ACCESS NATIONAL CORP - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - ACCESS NATIONAL CORP	ancx093017ex-321.htm
EX-31.2 - EXHIBIT 31.2 - ACCESS NATIONAL CORP	ancx093017ex-312.htm
EX-31.1 - EXHIBIT 31.1 - ACCESS NATIONAL CORP	ancx093017ex-311.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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

of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number: 000-49929

ACCESS NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)



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

(703) 871-2100

(Registrant’s telephone number, including area code)

N/A

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



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



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

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



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



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	o



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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 20,452,727 shares of Common Stock as of November 8, 2017.

ACCESS NATIONAL CORPORATION

FORM 10-Q

INDEX



Part I. Financial Information			Page No.

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Balance Sheets, September 30, 2017 and December 31, 2016	3

		Consolidated Statements of Operations, three and nine months ended September 30, 2017 and 2016	4

		Consolidated Statements of Comprehensive Income, three and nine months ended September 30, 2017 and 2016	5

		Consolidated Statements of Changes in Shareholders’ Equity, nine months ended September 30, 2017 and 2016	6

		Consolidated Statements of Cash Flows, nine months ended September 30, 2017 and 2016	7

		Notes to Consolidated Financial Statements (Unaudited)	9

	Item 2.	Management's Discussion and Analysis of Financial
		Condition and Results of Operations	43

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57

	Item 4.	Controls and Procedures	58


Part II. Other Information

	Item 1.	Legal Proceedings	59

	Item 1A.	Risk Factors	59

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

	Item 3.	Defaults upon Senior Securities	59

	Item 4.	Mine Safety Disclosures	59

	Item 5.	Other Information	59

	Item 6.	Exhibits	60

Signatures			61


ITEM 1.	FINANCIAL STATEMENTS

PART I



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

	September 30,			December 31,
	2017			2016
	(Unaudited)
ASSETS
Cash and due from banks	$	12,774		$	9,186
Interest-bearing balances and federal funds sold	117,159			81,873
Total cash and cash equivalents	129,933			91,059
Investment securities:
Available-for-sale, at fair value	395,040			194,090
Held-to-maturity, at amortized cost (fair value of $16,416 and $9,293, respectively)	15,778			9,200
Total investment securities	410,818			203,290
Restricted stock, at amortized cost	14,447			10,092
Loans held for sale, at fair value	26,234			35,676
Loans held for investment, net of allowance for loan losses of $15,692 and $16,008, respectively	1,953,968			1,033,690
Premises, equipment and land, net	26,400			7,084
Goodwill and intangible assets	182,156			1,833
Other real estate owned, net of valuation allowance	1,980			—
Bank owned life insurance	51,300			26,350
Other assets	75,833			21,634
Total assets	$	2,873,069		$	1,430,708
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits	$	710,691		$	362,036
Interest-bearing demand deposits	490,759			126,189
Savings and money market deposits	658,799			314,396
Time deposits	425,963			251,706
Total deposits	2,286,212			1,054,327
Short-term borrowings	79,527			186,009
Long-term borrowings	60,000			60,000
Trust preferred debentures	3,863			—
Other liabilities and accrued expenses	23,294			9,842
Total liabilities	2,452,896			1,310,178
SHAREHOLDERS' EQUITY
Common stock $0.835 par value; 60,000,000 shares authorized; 20,449,738 and 10,636,242 issued and outstanding, respectively	17,076			8,881
Additional paid in capital	305,682			21,779
Retained earnings	98,607			91,439
Accumulated other comprehensive loss, net	(1,192		)	(1,569		)
Total shareholders' equity	420,173			120,530
Total liabilities and shareholders' equity	$	2,873,069		$	1,430,708

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



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except for Share and Per Share Data)
(Unaudited)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	24,306	$	11,647	$	60,251	$	33,877
Interest on federal funds sold and bank balances	394		98		746		264
Interest and dividends on securities	2,992		1,033		7,388		2,954
Total interest and dividend income	27,692		12,778		68,385		37,095
INTEREST EXPENSE
Interest on deposits	2,639		1,349		6,560		3,774
Interest on other borrowings	459		286		1,366		867
Total interest expense	3,098		1,635		7,926		4,641
Net interest income	24,594		11,143		60,459		32,454
Provision for loan losses	900		750		3,200		870
Net interest income after provision for loan losses	23,694		10,393		57,259		31,584
NONINTEREST INCOME
Service charges and fees	560		249		1,509		748
Gain on sale of loans	5,594		8,316		14,985		19,419
Other income	2,369		120		6,917		4,510
Total noninterest income	8,523		8,685		23,411		24,677
NONINTEREST EXPENSE
Salaries and benefits	11,100		8,208		31,800		24,283
Occupancy and equipment	3,019		768		5,820		2,278
Other operating expenses	8,674		3,193		23,594		9,040
Total noninterest expense	22,793		12,169		61,214		35,601
Income before income taxes	9,424		6,909		19,456		20,660
Income tax expense	2,422		2,484		6,001		7,262
NET INCOME	$	7,002	$	4,425	$	13,455	$	13,398
Earnings per common share:
Basic	$	0.34	$	0.42	$	0.77	$	1.27
Diluted	$	0.34	$	0.41	$	0.77	$	1.26
Average outstanding shares:
Basic	20,409,696		10,595,599		17,156,521		10,575,088
Diluted	20,508,875		10,689,167		17,273,367		10,644,897

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



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
Net income	$	7,002		$	4,425		$	13,455		$	13,398
Other comprehensive income (loss):
Unrealized holding gains (losses) arising during the period	(616		)	(692		)	553			3,634
Reclassification adjustment for gains included in net income	—			—			—			(109		)
Unrealized gains (losses) on interest rate swaps	22			—			18			—
Tax effect	211			242			(194		)	(1,234		)
Total other comprehensive income (loss)	(383		)	(450		)	377			2,291
Total comprehensive income	$	6,619		$	3,975		$	13,832		$	15,689

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



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


	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance December 31, 2015	$	8,805	$	19,953	$	81,385		$	(1,005	)	$	109,138
Net income	—		—		13,398			—			13,398
Other comprehensive income	—		—		—			2,291			2,291
Cash dividends ($0.45 per share)	—		—		(4,757		)	—			(4,757		)
Dividend reinvestment plan shares issued from reserve (17,972 shares)	15		364		—			—			379
Exercise of stock options (41,351 shares)	35		468		—			—			503
Issuance of restricted common stock (6,205 shares)	5		123		—			—			128
Stock-based compensation	—		251		—			—			251
Balance September 30, 2016	$	8,860	$	21,159	$	90,026		$	1,286		$	121,331

Balance December 31, 2016	$	8,881	$	21,779	$	91,439		$	(1,569	)	$	120,530
Net income	—		—		13,455			—			13,455
Other comprehensive income	—		—		—			377			377
Cash dividends ($0.45 per share)	—		—		(6,287		)	—			(6,287		)
Exercise of stock options (143,092 shares)	120		1,940		—			—			2,060
Dividend reinvestment plan shares issued from reserve (149,758 shares)	125		3,801		—			—			3,926
Issuance of restricted common stock (4,549 shares)	4		125		—			—			129
Issuance of common stock (9,516,097 shares)	7,946		277,727		—			—			285,673
Stock-based compensation	—		310		—			—			310
Balance September 30, 2017	$	17,076	$	305,682	$	98,607		$	(1,192	)	$	420,173

