	%

Securities held to maturity:
Municipals - fixed rate
- Taxable		9,283		9,542		8.73		3.39	%

Total securities held to maturity		9,283		9,542		8.73		3.39	%

Total securities	$	82,660	$	83,394		5.35		2.16	%

(1)	Yields on tax-exempt securities are calculated on a tax equivalent basis.


	December 31, 2013
	Book Value		Fair Value		Weighted Average Life in Years		Weighted Average Yield
Securities available for sale:
Mortgage-backed securities
- Fixed rate	$	45,693	$	45,338		4.54		2.09	%
- Variable rate		4,903		4,852		4.20		1.68	%
Municipals - fixed rate
- Taxable		9,810		8,970		9.23		2.71	%
- Tax exempt (1)		1,634		1,573		8.12		2.95	%
Collateralized mortgage obligations - fixed rate		8,940		8,452		4.01		2.18	%

Total securities available for sale	$	70,980	$	69,185		5.16		2.17	%

(1)	Yields on tax-exempt securities are calculated on a tax equivalent basis.

The following table presents a maturity analysis of our securities portfolio as of the dates stated. Weighted average yield calculations are based on the current level of contractual maturities and expected prepayments as of the dates stated.


	June 30, 2014
	Within 1 Year		Weighted Average Yield		After 1 Year Through 5 Years		Weighted Average Yield			After 5 Years Through 10 Years		Weighted Average Yield			After 10 Years		Weighted Average Yield			Total		Weighted Average Yield
Securities available for sale:
Agencies	$	—		—	$	—		—		$	3,973		1.39	%	$	1,940		1.39	%	$	5,913		1.39	%
Mortgage-backed securities
- Fixed rate		—		—		21		5.10	%		27,276		1.86	%		17,383		2.28	%		44,679		2.09	%
- Variable rate		—		—		—		—			—		—			4,622		1.90	%		4,622		1.90	%
Municipals - fixed rate
- Taxable						853		3.30	%		—		—			—		—			853		3.30	%
- Tax exempt (1)		—		—		310		4.35	%		2,134		2.82	%		2,590		3.31	%		5,034		3.16	%
Collateralized mortgage obligations - fixed rate		—		—		—		—			—		—			12,750		2.11	%		12,750		2.11	%

Total securities available for sale		—				1,184					33,383					39,285					73,852

Securities held to maturity:
Municipals - fixed rate
- Taxable		—		—		—		—			8,563		3.31	%		979		4.12	%		9,542		3.39	%

Total securities held to maturity		—				—					8,563					979					9,542

Total securities	$	—		—	$	1,184		3.61	%	$	41,946		2.16	%	$	40,264		2.25	%	$	83,394		2.26	%

(1)	Yields on tax-exempt securities are calculated on a tax equivalent basis.

The following table presents the book value and fair value of securities for which the book value exceeded 10% of shareholders’ equity as of the date stated:


	June 30, 2014
	Book Value		Fair Value		Book Value as a Percentage of Shareholders’ Equity
Mortgage-backed securities
- Federal National Mortgage Association	$	37,283	$	37,801		37.5	%

Loans

The following table presents the company’s composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans as of the dates stated. Loans previously reported as loans held for sale have been reclassified as loans held for investment for both periods presented. See Note 2 – Basis of Presentation – Revised Financial Statements – in Part 1, Item 1, “Financial Statements” in this Form 10-Q for more information on the reclassification.


	June 30, 2014						December 31, 2013
	Amount			Percent of Total			Amount			Percent of Total
Commercial and industrial	$	288,465			42.92	%	$	249,687			46.08	%
Commercial real estate		219,908			32.71	%		172,711			31.88	%
Residential real estate		64,882			9.65	%		22,004			4.06	%
Consumer		6,461			0.96	%		3,191			0.59	%
Guaranteed student loans		92,435			13.75	%		94,028			17.36	%
Overdrafts		86			0.01	%		184			0.03	%

Total loans	$	672,237			100.00	%	$	541,805			100.00	%
Allowance for loan and lease losses		(6,016	)					(5,305	)

Total loans, net of allowance	$	666,221					$	536,500

Loans, net of allowance for loan losses, increased $129.7 million from $536.5 million as of December 31, 2013 to $666.2 million as of June 30, 2014. Excluding approximately $70 million of loans acquired in the CVB Acquisition, net loans increased $59.7 million, or 11%, from December 31, 2013.