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



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
	For the Nine Months Ended
	September 30,
	2017			2016
Cash Flows From Operating Activities
Net income	$	13,455		$	13,398
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	2,011			384
Provision for loan losses	3,200			870
Provision for off-balance sheet losses	50			—
Originations of loans held for sale	(319,164		)	(429,285		)
Proceeds from sales of loans held for sale	328,587			403,688
(Increase) decrease in valuation of loans held for sale carried at fair value	19			(1,266		)
Gains on sales of securities available-for-sale	—			(109		)
Deferred tax expense (benefit)	120			(692		)
Decrease (increase) in valuation allowance on derivatives	258			(88		)
Amortization on securities, net	1,984			1,459
Stock-based compensation	310			251
(Gains) losses on sale of other real estate owned, net	—			35
Income from bank owned life insurance	(869		)	(338		)
Changes in assets and liabilities:
Increase in other assets	(7,810		)	(1,966		)
Increase in other liabilities	2,645			201
Net cash provided by (used in) operating activities	$	24,796		$	(13,458	)
Cash Flows from Investing Activities
Proceeds from maturities, calls, principal repayments and sales of securities available-for-sale	$	188,716		$	25,644
Purchases of securities available-for-sale	(162,623		)	(53,500		)
Proceeds from sales, maturities and calls of securities held-to-maturity	4,273			5,000
Redemption of restricted stock, net	3,052			950
Purchases of premises, equipment and land, net	(1,263		)	(541		)
Purchase of bank owned life insurance	—			(7,500		)
Increase in loans, net	(123,353		)	(78,805		)
Proceeds from sale of other real estate owned	2,258			463
Cash paid in business combination	(608		)	—
Cash acquired in business combination	90,940			—
Net cash provided by (used in) investing activities	$	1,392		$	(108,289	)
Cash Flows from Financing Activities
Increase in demand, interest-bearing demand and savings deposits	$	178,531		$	244,915
Decrease in time deposits	(3,266		)	(43,606		)
Decrease in securities sold under agreements to repurchase	(2,407		)	(4,794		)
Decrease in short-term borrowings	(160,000		)	(45,000		)
Increase in long-term borrowings	—			20,000
Payment of dividends on common stock	(6,287		)	(4,757		)
Proceeds from issuance of common stock	6,115			1,010
Net cash provided by financing activities	$	12,686		$	167,768
Increase in cash and cash equivalents	38,874			46,021
Cash and cash equivalents at beginning of the period	91,059			35,889
Cash and cash equivalents at end of the period	$	129,933		$	81,910



ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
	For the Nine Months Ended
	September 30,
	2017			2016
Supplemental Disclosures of Cash Flow Information
Interest paid	$	6,338		$	2,981
Income taxes	$	5,561		$	4,828
Supplemental Disclosure of Non-Cash Transactions
Unrealized gains (losses) on securities available for sale	$	364		$	3,525
Change in fair value of interest rate swaps	$	13		$	—
Transfer of loans held for investment to other real estate owned	$	—		$	129
Transfer of other real estate owned to other assets due to FHA receivable	—			$	(129	)
Transactions Related to Business Combination
Increase in assets and liabilities:
Loans	$	(815,817	)	$	—
Securities	(243,679		)	—
Other Assets	(258,306		)	—
Noninterest bearing deposits	282,752			—
Interest bearing deposits	773,867			—
Trust preferred debentures	3,824			—
Borrowings	55,925			—
Other liabilities	10,206			—

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

ACCESS NATIONAL CORPORATION

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation

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

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”). The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. No reclassifications were significant and there was no effect on net income. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2016, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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

Note 2. Stock-Based Compensation Plan

During the first nine months of 2017, the Corporation granted 130,600 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “2009 Plan”). Options granted under the 2009 Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest over various periods ranging from 2.5 years to 4.0 years and expire one year after the full vesting date. Stock-based compensation expense recognized in other operating expense during the nine month periods ended September 30, 2017 and 2016 was $310 thousand and $251 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing model with the assumptions noted below.

Total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the 2009 Plan as of September 30, 2017 was $975 thousand. The cost is expected to be recognized over a weighted average period of 1.41 years.

A summary of stock option activity under the 2009 Plan as of and for the nine months ended September 30, 2017 and 2016 is presented as follows:



	For the Nine Months Ended September 30,
	2017			2016
Expected life of options granted, in years	4.42			4.33
Risk-free interest rate	1.49		%	1.26		%
Expected volatility of stock	29.64		%	29.67		%
Annual expected dividend yield	3.00		%	3.00		%
Fair value of granted options	$	806,422		$	433,479
Non-vested options	316,946			303,539

The following table summarizes options outstanding under the 2009 Plan for the nine months ended September 30, 2017 and 2016:



	September 30, 2017
	Number of Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at beginning of period	481,381		$	16.52	2.50	$	5,412,143
Granted	130,600		27.76		4.42	—
Exercised	(143,092	)	14.40		0.95	1,815,112
Lapsed or canceled	(3,720	)	15.69		1.44	—
Outstanding September 30, 2017	465,169		$	20.34	2.82	$	3,872,525
Exercisable at September 30, 2017	148,223		$	16.51	1.51	$	1,801,644



	September 30, 2016
	Number of Options		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at beginning of period	407,832		$	15.33	2.81	$	2,091,196
Granted	122,050		18.39		4.33	—
Exercised	(41,351	)	12.18		1.02	301,198
Lapsed or canceled	(8,700	)	16.16		2.59	—
Outstanding September 30, 2016	479,831		$	16.37	2.72	$	3,614,016
Exercisable at September 30, 2016	176,292		$	14.43	1.67	$	1,669,471

At the Corporation’s 2017 Annual Meeting of Shareholders held on October 26, 2017 (the “Annual Meeting”), shareholders approved the Access National Corporation 2017 Equity Compensation Plan (the “2017 Plan”). The 2017 Plan provides for the grant to key employees, non-employee directors, consultants and advisors of awards that may include one or more of the following: stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance cash awards. No awards may be granted under the 2017 Plan after October 25, 2027. Awards previously granted under the 2009 Plan will remain outstanding and valid in accordance with their terms, but no new awards will be granted under the 2009 Plan following the Annual Meeting. Complete details of the 2017 Plan are contained in Exhibit 10.18 to Form 8-K filed November 1, 2017. As of the date of this Quarterly Report on Form 10-Q, there were no awards outstanding under the 2017 Plan.

Note 3. Securities

The following tables provide the amortized costs and fair values of securities held-to-maturity at September 30, 2017 and December 31, 2016. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premium and accretion of discounts.



	September 30, 2017
(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Held-to-maturity
U.S. Government agencies	$	5,000	$	18	$	—		$	5,018
Municipals	10,778		642		(22		)	11,398
Total	$	15,778	$	660	$	(22	)	$	16,416



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

The amortized cost and fair value of securities held-to-maturity as of September 30, 2017 and December 31, 2016 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.



	September 30, 2017				December 31, 2016
(In Thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Held-to-maturity
U.S. Government agencies:
Due after one year through five years	$	5,000	$	5,018	$	5,000	$	5,046
Municipals:
Due after one year through five years	1,996		2,032		2,028		2,062
Due after five years through ten years	1,609		1,637		1,617		1,649
Due after ten years through fifteen years	553		530		555		536
Due after fifteen years	6,620		7,199		—		—
Total	$	15,778	$	16,416	$	9,200	$	9,293

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



	September 30, 2017
(In Thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Available-for-sale
U.S. Government agencies	$	26,262	$	—	$	(203	)	$	26,059
Municipals	101,037		1,208		(836		)	101,409
Mortgage backed securities	248,702		158		(1,945		)	246,915
Asset backed securities	8,892		4		(173		)	8,723
Corporate bonds	8,527		25		(1		)	8,551
Certificates of deposit	1,976		17		—			1,993
CRA mutual fund	1,500		—		(110		)	1,390
Total	$	396,896	$	1,412	$	(3,268	)	$	395,040



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

The amortized cost and fair value of securities available-for-sale as of September 30, 2017 and December 31, 2016 by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.



	September 30, 2017				December 31, 2016
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In Thousands)
Available-for-sale:
U.S. Government agencies:
Due in one year or less	$	50	$	50	$	—	$	—
Due after one year through five years	5,165		5,140		5,106		4,994
Due after ten years through fifteen years	7,049		6,945		—		—
Due after fifteen years	13,998		13,924		—		—
Municipals:
Due in one year or less	691		698		—		—
Due after one year through five years	7,788		7,714		3,442		3,500
Due after five years through ten years	8,693		8,657		5,025		4,888
Due after ten years through fifteen years	26,234		26,629		20,463		20,300
Due after fifteen years	57,631		57,711		16,462		15,671
Mortgage backed securities:
Due after one year through five years	53,961		54,058		24,959		24,916
Due after five years through ten years	89,120		88,501		24,996		24,895
Due after ten years through fifteen years	7,433		7,292		12,861		12,555
Due after fifteen years	98,188		97,064		57,978		57,441
Asset backed securities:
Due after five years through ten years	3,067		3,071		3,080		3,001
Due after fifteen years	5,825		5,652		10,025		9,863
Corporate bonds:
Due in one year or less	4,001		4,000		4,141		4,144
Due after one year through five years	4,526		4,551		4,490		4,522
Certificates of deposit:
Due after one year through five years	1,976		1,993		1,976		2,009
CRA mutual fund	1,500		1,390		1,500		1,391
Total	$	396,896	$	395,040	$	196,504	$	194,090

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, credit lines with the Federal Reserve Bank ("FRB"), and debtor-in-possession accounts amounted to $352.7 million and $178.7 million at September 30, 2017 and December 31, 2016, respectively.

Securities available-for-sale and held-to-maturity that had an unrealized loss position at September 30, 2017 and December 31, 2016 are as follow:



(In Thousands)	Less than Twelve Months					Twelve Months or Greater					Total
September 30, 2017	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
Held-to-maturity
Municipals	$	—	$	—		$	530	$	(22	)	$	530	$	(22	)

Available-for-sale
U.S. Government agencies	$	23,545	$	(152	)	$	2,390	$	(51	)	$	25,935	$	(203	)
Municipals	19,115		(239		)	14,228		(597		)	33,343		(836		)
Mortgage backed securities	180,423		(1,017		)	33,370		(928		)	213,793		(1,945		)
Asset backed securities	—		—			5,652		(173		)	5,652		(173		)
CRA mutual funds	—		—			1,390		(110		)	1,390		(110		)
Corporate bonds	4,000		(1		)	—		—			4,000		(1		)
Total	$	227,083	$	(1,409	)	$	57,030	$	(1,859	)	$	284,113	$	(3,268	)



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

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

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

At September 30, 2017, there were 93 available-for-sale securities with unrealized losses totaling $3.268 million and one held-to-maturity security with an unrealized loss of $22 thousand. The Corporation evaluated the investment portfolio for possible other-than-temporary impairment losses and concluded the unrealized losses were caused by interest rate fluctuations with no adverse change in cash flows noted. Based on this analysis and because the Corporation does not intend to sell securities in an unrealized loss position and it is more likely than not the Corporation will not be required to sell any securities before recovery of amortized cost basis, which may be at maturity, the Corporation does not consider any portfolio securities to be other-than-temporarily impaired.

Restricted stock

The Corporation’s investment in the Federal Home Loan Bank of Atlanta ("FHLB") stock totaled $6.0 million and $9.1 million at September 30, 2017 and December 31, 2016, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted security which is carried at cost because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Corporation does not consider this investment to be other-than-

temporarily impaired at September 30, 2017, and no impairment has been recognized. FHLB stock is shown in restricted stock on the consolidated balance sheets.

The Corporation also has an investment in FRB stock which totaled $8.4 million and $1.0 million at September 30, 2017 and December 31, 2016, respectively. The investment in FRB stock is a required investment and is carried at cost since there is no ready market. The Corporation does not consider this investment to be other-than-temporarily impaired at September 30, 2017, and no impairment has been recognized. FRB stock is shown in restricted stock on the consolidated balance sheets.

Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

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

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial institution in the Corporation’s custodial account. The Corporation has the right to sell or re-pledge the investment securities. The risks and rewards associated with the investment securities pledged as collateral (e.g. a decline or rise in the fair value of the investments) remains with the Corporation. As of September 30, 2017 and December 31, 2016, the obligations outstanding under these repurchase agreements totaled $54.6 million and $17.0 million, respectively, and were comprised of overnight sweep accounts. The fair value of the securities pledged in connection with these repurchase agreements at September 30, 2017 was $72.5 million in total and consisted of $20.2 million in municipal securities, $45.0 million in mortgage backed securities, $1.7 million in corporate bonds, $1.2 million in certificates of deposit, $3.0 million in U.S. Government agencies, and $1.4 million in the CRA mutual fund. The fair value of the securities pledged in connection with these repurchase agreements at December 31, 2016 was $21.4 million in total and consisted of $4.7 million in municipal securities, $6.9 million in mortgage backed securities, $5.9 million in corporate bonds, $2.5 million in asset backed securities and $1.4 million in the CRA mutual fund.

Note 4. Loans

The following table presents the composition of the loans held for investment portfolio at September 30, 2017 and December 31, 2016:



	September 30, 2017				December 31, 2016
(In Thousands)	Outstanding Amount		Percent of Total Portfolio		Outstanding Amount		Percent of Total Portfolio
Commercial real estate - owner occupied	$	443,128	22.50	%	$	250,440	23.87	%
Commercial real estate - nonowner occupied	435,181		22.09		184,688		17.59
Real estate construction	104,193		5.29		91,822		8.75
Residential real estate	512,621		26.03		204,413		19.47
Commercial	449,450		22.82		311,486		29.67
Consumer	25,087		1.27		6,849		0.65
Total loans	$	1,969,660	100.00	%	$	1,049,698	100.00	%
Less allowance for loan losses	15,692				16,008
Net loans	$	1,953,968			$	1,033,690

Unearned income and net deferred loan fees and costs totaled $3.0 million and $2.4 million at September 30, 2017 and December 31, 2016, respectively. Loans pledged to secure borrowings at the FHLB totaled $491.4 million and $266.6 million at September 30, 2017 and December 31, 2016, respectively.