The following tables provide the maturity analysis of our loans as of the dates stated based on whether loans are variable-rate or fixed-rate loans:


	June 30, 2014
			Variable Rate						Fixed Rate
	Within 1 year		1 to 5 years		After 5 years		Total variable > 1 year		1 to 5 years		After 5 years		Total fixed > 1 year		Total Maturities
Commercial and industrial (1)	$	127,472	$	96,635	$	14,854	$	111,489	$	38,283	$	10,707	$	48,990	$	287,951
Commercial real estate (2)		68,026		76,934		35,258		112,192		32,655		5,493		38,148		218,366
Residential real estate (3)		12,607		9,296		23,915		33,211		8,127		5,227		13,354		59,172
Consumer (4)		3,472		541		2,149		2,690		873		66		939		7,101
Guaranteed student loans		40		1,030		91,365		92,395		—		—		—		92,435
Overdrafts		86		—		—		—		—		—		—		86

Total loans	$	211,703	$	184,436	$	167,541	$	351,977	$	79,938	$	21,493	$	101,431	$	665,111

(1)	Excludes $2.5 million in nonaccrual fixed-rate loans and $880 thousand in nonaccrual variable-rate loans.

(2)	Excludes $863 thousand in nonaccrual fixed-rate loans and $476 thousand in nonaccrual variable-rate loans.

(3)	Excludes $282 thousand in nonaccrual fixed-rate loans and $2.0 million in nonaccrual variable-rate loans.

(4)	Excludes $128 thousand in nonaccrual fixed-rate loans.


	December 31, 2013
			Variable Rate						Fixed Rate
	Within 1 year		1 to 5 years		After 5 years		Total variable > 1 year		1 to 5 years		After 5 years		Total fixed > 1 year		Total Maturities
Commercial and industrial (1)	$	102,663	$	79,277	$	9,980	$	89,257	$	43,496	$	8,522	$	52,018	$	243,938
Commercial real estate (2)		57,749		78,167		8,489		86,656		23,029		4,394		27,423		171,828
Residential real estate (3)		6,994		3,615		5,006		8,621		5,355		481		5,836		21,451
Consumer		2,242		319		69		388		559		2		561		3,191
Guaranteed student loans		30		1,247		92,751		93,998		—		—		—		94,028
Overdrafts		185		—		—		—		—		—		—		185

Total loans	$	169,863	$	162,625	$	116,295	$	278,920	$	72,439	$	13,399	$	85,838	$	534,621

(1)	Excludes $1.5 million in nonaccrual fixed-rate loans and $874 thousand in nonaccrual variable-rate loans.

(2)	Excludes $384 thousand in nonaccrual fixed-rate loans and $499 thousand in nonaccrual variable-rate loans.

(3)	Excludes $119 thousand in nonaccrual fixed-rate loans and $434 thousand in nonaccrual variable-rate loans.

A certain degree of risk is inherent in the extension of credit. Management has established loan and credit policies and guidelines designed to control both the types and amounts of risks we take and to minimize losses. Such policies and guidelines include loan underwriting parameters, loan-to-value parameters, credit monitoring guidelines, adherence to regulations, and other prudent credit practices.

Loans secured by real estate comprised 53.7% of our loan portfolio at June 30, 2014 and 47.9% at December 31, 2013. The percentage as of June 30, 2014 reflects the loans acquired in the CVB Acquisition. Commercial real estate (“CRE”) loans are secured by commercial properties. Typically, our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt service coverage ratios as well. Residential real estate loans consist primarily of first and second lien loans, including home equity lines and credit loans, secured by residential real estate located primarily in our target markets, offered to select customers. These customers primarily include branch and private banking customers. Typically, our loan-to-value benchmark for these loans is below 80% at inception, with satisfactory debt-to-income ratios as well. The repayment of both residential and owner-occupied commercial real estate (“OORE”) loans depends primarily on the income and cash flows of the borrowers, with the real estate serving as a secondary source of repayment. We classify OORE loans as commercial and industrial (“C&I”), as the primary source of repayment of the loan is generally dependent on the financial performance of the commercial enterprise occupying the property, with the real estate being a secondary source of repayment.

Allowance for Loan and Lease Losses

Our allowance for loan and lease losses consists of (1) a component for collective loan impairment recognized and measured pursuant to FASB ASC Topic 450, “Contingencies,” and (2) a component for individual loan impairment recognized pursuant to FASB ASC Topic 310, “Receivables.”

We determine the allowance for loan and lease losses based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that we originate in our portfolio. We also consider qualitative factors, such as general economic conditions, nationally and in our target markets, as well as threats of outlier events, such as the unexpected deterioration of a significant borrower. These quantitative and qualitative factors are estimates and may be subject to significant change. Increases to our allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected in our consolidated statements of operations. Loans deemed to be uncollectible, in full or in part, are charged against our allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to our allowance for loan and lease losses.