Loans acquired in a transfer, including in business combinations, where there is evidence of credit deterioration since origination and it is probable at the date of acquisition that the Corporation will not collect all contractually required principal and interest payments, are accounted for as purchased impaired loans. Purchased impaired loans are initially recorded at fair value, which

includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, the historical allowance for credit losses related to these loans is not carried over.

Accounting for purchased impaired loans involves estimating fair value, at acquisition, using the principal and interest cash flows expected to be collected discounted at the prevailing market rate of interest. The excess of cash flows expected to be collected over the estimated fair value at the acquisition date is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loans. The difference between contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayments, is referred to as the nonaccretable difference and is not recorded. Any decreases in cash flows expected to be collected (other than due to decreases in interest rate indices and changes in prepayment assumptions) will be charged to the provision for loan losses, resulting in an increase to the allowance for loan losses.

The following table presents the changes in the accretable yield for purchased impaired loans for three and nine month periods ended September 30, 2017:



	September 30, 2017
(In Thousands)	Three Months Ended			Nine Months Ended
Accretable yield, beginning of period	$	466		$	—
Additions	—			557
Accretion	(146		)	(237		)
Reclassification from (to) nonaccretable difference	—			—
Other changes, net	—			—
Accretable yield, end of period	$	320		$	320

At September 30, 2017, none of the purchased impaired loans were classified as nonperforming assets. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, is being recognized on all purchased loans.

Loans are considered past due if a contractual payment is not made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the portfolio is shown below as of September 30, 2017 and December 31, 2016. Loans that were on non-accrual status are not included in any past due amounts.



	September 30, 2017
(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Non-accrual Loans		Current Loans		Total Loans
Commercial real estate - owner occupied	$	892	$	—	$	—	$	892	$	—	$	442,236	$	443,128
Commercial real estate - nonowner occupied	—		—		—		—		—		435,181		435,181
Real estate construction	—		—		—		—		26		104,167		104,193
Residential real estate	677		160		—		837		572		511,212		512,621
Commercial	397		39		73		509		5,236		443,705		449,450
Consumer	41		1		—		42		3		25,042		25,087
Total	$	2,007	$	200	$	73	$	2,280	$	5,837	$	1,961,543	$	1,969,660



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

The following table includes an aging analysis of the recorded investment of purchased impaired loans included in the table above:



	September 30, 2017
(In Thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days Or Greater		Total Past Due		Non-accrual Loans		Current Loans		Total Loans
Commercial real estate - owner occupied	$	653	$	—	$	—	$	653	$	—	$	442	$	1,095
Commercial real estate - nonowner occupied	—		—		—		—		—		920		920
Real estate construction	—		—		—		—		—		—		—
Residential real estate	186		—		—		186		—		2,189		2,375
Commercial	—		—		—		—		—		94		94
Consumer	—		—		—		—		—		6		6
Total	$	839	$	—	$	—	$	839	$	—	$	3,651	$	4,490

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



	September 30, 2017						December 31, 2016
(In Thousands)	Non-performing		Performing		Total Loans		Non-performing		Performing		Total Loans
Commercial real estate - owner occupied	$	—	$	443,128	$	443,128	$	—	$	250,440	$	250,440
Commercial real estate - nonowner occupied	—		435,181		435,181		—		184,688		184,688
Real estate construction	26		104,167		104,193		940		90,882		91,822
Residential real estate	572		512,049		512,621		431		203,982		204,413
Commercial	5,236		444,214		449,450		5,551		305,935		311,486
Consumer	3		25,084		25,087		—		6,849		6,849
Total	$	5,837	$	1,963,823	$	1,969,660	$	6,922	$	1,042,776	$	1,049,698

Identifying and Classifying Portfolio Risks by Risk Rating

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

A loan may have portions of its balance in one rating and other portions in a different rating. The Bank may use these “split ratings”

when factors cause loan loss risk to exist for part, but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has provided a guaranty that partially covers a loan.

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

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

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

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

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

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

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



September 30, 2017
(In Thousands)	Real Estate Construction			Commercial Real Estate Owner Occupied			Commercial Real Estate Non-Owner Occupied			Residential Real Estate			Commercial			Consumer		Total
Pass	$	98,263		$	438,924		$	434,911		$	509,478		$	433,861		$	25,077	$	1,940,514
Special Mention	5,419			1,452			284			647			2,520			—		10,322
Substandard	926			3,457			987			2,667			13,611			3		21,651
Doubtful	—			—			—			—			187			3		190
Loss	—			—			—			—			—			—		—
Unearned income	(415		)	(705		)	(1,001		)	(171		)	(729		)	4		(3,017		)
Ending Balance	$	104,193		$	443,128		$	435,181		$	512,621		$	449,450		$	25,087	$	1,969,660



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

Impaired Loans

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

As the ultimate collectability of the total principal of an impaired loan is in doubt, the loan is placed on non-accrual status with all payments applied to principal under the cost-recovery method. As the Bank does not utilize the cash-basis method of accounting for impaired loans, the Bank did not recognize interest income in association with its impaired loans during the first nine months of 2017 and 2016.

The table below shows the results of management’s analysis of impaired loans, excluding purchased impaired loans, as of September 30, 2017 and December 31, 2016:



	September 30, 2017
(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no specific related allowance recorded:
Commercial real estate - owner occupied	$	—	$	—	$	—
Commercial real estate - nonowner occupied	—		—		—
Real estate construction	26		35		—
Residential real estate	35		36		—
Commercial	3,220		4,378		—
Consumer	3		3		—
Total with no specific related allowance	$	3,284	$	4,452	$	—
With a specific related allowance recorded:
Commercial real estate loans - owner occupied	$	—	$	—	$	—
Commercial real estate loans - nonowner occupied	—		—		—
Real estate construction	903		974		223
Residential real estate	537		549		—
Commercial	1,113		1,268		477
Consumer	—		—		—
Total with a specific related allowance	$	2,553	$	2,791	$	700
Total	$	5,837	$	7,243	$	700



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

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



	Average Recorded Investment
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
(In Thousands)	2017		2016		2017		2016
Commercial real estate - owner occupied	$	67	$	67	$	151	$	23
Commercial real estate - nonowner occupied	334		—		779		2,423
Real estate construction	939		1,003		953		1,022
Residential real estate	952		23		1,189		45
Commercial	4,508		4,969		4,273		4,970
Consumer	2		—		1		—
Total	$	6,802	$	6,062	$	7,346	$	8,483

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

Troubled Debt Restructurings ("TDR")

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

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

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

No loans were modified in connection with a TDR during the three and nine month periods ended September 30, 2017 and 2016.

The total balance of TDRs at September 30, 2017 and December 31, 2016 was $940 thousand and $4.1 million, respectively. The significant decrease was the result of a $3.8 million charge off done in the first quarter of 2017 on one of the TDR loans. The amount of the specific valuation allowance related to TDRs was $206 thousand and $2.2 million as of September 30, 2017 and December 31, 2016, respectively.

There were no outstanding commitments to lend additional amounts to TDR borrowers at September 30, 2017 or December 31, 2016.

There were no TDR payment defaults during the three and nine months ended September 30, 2017 and 2016. For purposes of this disclosure, a TDR payment default occurs when, within twelve months of the original TDR modification, either a full or partial charge-off occurs or a TDR becomes 90 or more past due.

Note 5. Allowance for Loan Losses

The allowance for loan losses totaled $15.7 million and $16.0 million at September 30, 2017 and December 31, 2016, respectively. The allowance for loan losses was equivalent to 0.80% and 1.53% of total loans held for investment at September 30, 2017 and December 31, 2016, respectively. Adequacy of the allowance is assessed and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible.

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

The level of the allowance for loan losses is determined by management through an ongoing, detailed analysis of historical loss

rates and risk characteristics. During each quarter, management evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk rating scale and definitions commonly adopted by the federal banking agencies is contained within the framework prescribed by the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve may be assigned if the loan is deemed to be impaired.

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

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

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

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

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



	September 30, 2017
(In Thousands)	Real Estate Construction			Commercial Real Estate Owner Occupied		Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial			Consumer			Total
Allowance for loan losses, Three months ended September 30, 2017
Balance at June 30, 2017	$	877		$	3,037	$	2,691	$	2,382		$	5,595		$	89		$	14,671
Charge-offs	—			—		—		—			—			—			—
Recoveries	—			—		—		107			14			—			121
Provision	(188		)	670		651		(178		)	(52		)	(3		)	900
Balance at September 30, 2017	$	689		$	3,707	$	3,342	$	2,311		$	5,557		$	86		$	15,692

Allowance for loan losses, Nine months ended September 30, 2017
Balance at December 31, 2016	$	1,277		$	2,943	$	2,145	$	2,510		$	7,053		$	80		$	16,008
Charge-offs	—			—		—		(1		)	(3,828		)	(6		)	(3,835		)
Recoveries	—			18		—		128			171			2			319
Provision	(588		)	746		1,197		(326		)	2,161			10			3,200
Balance at September 30, 2017	$	689		$	3,707	$	3,342	$	2,311		$	5,557		$	86		$	15,692

Ending allowance for loan losses, September 30, 2017
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	223		$	—	$	—	$	—		$	477		$	—		$	700
Collectively evaluated for impairment	466			3,707		3,342		2,311			5,080			86			14,992
Total ending allowance balance	$	689		$	3,707	$	3,342	$	2,311		$	5,557		$	86		$	15,692

Recorded Investment in Loans, September 30, 2017
Individually evaluated for impairment	$	26		$	—	$	—	$	572		$	5,236		$	3		$	5,837
Collectively evaluated for impairment	104,167			442,033		434,261		509,674			444,120			25,078			1,959,333
Purchased impaired loans	—			1,095		920		2,375			94			6			4,490
Total ending loans balance	$	104,193		$	443,128	$	435,181	$	512,621		$	449,450		$	25,087		$	1,969,660



	December 31, 2016
(In Thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial		Consumer			Total
Allowance for loan losses:
Beginning balance, January 1, 2016	$	1,056	$	3,042		$	1,862	$	2,862		$	4,612	$	129		$	13,563
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		40			285		—			325
Provision	221		(99		)	283		(392		)	2,156		(49		)	2,120
Ending balance, December 31, 2016	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053	$	80		$	16,008
Ending allowance at December 31, 2016:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	221	$	—		$	—	$	—		$	2,805	$	—		$	3,026
Collectively evaluated for impairment	1,056		2,943			2,145		2,510			4,248		80			12,982
Total ending allowance balance	$	1,277	$	2,943		$	2,145	$	2,510		$	7,053	$	80		$	16,008
Loans:
Individually evaluated for impairment	$	940	$	—		$	—	$	431		$	5,551	$	—		$	6,922
Collectively evaluated for impairment	90,882		250,440			184,688		203,982			305,935		6,849			1,042,776
Total ending loans balance	$	91,822	$	250,440		$	184,688	$	204,413		$	311,486	$	6,849		$	1,049,698



	September 30, 2016
(In Thousands)	Real Estate Construction		Commercial Real Estate Owner Occupied			Commercial Real Estate Nonowner Occupied		Residential Real Estate			Commercial		Consumer			Total
Allowance for loan losses, Three months ended September 30, 2016
Balance at June 30, 2016	$	1,178	$	3,142		$	1,969	$	2,854		$	4,574	117			$	13,834
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		9			103		—			112
Provision	73		(141		)	171		(229		)	909		(33		)	750
Balance at September 30, 2016	$	1,251	$	3,001		$	2,140	$	2,634		$	5,586	$	84		$	14,696

Allowance for loan losses, Nine months ended September 30, 2016
Beginning balance	$	1,056	$	3,042		$	1,862	$	2,862		$	4,612	$	129		$	13,563
Charge-offs	—		—			—		—			—		—			—
Recoveries	—		—			—		30			233		—			263
Provision	195		(41		)	278		(258		)	741		(45		)	870
Ending balance	$	1,251	$	3,001		$	2,140	$	2,634		$	5,586	$	84		$	14,696

Ending allowance for loan losses, September 30, 2016
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	284	$	—		$	—	$	—		$	1,490	$	—		$	1,774
Collectively evaluated for impairment	967		3,001			2,140		2,634			4,096		84			12,922
Total ending allowance balance	$	1,251	$	3,001		$	2,140	$	2,634		$	5,586	$	84		$	14,696

Recorded Investment in Loans, September 30, 2016
Individually evaluated for impairment	$	1,001	$	550		$	—	$	176		$	5,272	$	—		$	6,999
Collectively evaluated for impairment	78,620		237,674			174,342		202,429			259,522		6,959			959,546
Total ending loans balance	$	79,621	$	238,224		$	174,342	$	202,605		$	264,794	$	6,959		$	966,545

Note 6. Earnings Per Share

The following table shows the calculation of both basic and diluted earnings per share (“EPS”) for the three and nine months ended September 30, 2017 and 2016, respectively. The numerator of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding used as the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive common stock options utilizing the treasury stock method.



	For the Three Months Ended September 30,
	2017		2016
(In thousands, except for share and per share data)
Basic earnings per share:
Net income	$	7,002	$	4,425
Weighted average shares outstanding	20,409,696		10,595,599
Basic earnings per share	$	0.34	$	0.42
Diluted earnings per share:
Net income	$	7,002	$	4,425
Weighted average shares outstanding	20,409,696		10,595,599
Dilutive effect of stock options	99,179		93,568
Weighted average diluted shares outstanding	20,508,875		10,689,167
Diluted earnings per share	$	0.34	$	0.41



	For the Nine Months Ended September 30,
	2017		2016
(In thousands, except for share and per share data)
Basic earnings per share:
Net income	$	13,455	$	13,398
Weighted average shares outstanding	17,156,521		10,575,088
Basic earnings per share	$	0.77	$	1.27
Diluted earnings per share:
Net income	$	13,455	$	13,398
Weighted average shares outstanding	17,156,521		10,575,088
Dilutive effect of stock options	116,846		69,809
Weighted average diluted shares outstanding	17,273,367		10,644,897
Diluted earnings per share	$	0.77	$	1.26

None of the stock options were considered anti-dilutive as of September 30, 2017 and 2016.