In assessing the adequacy of our allowance for loan and lease losses as of the end of a reporting period, we also evaluate our loan risk ratings. Each loan is assigned two “risk ratings” at origination. One risk rating is based on our assessment of our borrower’s financial capacity and the other is based on the type of collateral and estimated loan to value. Our assigned risk ratings generally determine the quantitative factors used in the calculation of our allowance for loan and lease losses. In addition to our assessment of risk ratings, we also consider internal observable data related to trends within the loan portfolio, such as concentrations, aging of the portfolio, changes to our policies and procedures, and external observable data such as industry and general economic trends.

In evaluating loans accounted for under ASC 310-30, we periodically estimate the amount and timing of cash flows expected to be collected. Upon re-estimation, any deterioration in the timing and/or amount of cash flows results in an impairment charge,

which is reported as a provision for loan and lease losses in net income and a component of our allowance for loan and lease losses. A subsequent improvement in the expected timing or amount of future cash flows for those loans could result in the reduction of the allowance for loan and lease losses and an increase in our net income.

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

Although we use various data and information sources to establish our allowance for loan and lease losses, future adjustments to our allowance for loan and lease losses may be necessary, if conditions, circumstances or events are substantially different from the assumptions used in making the assessments. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan and lease losses. Such agencies may require us to recognize additions or reductions to the allowance for loan and lease losses based on their judgments of information available to them at the time of their examination.

The following table presents the allowance for loan and losses by loan type and the percent of loans in each category to total loans as of the dates stated:


	June 30, 2014					December 31, 2013
	Amount		Percent of loans in each category to total loans			Amount		Percent of loans in each category to total loans
Balance at end of period applicable to:
Commercial and industrial	$	1,731		42.92	%	$	2,148		45.75	%
Commercial real estate		3,067		32.71	%		2,756		32.08	%
Residential real estate		446		9.65	%		194		4.09	%
Consumer		35		0.97	%		12		0.62	%
Guaranteed student loans		737		13.75	%		195		17.46	%

Total allowance for loan and lease losses	$	6,016		100.00	%	$	5,305		100.00	%

The following tables present the activity in the allowance for loan and lease losses for the dates stated:


	For the Three Months Ended June 30,
	2014			2013
Balance at beginning of period	$	5,414		$	5,099
Charge-offs:
Commercial and industrial		—			—
Commercial real estate		—			211
Residential real estate		—			25
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		13			1

Total charge-offs		13			237

Recoveries:
Commercial and industrial		—			—
Commercial real estate		4			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		1			—

Total recoveries		5			—

Net charge-offs		8			237

Provision for loan and lease losses		602			4
Amount for unfunded commitments		10			16
Other (1)		(2	)		—

Balance at end of period	$	6,016		$	4,882

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


	For the Six Months Ended June 30,
	2014			2013
Balance at beginning of period	$	5,305		$	4,875
Charge-offs:
Commercial and industrial		—			1
Commercial real estate		—			370
Residential real estate		35			25
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		14			2

Total charge-offs		49			398

Recoveries:
Commercial and industrial		1			—
Commercial real estate		4			—
Residential real estate		—			—
Consumer		—			—
Guaranteed student loans		—			—
Overdrafts		1			1

Total recoveries		6			1

Net charge-offs		43			397

Provision for loan and lease losses		830			415
Amount for unfunded commitments		(10	)		(11	)
Other (1)		(66	)		—

Balance at end of period	$	6,016		$	4,882

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

Acquired Loans

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

Pursuant to the merger with First Bankshares, the acquired loans were adjusted to estimated fair value with a discount of $7.6 million. The loans acquired in the Paragon Transaction and the VBB Acquisition were also adjusted to estimated fair value by recording a discount of $1.8 million and $14.0 million, respectively. As of June 30, 2014, we recorded a $3.1 million estimated fair value adjustment, for credit and interest rates, on the loans acquired in the CVB Acquisition.

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC 310-30. We concluded that a portion of the loans acquired in the VBB Acquisition are credit-impaired loans qualifying for accounting under ASC 310-30. As of June 30, 2014, we have not completed our determination of which of the loans acquired in the CVB Acquisition meet the requirements to be accounted for under ASC 310-30.

In applying ASC 310-30 to acquired loans, we must estimate the amount and timing of cash flows expected to be collected. The estimation of the amount and timing of expected cash flows to be collected requires significant judgment, including estimated default rates and the amount and timing of prepayments, in addition to other factors. ASC 310-30 allows the purchaser to estimate cash flows on credit-impaired loans on a loan-by-loan basis or aggregate credit-impaired loans into one or more pools if the loans have common risk characteristics. We have estimated cash flows expected to be collected on a loan-by-loan basis.