Note 7. Segment Reporting

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

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

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

The following tables present segment information as of and for the three months ended September 30, 2017 and 2016:



	September 30, 2017
(In Thousands)	Commercial Banking		Trust & Wealth Management			Mortgage Banking			Other			Eliminations			Consolidated
Revenues:
Interest income	$	27,429	$	4		$	299		$	5		$	(45	)	$	27,692
Gain on sales of loans	—		—			5,594			—			—			5,594
Other revenues	1,977		1,617			(740		)	312			(237		)	2,929
Total revenues	29,406		1,621			5,153			317			(282		)	36,215
Expenses:
Interest expense	3,072		—			(25		)	96			(45		)	3,098
Salaries and employee benefits	7,334		868			2,898			—			—			11,100
Other expenses	8,724		1,850			1,149			1,107			(237		)	12,593
Total operating expenses	19,130		2,718			4,022			1,203			(282		)	26,791
Income (loss) before income taxes	$	10,276	$	(1,097	)	$	1,131		$	(886	)	$	—		$	9,424
Total assets	$	2,810,037	$	41,002		$	26,485		$	19,756		$	(24,211	)	$	2,873,069



	September 30, 2016
(In Thousands)	Commercial Banking		Wealth Management			Mortgage Banking			Other			Eliminations			Consolidated
Revenues:
Interest income	$	12,531	$	—		$	574		$	5		$	(332	)	$	12,778
Gain on sales of loans	—		—			8,316			—			—			8,316
Other revenues	682		773			(1,060		)	289			(315		)	369
Total revenues	13,213		773			7,830			294			(647		)	21,463
Expenses:
Interest expense	1,640		—			261			66			(332		)	1,635
Salaries and employee benefits	3,977		567			3,664			—			—			8,208
Other expenses	2,578		233			1,491			724			(315		)	4,711
Total operating expenses	8,195		800			5,416			790			(647		)	14,554
Income (loss) before income taxes	$	5,018	$	(27	)	$	2,414		$	(496	)	$	—		$	6,909
Total assets	$	1,290,518	$	2,894		$	74,195		$	18,420		$	(23,189	)	$	1,362,838

The following table presents segment information as of and for the nine months ended September 30, 2017 and 2016:



	September 30, 2017
(In Thousands)	Commercial Banking		Trust & Wealth Management			Mortgage Banking			Other			Eliminations			Consolidated
Revenues:
Interest income	$	67,740	$	7		$	846		$	17		$	(225	)	$	68,385
Gain on sale of loans	—		—			14,985			—			—			14,985
Other revenues	4,445		4,195			(306		)	975			(883		)	8,426
Total revenues	72,185		4,202			15,525			992			(1,108		)	91,796
Expenses:
Interest expense	7,796		—			18			337			(225		)	7,926
Salaries and employee benefits	19,992		2,686			9,122			—			—			31,800
Other expenses	20,173		2,541			3,246			7,537			(883		)	32,614
Total operating expenses	47,961		5,227			12,386			7,874			(1,108		)	72,340
Income (loss) before income taxes	$	24,224	$	(1,025	)	$	3,139		$	(6,882	)	$	—		$	19,456
Total assets	$	2,810,037	$	41,002		$	26,485		$	19,756		$	(24,211	)	$	2,873,069



	September 30, 2016
(In Thousands)	Commercial Banking		Wealth Management			Mortgage Banking		Other			Eliminations			Consolidated
Revenues:
Interest income	$	36,379	$	—		$	1,355	$	15		$	(654	)	$	37,095
Gain on sale of loans	—		—			19,419		—			—			19,419
Other revenues	2,908		2,269			53		978			(950		)	5,258
Total revenues	39,287		2,269			20,827		993			(1,604		)	61,772
Expenses:
Interest expense	4,656		—			439		200			(654		)	4,641
Salaries and employee benefits	12,065		1,655			10,563		—			—			24,283
Other expenses	6,285		783			4,127		1,943			(950		)	12,188
Total operating expenses	23,006		2,438			15,129		2,143			(1,604		)	41,112
Income (loss) before income taxes	$	16,281	$	(169	)	$	5,698	$	(1,150	)	$	—		$	20,660
Total assets	$	1,290,518	$	2,894		$	74,195	$	18,420		$	(23,189	)	$	1,362,838

Note 8. Fair Value Measurements

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

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


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


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


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

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

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

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

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

Derivative financial instruments: Derivative instruments are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward commitments to sell mortgage loans and mortgage backed securities as further described in Note 11. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for interest rate lock commitments (Level 3).

Derivative instruments are also in the form of interest rate swaps and an interest rate cap. Interest rate swaps and the cap are recorded at fair value based on third party vendors who compile prices from various sources and may determine fair value of identical or similar instruments by using pricing models that consider observable market data (Level 2). The interest rate swaps and cap are further described in Note 16.

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

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

Assets and liabilities measured at fair value under FASB ASC 820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected the fair value option as of September 30, 2017 and December 31, 2016 are summarized below:



(In Thousands)	September 30, 2017
Description	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets - Recurring
Available-for-sale investment securities
U.S. Government agencies	$	26,059	$	—	$	26,059	$	—
Municipals	101,409		—		101,409		—
Mortgage backed securities	246,915		—		246,915		—
Asset backed securities	8,723		—		4,402		4,321
Corporate bonds	8,551		—		8,551		—
Certificates of deposit	1,993		—		1,993		—
CRA mutual fund	1,390		—		1,390		—
Total available-for-sale investment securities	395,040		—		390,719		4,321

Residential loans held for sale	26,234		—		26,234		—
Derivative assets	487		—		51		436
Total Financial Assets - Recurring	$	421,761	$	—	$	417,004	$	4,757

Financial Liabilities - Recurring
Derivative liabilities	$	71	$	—	$	44	$	27

Financial Assets - Non-Recurring
OREO	$	1,980	$	—	$	—	$	1,980
Impaired loans ⁽¹⁾	$	5,837	$	—	$	—	$	5,837


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



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

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

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

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


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

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the three month periods ended September 30, 2017 and 2016:



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

Balance, beginning of period	$	606		$	4,226	$	4,832
Realized and unrealized gains (losses) included in earnings	(197		)	—		(197		)
Unrealized gains (losses) included in other comprehensive income	—			95		95
Purchases, settlements, paydowns, and maturities	—			—		—
Transfer into Level 3	—			—		—
Balance, September 30, 2017	$	409		$	4,321	$	4,730

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

Balance, beginning of period	$	287		$	—	$	287
Realized and unrealized gains (losses) included in earnings	75			—		75
Unrealized gains (losses) included in other comprehensive income	—			—		—
Purchases, settlements, paydowns, and maturities	—			—		—
Transfer into Level 3	—			—		—
Balance, September 30, 2016	$	362		$	—	$	362

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the nine month periods ended September 30, 2017 and 2016:



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

Balance, January 1, 2017	$	668		$	4,500		$	5,168
Realized and unrealized gains (losses) included in earnings	(259		)	—			(259		)
Unrealized gains (losses) included in other comprehensive income	—			(179		)	(179		)
Purchases, settlements, paydowns, and maturities	—			—			—
Transfer into Level 3	—			—			—
Balance, September 30, 2017	$	409		$	4,321		$	4,730

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

Balance, January 1, 2016	$	273		$	—		$	273
Realized and unrealized gains (losses) included in earnings	89			—			89
Unrealized gains (losses) included in other comprehensive income	—			—			—
Purchases, settlements, paydowns, and maturities	—			—			—
Transfer into Level 3	—			—			—
Balance, September 30, 2016	$	362		$	—		$	362

The following tables present quantitative information as of September 30, 2017 and December 31, 2016 about Level 3 fair value measurements for assets measured at fair value:



	September 30, 2017
Description	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range (Weighted Average)
	(In Thousands)
Financial Assets - Recurring
Asset backed securities	$	4,321	Valuation service	Discounted cash flows	3% - 6% (5%)
Derivative assets	436		Market pricing (3)	Estimated pullthrough	75% - 90% (85.5%)
Derivative liabilities	27		Market pricing (3)	Estimated pullthrough	75% - 90% (85.5%)

Financial Assets - Non-recurring
Impaired loans - Real estate secured	$	598	Appraisal of collateral (1)	Liquidation expenses (2)	0% - 20% (10%)
Impaired loans - Non-real estate secured	$	5,239	Cash flow basis	Liquidation expenses (2)	0% - 20% (10%)
Other real estate owned	$	1,980	Appraisal of collateral (1)	Discounts to reflect current market conditions and estimated selling costs	10%


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


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


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



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

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


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


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


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

Financial instruments recorded using FASB ASC 825-10

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

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



	September 30, 2017
(In Thousands)	Aggregate Fair Value		Difference		Contractual Principal
Residential mortgage loans held for sale	$	26,234	$	985	$	25,249



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

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

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

Cash and Short-Term Investments

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

Restricted Stock

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

Loans, Net of Allowance

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

Deposits and Borrowings

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

Trust Preferred Debentures

The fair values of the Corporation's trust preferred debentures are estimated using discounted cash flow analysis based on the Corporation's incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest

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

Off-Balance Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed interest rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At September 30, 2017 and December 31, 2016, the majority of off-balance-sheet items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair value of these items is largely based on fees, which are nominal and immaterial.

Fair Value of Financial Instruments

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



	September 30, 2017				December 31, 2016

	Carrying Amount		Total Fair Value		Carrying Amount		Total Fair Value
	(In Thousands)
Financial assets:
Cash and short-term investments	$	129,933	$	129,933	$	91,059	$	91,059
Securities held-to-maturity	15,778		16,416		9,200		9,293
Securities available-for-sale	395,040		395,040		194,090		194,090
Restricted stock	14,447		14,447		10,092		10,092
Loans, net	1,953,968		1,992,323		1,069,366		1,080,820
Derivatives	487		487		993		993
Total financial assets	$	2,509,653	$	2,548,646	$	1,374,800	$	1,386,347

Financial liabilities:
Deposits	$	2,286,212	$	2,252,241	$	1,054,327	$	1,040,402
Short-term borrowings	79,527		79,336		186,009		185,910
Long-term borrowings	60,000		59,491		60,000		59,954
Trust preferred debentures	3,863		3,689		—		—
Derivatives	71		71		325		325
Total financial liabilities	$	2,429,673	$	2,394,828	$	1,300,661	$	1,286,591

Note 9. Financial Instruments with Off-Balance Sheet Risk

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by the Corporation upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally consists of real property, liquid assets or business assets. The Corporation had $61.0 million and $25.1 million in outstanding commitments at September 30, 2017 and December 31, 2016, respectively.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Corporation had $499.0 million and $330.0 million in unfunded lines of credit whose contract amounts represent credit risk at September 30, 2017 and December 31, 2016, respectively.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby letters of credit outstanding in the amount of $15.9 million and $9.6 million at September 30, 2017 and December 31, 2016, respectively.

The Bank maintains a reserve for potential off-balance sheet credit losses that is included in other liabilities on the balance sheet. At September 30, 2017 and December 31, 2016 the balance in this reserve totaled $800 thousand and $750 thousand, respectively.

The Bank has a letter of credit agreement with the Commonwealth of Virginia Treasury Board pertaining to its public deposits program. Under the terms of the agreement, the Commonwealth of Virginia Treasury Board in accordance with the Security for Public Deposits Act has approved the use of a letter of credit issued by the FHLB as collateral by the Bank. The maximum amount available under the letter of credit is $65.0 million. The letter of credit expires in August 2017 with an automatic one year extension until August 2018.

The Mortgage Division of the Bank makes representations and warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations. The Mortgage Division maintains a reserve in other liabilities for potential losses on mortgage loans sold. Management performs a quarterly analysis to determine the adequacy of the reserve. At September 30, 2017 and December 31, 2016, the balance in this reserve totaled $987 thousand and $1.0 million, respectively.

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



	For the Nine Months Ended September 30,					For the Year Ended
(In Thousands)	2017			2016		December 31, 2016
Balance, beginning of period	$	1,029		$	1,029	$	1,029
Provision charged to operating expenses	—			—		—
Recoveries	—			—		—
Charge-offs	(42		)	—		—
Balance, end of period	$	987		$	1,029	$	1,029

Note 10. Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” as well as most industry-specific guidance. The amendments also create a new Subtopic 340-40 “Other Assets and Deferred Costs - Contracts with Customers”. In summary, entities are to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The provisions of ASU 2014-09 were originally effective for annual periods beginning after December 15, 2016 and interim periods within 2017; however, a one year deferral was issued which now makes the provisions effective for annual periods beginning after December 15, 2017 and interim periods within 2018. The Corporation is currently in the process of analyzing the impact, if any, to its revenue recognition policies that will result from adopting the ASU on January 1, 2018. The Corporation has identified the revenue streams that are in the scope of the ASU consisting primarily of non-interest income exclusive of the gain on the sales of loans held for sale. The Corporation is in the process of documenting its review of the impacted contracts and expect to complete this analysis in the fourth quarter. The Corporation plans to adopt using the modified retrospective method of adoption on contracts that are not completed, and will record a cumulative effect adjustment to opening retained earnings if necessary. The Corporation currently does not anticipate a material impact to current revenue recognition policies.

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

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

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU specifies the accounting for leases in an effort to increase transparency and comparability among organizations. The amendments in the ASU are effective beginning after December 15, 2018. The Corporation is currently evaluating the impact this guidance will have on its consolidated financial statements and has hired a firm to assist in this process so as to be able to determine the impact this ASU will have on the Corporation by second quarter 2018.

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

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

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Under this ASU all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized as income tax expense or benefit in the income statement during the period in which they occur. Previously, such amounts were recorded in the pool of excess tax benefits included in additional paid-in capital, if such pool was available. Because excess tax benefits are no longer recognized in additional paid-in capital, the assumed proceeds from applying the treasury stock method when computing earnings per share should exclude the amount of excess tax benefits that would have

previously been recognized in additional paid-in capital. Additionally, excess tax benefits should be classified along with other income tax cash flows as an operating activity rather than a financing activity, as was previously the case. ASU 2016-09 also provides that an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. ASU 2016-09 changes the threshold to qualify for equity classification (rather than as a liability) to permit withholding up to the maximum statutory tax rates (rather than the minimum as was previously the case) in the applicable jurisdictions. The amendments in the ASU were effective beginning after December 15, 2016 and for interim periods within that year. The Corporation has chosen to continue estimating the number of awards that are expected to vest rather than accounting for forfeitures as they occur. The adoption of this guidance did not have a material effect on the Corporation's financial condition or results of operations.