The excess of cash flows expected to be collected over the estimated fair value of purchased credit-impaired loans is referred to as the accretable yield. This amount is accreted into interest income over the period of expected cash flows from the loan, using the effective yield method. The difference between contractually required payments due and the cash flows expected to be collected, on an undiscounted basis, is referred to as the nonaccretable difference.

Our re-evaluation of expected cash flows in the second quarter of 2014 resulted in an impairment of $25 thousand due to the deterioration in the timing and/or amount of cash flows from certain purchased credit-impaired loans. This impairment is recorded in the provision for loan and lease losses in the consolidated statement of operations and in our allowance for loan and lease losses in our consolidated balance sheets.

The following table presents our accretion activity for the periods presented. Additions in the period ended June 30, 2014 relate to the CVB Acquisition.


	June 30, 2014			December 31, 2013
Balance at beginning of period	$	4,441		$	8,133
Additions		3,050
Accretion (1)		(278	)		(2,644	)
Disposals (2)		—			(1,048	)
Other (3)		66			—

Balance at end of period	$	7,279		$	4,441

(1)	Accretion amounts are reported in interest income.

(2)	Disposals represent the reduction of purchase accounting adjustments due to the resolution of acquired loans at amounts less than the contractually-owed receivable. Of the 2013 amount, $85 thousand relates to loans reclassified as other real estate owned (“OREO”).

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

Nonperforming Assets

It is our policy to discontinue the accrual of interest income on nonperforming loans. We consider a loan as nonperforming when it is 90 days or greater past due as to interest and principal or when collectability is in doubt, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of June 30, 2014, and December 31, 2013, there were no loans, other than guaranteed student loans, 90 days or greater past due with respect to principal and interest for which interest was accruing. The federal guaranty on our guaranteed student loans covers both principal and interest accrued to the date a claim is paid under the guaranty.

As of June 30, 2014 and December 31, 2013, we had $1.3 million and $199 thousand, respectively, in OREO. We acquired $1.1 million of OREO in the CVB Acquisition. OREO valuations are evaluated periodically, and any necessary reserve to carry the asset at its fair value is recorded as a charge to net income. In the six months ended June 30, 2014, we recorded a $39 thousand valuation allowance and charge to income for two properties to reflect their net carrying values at estimated fair value.

The following table presents our nonperforming assets, including those acquired in the CVB Acquisition, and various performance ratios for the periods and as of the dates stated:


	June 30, 2014			December 31, 2013
Nonaccrual loans	$	7,127		$	3,822
Other real estate owned		1,298			199

Total nonperforming assets	$	8,425		$	4,021


Nonperforming assets as a percentage of total loans		1.25	%		0.74	%
Nonperforming assets as a percentage of total assets		0.95	%		0.59	%
Net charge-offs as a percentage of average loans		0.01	%		0.20	%
Allowance for loan and lease losses as a percentage of total loans		0.89	%		0.98	%
Allowance for loan and lease losses to nonaccrual loans		84.41	%		138.78	%

Deposits

Deposits represent our primary source of funds and are comprised of demand deposits, savings deposits and time deposits. Deposits as of June 30, 2014 totaled $757.2 million compared to deposits of $569.2 million at December 31, 2013. Demand deposits, including money market accounts, as of June 30, 2014, increased $71.8 million from balances at December 31, 2013, while time

deposits increased $108.5 million over this period. We assumed $49.9 million of demand and money market accounts and $43.6 million of time deposits in the CVB Acquisition. As of June 30, 2014, $119.1 million of our deposits were in Insured Cash Sweep (“ICS”) accounts, Certificate of Deposit Account Registry Service accounts, and brokered time deposits, which we collectively refer to as brokered deposits. As of December 31, 2013, $71.3 million of our deposits were in ICS accounts and brokered time deposits.

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


	June 30, 2014					December 31, 2013
	Amount		Rate			Amount		Rate
Noninterest-bearing demand deposits	$	104,675		—		$	88,254		—
Interest-bearing deposits:
Demand and money market		245,128		0.51	%		251,110		0.54	%
Savings accounts		5,087		0.25	%		4,535		0.29	%
Time deposits $100,000 or greater		174,273		0.73	%		95,490		1.01	%
Time deposits less than $100,000		58,091		1.24	%		57,374		1.36	%

Total interest-bearing deposits		482,579		0.68	%		408,509		0.76	%

Total average deposits	$	587,254		0.56	%	$	496,763		0.63	%

The following table presents maturities of large denomination time deposits (equal to or greater than $100,000) as of June 30, 2014:


	Within 3 Months		3-6 Months		6-12 Months		Over 12 Months		Total		Percent of Total Deposits
Time deposits	$	58,080	$	44,329	$	54,692	$	75,199	$	232,300		30.68	%

Borrowings

The following table summarizes the period-end balance, highest month-end balance, average balance, and weighted average rate of short-term borrowings for each of the periods stated:


	June 30, 2014									December 31, 2013
	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate			Year-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
Federal funds purchased	$	—	$	6,367	$	1,229		0.61	%	$	—	$	—	$	247		0.58	%
Other borrowings		—		16,000		4,815		0.40	%		—		5,000		805		0.31	%

Total short-term borrowings	$	—	$	22,367	$	6,044		0.44	%	$	—	$	5,000	$	1,052		0.37	%

We have one secured long-term borrowing with the FHLB in the amount of $20 million, which matures on September 28, 2015. The borrowing is a nonamortizing term loan and bears interest at a rate of 20 basis points over LIBOR, which resets quarterly. The borrowing was a modification of a then-existing borrowing, and in connection with the modification, we paid a fee of $533 thousand that is being recognized as interest expense over the remaining term of the borrowing.

At the time we modified the FHLB borrowing, we entered into a derivative (interest rate swap) whereby we pay fixed amounts to a counterparty in exchange for receiving LIBOR-based variable payments over the life of the agreement without the exchange of the underlying notional amount, which is $20 million. Our objective in using interest rate derivatives is to manage our exposure to interest rate movements. During the second quarter of 2013 and the first quarter of 2014, we entered into forward-starting swaps for notional amounts totaling $17.5 million, whereby upon the renewal of the FHLB borrowing for a specified period we pay fixed amounts and receive variable payments on a portion of the underlying notional amount of the borrowings. The derivatives are designated as cash flow hedges, whereby the effective portion of the hedges is recorded in accumulated other comprehensive (loss) income. The amount reported in accumulated other comprehensive (loss) income as of June 30, 2014, related to these derivatives was an unrealized loss of $169 thousand, net of a tax benefit of $87 thousand. As of June 30, 2014, the ineffective portion of the derivatives was insignificant.

We have agreements with the counterparty to our derivatives that contain a provision whereby, if we fail to maintain our status as a well/an adequate capitalized institution, we could be required to terminate or fully collateralize the derivative contracts. Additionally, if we default on any of our indebtedness, including default where repayment has not been accelerated by the lender, we could also be in default on our derivative obligations. We have minimum collateral requirements with our counterparty and, as of June 30, 2014, $250 thousand had been pledged as collateral under the agreements, as the valuation of one of the derivatives had surpassed the contractually specified minimum transfer amount of $250 thousand. If we are not in compliance with the terms of the derivative agreements, we could be required to settle obligations under the agreements at termination value. As of June 30, 2014, a hedge liability of $275 thousand was recorded in other liabilities on our consolidated balance sheet related to these derivatives.

For the six-month period ended June 30, 2014, our effective interest rate on the $20 million FHLB borrowing, including the effect of the modification fee and cash flow hedge, was 1.82%.

LIQUIDITY AND CAPITAL RESOURCES

In the six-month period ended June 30, 2014, cash and cash equivalents increased $43.7 million compared to a decrease of $4.1 million in the same period in 2013. Net cash used in operating activities was $392 thousand for the six-month period ended June 30, 2014 compared to net cash provided by operating activities of $1.6 million for the same period in 2013. Net cash used in investing activities was $42.7 million for the six-month period ended June 30, 2014 compared to $22.1 million for the same period in 2013. Cash used in investing activities in the 2014 period reflected a net increase in loans of $60.2 million, partially offset by $12.6 million of cash and cash equivalents acquired in the CVB Acquisition and $5.1 million of proceeds from the sale of securities. Net cash used in investing activities in the six-month period ended June 30, 2013 reflected a net decrease in loans and proceeds from the sale of securities, partially offset by purchases of securities. The reclassification of the warehouse lending program from loans held for sale to loans held for investment resulted in a $19.0 million decrease in both net cash provided by operating activities and net cash used in investing activities in the 2013 period as increases and decreases in loans held for investment are reported as cash flows from investing activities. Net cash provided by financing activities in the six-month period ended June 30, 2014 was $86.7 million compared to $16.4 million for the same period of 2013. Cash provided by financing activities in the 2014 period reflected an increase in deposits, while cash provided by financing activities in the 2013 period was primarily due to the increase in deposits and federal funds purchased. In the third quarter of 2013, we began our share repurchase program and used $265 thousand to repurchase shares of our common stock in the six-month period ended June 30, 2014.

Liquidity

Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate deposit withdrawals, payments of debt and operating expenses and increased loan demand, and to achieve stated objectives (including working capital requirements.) These events may occur daily or in other short-term intervals in the normal operation of business. Historical trends may help management predict the amount of cash required. In assessing liquidity, management gives consideration to various factors, including stability of deposits, maturity of time deposits, quality, volume and maturity of assets, sources and costs of borrowings, concentrations of business and industry, competition, and our overall financial condition and cash flows.

Our primary sources of liquidity are cash, due from banks, federal funds sold, and securities in our available-for-sale securities portfolio. We have access to a credit line from our primary correspondent bank in the amount of $9.0 million. This line is for short-term liquidity needs, expires in February 2015, and is subject to the prevailing federal funds interest rate.

In addition, we have secured borrowing facilities with the FHLB and the Federal Reserve Bank (“FRB”), both of which are secured with certain of our loans. The total credit availability under the FHLB facility is equal to 30% of our total assets, which as of June 30, 2014 was $204.8 million, based on our March 31, 2014 balance sheet. Pledged collateral for this facility as of June 30, 2014 was $42.2 million. Under this facility, as of June 30, 2014, we had one nonamortizing term loan for $20 million borrowing outstanding. Credit availability under the FRB facility was $121.8 million as of June 30, 2014, which is also based on pledged collateral. Borrowings under the FRB facility bear the prevailing current rate for primary credit. There were no amounts outstanding under the FRB facility as of June 30, 2014.

We also have three additional uncommitted lines of credit by national banks to borrow federal funds up to $28.0 million in total on an unsecured basis. One line for $5.0 million expires on September 30, 2014. The remainder of the lines of credit can be cancelled at any time. As of June 30, 2014, no amounts were outstanding under these uncommitted lines of credit. Borrowings under these arrangements bear interest at the prevailing federal funds rate.

Capital Adequacy

Capital management in a regulated financial services industry must properly balance return on equity to shareholders, while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Our capital management strategies have been developed to maintain our “well-capitalized” position.

We are subject to various regulatory capital requirements administered by federal and other bank regulators. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if

undertaken, could have a direct material adverse effect on us. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July 2013, the Federal Reserve Board approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions. The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the final rule, minimum requirements will increase for both the quantity and quality of capital held by banking organizations. The rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. The phase-in period for this rule is not scheduled to begin until January 2015.

The following table presents Tier 1 and total risk-based capital and risk-weighted assets for the Bank and Xenith Bankshares as of the dates stated:


	June 30, 2014				December 31, 2013
	Xenith Bank		Xenith Bankshares		Xenith Bank		Xenith Bankshares
Tier 1 capital	$	79,151	$	79,580	$	69,314	$	70,299
Total risk-based capital		85,512		85,941		74,955		75,940
Risk-weighted assets		670,818		670,803		526,841		526,752

The following table presents capital ratios and minimum capital ratios required by our regulators for the Bank and Xenith Bankshares as of the dates stated:


	June 30, 2014						December 31, 2013
	Xenith Bank			Xenith Bankshares			Xenith Bank			Xenith Bankshares			Regulatory Minimum			Well Capitalized
Tier 1 leverage ratio		11.20	%		11.27	%		10.37	%		10.52	%		4.00	%		> 5.00	%
Tier 1 risk-based capital ratio		11.80	%		11.86	%		13.16	%		13.35	%		4.00	%		> 6.00	%
Total risk-based capital ratio		12.75	%		12.81	%		14.23	%		14.42	%		8.00	%		> 10.00	%

Interest Rate Sensitivity

Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of an organization. Our primary market risk is interest rate risk. Interest rate risk is inherent in banking, because we derive a significant amount of our operating revenue from “purchasing” funds (customer deposits and borrowings) at various terms and rates. These funds are invested in interest-earning assets (e.g., loans and investments) at various terms and rates.

Interest rate risk is the exposure to fluctuations in our future earnings (earnings at risk) and value (market value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that re-price within a specific time period as a result of scheduled maturities and prepayments and contractual interest rate changes.

The balance sheet may be asset or liability sensitive at a given time. We intend to manage the Bank’s asset or liability sensitivity to optimize earnings, to minimize interest rate risk, and to preserve capital within policy limits, while optimizing the return to our shareholders.

Management strives to control the Bank’s exposure to interest rate volatility, and we operate under an asset and liability management policy approved by our board of directors. In accordance with our policy, we emphasize the loan and deposit pricing characteristics that best meet our current view on the future direction of interest rates and use sophisticated analytical tools to support our asset and liability processes.

Gap Analysis

Gap analysis tools monitor the “gap” between interest-sensitive assets and interest-sensitive liabilities. The Bank uses a simulation model to forecast balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, the Bank can position itself to mitigate risks associated with anticipated interest rate movements by understanding the dynamic nature of its balance sheet components. We evaluate our balance sheet components (securities, loan and deposit portfolios) to manage our interest rate risk position.

A negative interest-sensitive gap results when interest-sensitive liabilities exceed interest-sensitive assets for a specific re-pricing “time horizon.” The gap is positive when interest-sensitive assets exceed interest-sensitive liabilities for a given time period. For a bank with a positive gap, rising interest rates would be expected to have a positive effect on net interest income, and falling rates would be expected to have a negative effect. The table below reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Variable-rate loans are reflected at the earliest re-pricing interval since they re-price according to their terms. Borrowed funds are reflected in the earliest contractual re-pricing interval. Interest-bearing liabilities, with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected in expected re-pricing intervals. Time deposits and fixed-rate loans are reflected at their respective contractual maturity dates.

The following table, “Gap Report,” indicates that, on a cumulative basis through the next 12 months, our interest rate-sensitive assets exceed interest rate-sensitive liabilities, resulting in an asset-sensitive position as of June 30, 2014 of $313.5 million. This net asset-sensitive position was a result of $661.4 million in interest rate-sensitive assets being available for re-pricing during the next 12 months and $348.0 million in interest rate-sensitive liabilities being available for re-pricing during the same time period. Our gap position as of June 30, 2014 is considered by management to be favorable in an increasing interest rate environment.


	0-180 Days		181-360 days			1-3 Years			Over 3 Years		Totals
Assets:
Cash and cash due	$	17,783	$	—		$	—		$	—	$	36,862
Fed funds sold		37,499		—			—			—		37,499
Securities		7,944		11,373			17,708			45,635		83,135
Loans		575,159		11,204			28,220			56,294		672,237
Allowance for loan and lease losses		—		—			—			—		(6,016	)
Premises and equipment		—		—			—			—		8,218
Intangibles		—		—			—			—		16,372
OREO		—		—			—			—		1,298
Deferred tax asset		—		—			—			—		6,201
Bank owned life insurance		—		—			—			—		13,904
Other assets		481		—			—			4,683		13,673

Total assets	$	638,866	$	22,577		$	45,928		$	106,612	$	883,383


Liabilities and Equity:
Demand deposits	$	—	$	—		$	—		$	—	$	123,792
Interest-bearing deposits		216,717		131,234			253,241			32,133		633,419
Borrowed funds		—		—			20,000			—		20,000
Other liabilities		—		—			—			—		6,731
Shareholders’ equity		—		—			—			—		99,441

Total liabilities and equity	$	216,717	$	131,234		$	273,241		$	32,133	$	883,383


Discrete gap:	$	422,149	$	(108,657	)	$	(227,313	)	$	74,479
Cumulative gap:	$	422,149	$	313,492		$	86,179		$	160,658

Commitments and Contingencies

In the normal course of business, we have commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Additionally, we issue letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.

These commitments represent outstanding off-balance sheet commitments. The following table presents unfunded loan commitments outstanding as of the dates stated:


	June 30, 2014		December 31, 2013
Commercial lines of credit	$	121,718	$	74,419
Commercial real estate		33,848		44,324
Residential real estate		14,496		7,183
Consumer		1,836		481
Letters of credit		5,882		6,796

Total commitments	$	177,780	$	133,203

CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements included in this Form 10-Q are “forward-looking statements.” All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our plans, objectives and goals, future events or results, our competitive strengths and business strategies, and the trends in our industry are forward-looking statements. The words “believe,” “will,” “may,” “could,” “estimate,” “project,” “predict,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “appear,” “future,” “likely,” “probably,” “suggest,” “goal,” “potential” and similar expressions, as they relate to our company, are intended to identify forward-looking statements.

Forward-looking statements made in this Form 10-Q reflect beliefs, assumptions, and expectations of future events or results, taking into account the information currently available to us. These beliefs, assumptions, and expectations may change as a result of many possible events, circumstances or factors, not all of which are currently known to us. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed in, or implied by, the forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. You should carefully consider these matters, along with the risks discussed under “Risk Factors” in our proxy statement/prospectus (Registration No. 333-195108) that we filed with the Securities and Exchange Commission (the “SEC”) on April 30, 2014 and the following factors, which are not intended to be exhaustive, that may cause actual results to vary materially from our forward-looking statements:

•

general economic conditions nationally, regionally or in our target markets;

•

the efforts of government agencies to stabilize the equity and debt markets;

•

the adequacy of our allowance for loan and lease losses and the methodology for determining such allowance;

•

adverse changes in our loan portfolio and credit risk-related losses and expenses;

•

concentrations within our loan portfolio, including exposure to commercial real estate loans, and to our target markets;

•

our dependence on our target markets in and around Virginia;

•

reduced deposit flows and loan demand as well as increasing default rates;

•

changes in interest rates, reducing our margins or the volumes or values of the loans we make and the deposits and investments we hold;

•

our ability to generate sufficient taxable income to utilize our deferred tax assets, thus requiring a valuation allowance against this asset;

•

business conditions in the financial services industry, including competitive pressures among financial services companies, new service and product offerings by competitors, and similar factors;

•

the degree and nature of our competition, with the understanding that competitors may have greater financial resources and access to capital and may offer services that enable those competitors to compete more successfully than we can;

•

the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;

•

our ability and willingness to pay dividends on our common stock in the future;

•

changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

•

volatility of the market price of our common stock and capital markets generally;

•

changes in our competitive strengths or business or strategies;

•

the availability, terms and deployment of debt and equity capital;

•

our dependence upon key personnel whose continued service is not guaranteed, and our ability to identify, hire and retain highly qualified personnel in the future;

•

our ability to implement our business strategies successfully;

•

our ability to integrate CVB as expected and within the expected timeframe;

•

disruptions to customer and employee relationships and business operations caused by the CVB Acquisition;

•

our ability to achieve the cost savings and growth contemplated by the CVB Acquisition within the expected timeframe;

•

our ability to maintain regulatory capital levels and adequate sources of funding and liquidity, which could be adversely affected by market conditions and changes in capital requirements made by regulators;

•

our ability to identify and mitigate cybersecurity risk;

•

negative publicity and the impact on our reputation;

•

rapidly changing technology;

•

war or terrorist activities causing deterioration in the economy;

•

other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and

•

the risks discussed in our public filings with the SEC.

As a result of these factors, among others, the future events or results that are the subject of our beliefs, assumptions and expectations expressed in, or implied by, our forward-looking statements in this Form 10-Q may not be achieved in any specified time frame, or at all, which could be material. Accordingly and as noted above, you should not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or the persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by applicable law or regulations, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Management evaluated, with the participation of the company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the company’s disclosure controls and procedures are effective as of the end of the period covered by this Form 10-Q to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in the company’s internal control over financial reporting occurred during the fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management’s opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.

Item 1A. Risk Factors

While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. “Risk Factors” in the proxy statement/prospectus (Registration No. 333-195108) that we filed with the SEC on April 30, 2014 describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our results of operations and our financial condition. We do not believe that there have been any material changes to the risk factors previously disclosed in the proxy statement/prospectus.

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

In July 2013, the company’s board of directors approved a share repurchase program under which the company may purchase in the open market or otherwise up to 210,000 shares of its outstanding common stock, or approximately 2% of its then outstanding shares. There is no guarantee as to the number of shares that will be repurchased by the company, and the program can be discontinued at any time. There were no purchases during the second quarter of 2014.

Item 6. Exhibits

Exhibit Index:


Exhibit Number		Description

10.1		Xenith Bankshares, Inc. 2012 Stock Incentive Plan, as amended and restated effective May 1, 2014

10.2		Colonial Virginia Bank 2004 Equity Compensation Plan (incorporated herein by reference to Exhibit 99.1 to registration statement on Form S-8 filed on July 8, 2014 (Registration No. 333-197310))

31.1		Certification of CEO pursuant to Rule 13a-14(a)

31.2		Certification of CFO pursuant to Rule 13a-14(a)

32.1		CEO Certification pursuant to 18 U.S.C. § 1350

32.2		CFO Certification pursuant to 18 U.S.C. § 1350

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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


						XENITH BANKSHARES, INC.

Date: August 8, 2014						/S/ T. GAYLON LAYFIELD, III
						T. Gaylon Layfield, III President and Chief Executive Officer (Principal Executive Officer)

Date: August 8, 2014						/S/ THOMAS W. OSGOOD
						Thomas W. Osgood Executive Vice President, Chief Financial Officer, Chief Administrative Officer and Treasurer (Principal Financial Officer)

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