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

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

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

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

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

In January 2017, the FASB updated the Accounting Changes and Error Corrections and the Investments-Equity Method and Joint Ventures Topics of the Accounting Standards Codification. ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investment - Equity Method and Joint Ventures (Topic 323) incorporates into the Accounting Standards Codification recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases,

and credit losses standards. The ASU was effective upon issuance. The Corporation is currently evaluating the impact on additional disclosure requirements; however, it does not expect these amendments to have a material effect on its financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued with the intent to simplify goodwill impairment testing by eliminating the second step of the analysis under which the implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. The update instead requires entities to compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value, to the extent that the loss recognized does not exceed the amount of goodwill allocated to that reporting unit. ASU 2017-04 must be applied prospectively and is effective for the Corporation on January 1, 2020. Early adoption is permitted. The Corporation does not expect the new guidance to have a material impact on its consolidated financial statements.

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

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

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

In May 2017, the FASB issued ASU No. 2017-09, which amended the requirements in the Compensation-Stock Compensation Topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Corporation for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Corporation does not expect these amendments to have a material effect on its financial statements.

Note 11. Commitments and Contingent Liabilities

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

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

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

At September 30, 2017 and December 31, 2016, the Mortgage Division had open forward contracts with a notional value of $37.0 million and $54.3 million, respectively. At September 30, 2017 and December 31, 2016, the Mortgage Division had no open mandatory delivery contracts. The open forward delivery contracts are composed of forward sales of MBS. The fair value of these open forward contracts was $105 thousand and $102 thousand at September 30, 2017 and December 31, 2016, respectively.

Interest rate lock commitments totaled $38.5 million and $37.9 million at September 30, 2017 and December 31, 2016, respectively, and included $16.2 million and $7.3 million that were made on a best efforts basis at September 30, 2017 and December 31, 2016, respectively. Fair values of these best efforts commitments were $82 thousand and $82 thousand at September 30, 2017 and December 31, 2016, respectively. The remaining hedged interest rate lock commitments totaling $22.3 million and $30.6 million at September 30, 2017 and December 31, 2016, respectively, had a fair value of $267 thousand and $484 thousand, respectively.

Included in other noninterest income for the nine months ended September 30, 2017 and 2016 was a net loss of $265 thousand and a net gain of $655 thousand, respectively, relating to derivative instruments. The amount included in other noninterest income for the nine months ended September 30, 2017 and 2016 pertaining to its hedging activities was a net realized loss of $777 thousand and a net realized loss of $2.5 million, respectively.

Note 12. Low Income Housing Tax Credits

The Corporation has invested in five separate housing equity funds at September 30, 2017 and December 31, 2016. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were $10.6 million and $664 thousand at September 30, 2017 and December 31, 2016, respectively. Additional capital calls expected for the funds totaled $6.15 million at September 30, 2017, and are included in other liabilities on the consolidated balance sheets. The expected terms of these investments and the related tax benefits run through 2033.

Note 13. Bank Owned Life Insurance

The Corporation had $51.3 million and $26.4 million in bank owned life insurance ("BOLI") at September 30, 2017 and December 31, 2016, respectively. The Corporation recognized interest income, which is included in other noninterest income of $342 thousand and $112 thousand for the three months ended September 30, 2017 and 2016, respectively and $869 thousand and $338 thousand for the nine months ended September 30, 2017 and 2016, respectively.

Note 14. Mergers and Acquisitions

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

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the Acquisition Date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the Acquisition Date.

In connection with the acquisition, the consideration paid, and the fair value of identifiable assets acquired and liabilities assumed as of the Acquisition Date are summarized in the following table (dollars in thousands):



Consideration Paid:
Common shares issued (9,516,097)	$	285,679
Cash paid to shareholders	608
Value of consideration	286,287

Fair value of assets acquired:
Cash and cash equivalents	$	90,940
Investment securities	243,679
Restricted stock	4,119
Loans	815,817
Bank premises and equipment	22,516
OREO	3,949
Core deposit intangible	16,057
Bank owned life insurance	24,081
Other assets	24,572
Total assets	1,245,730

Fair value of liabilities assumed:
Deposits	1,056,619
Short-term borrowings	26,033
Long-term borrowings	29,892
Trust preferred debentures	3,824
Other liabilities	10,206
Total liabilities	1,126,574

Net assets acquired	119,156
Goodwill resulting from merger with Middleburg	$	167,131

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Loans

The acquired loans were recorded at fair value at the Acquisition Date without carryover of Middleburg's previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), nonaccrual status, and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate), and re-payment structure (e.g., interest only, fully amortizing, balloon).

The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality (acquired impaired or PCI) and loans that do not meet this criteria, which are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs (acquired performing). The fair values of the acquired performing loans were $810.9 million and the fair values of the acquired

impaired loans were $4.9 million. The gross contractually required principal and interest payments receivable for acquired performing loans was $7.8 million. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $3.4 million.

The following table presents the acquired impaired loans receivable at the Acquisition Date (dollars in thousands):



Contractual principal and interest at acquisition	$	7,835
Nonaccretable difference	(3,427		)
Expected cash flows at acquisition	4,408
Accretable yield	(186		)
Fair value of purchased impaired loans	$	4,222

Bank Premises

The fair value of Middleburg’s premises, including land, buildings, and improvements, was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located. These appraisals were based upon the highest and best use of the underlying asset(s) with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised. The Corporation also engaged independent appraisers to value the leasehold interests. The fair value of the leasehold interest was not material to the consolidated financial statements. The fair value adjustment related to bank premises was $3.1 million.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a blended market approach and discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the FHLB. The life of the deposit base and projected deposit attrition rates were determined using Middleburg’s historical deposit data. The core deposit intangible will be amortized over nine years using the sum-of-years digits method.

Time Deposits

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $293.6 thousand is being amortized into income over the remaining life of the time deposits.

Long-term Borrowings

The Corporation assumed long-term borrowings in the form of FHLB advances and trust preferred capital notes in connection with the merger. The fair value of the trust preferred capital notes assumed was valued using an income approach with consideration of the market approach. The contractual cash flows were projected and discounted using a prevailing market rate. The market rate was developed using a third-party broker opinion, implied market yields for recent subordinated debt sales, and new subordinated debt issuances for instruments with similar durations and pricing characteristics. The fair value of FHLB advances represents contractual repayments discounted using interest rates currently available on borrowings with similar characteristics and remaining maturities. The FHLB advances were valued at a discount of $107.6 thousand which is being amortized into income over 1.7 years using the effective interest method. The trust preferred capital notes were valued at discount of $1.3 million which is being amortized over 16.8 years using the effective interest method.

The following table presents certain pro forma information as if Middleburg had been acquired on December 31, 2016. These results combine the historical results of the Corporation in the Corporation's Consolidated Statements of Operations and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on December 31, 2016. In particular, no adjustments have been made to eliminate the amount of Middleburg’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of December 31, 2016. The Corporation expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):



	For the year ended,
	December 31, 2016
Total revenues (net interest income plus noninterest income)	$	131,084
Net Income	27,560

Acquisition-related expenses associated with the acquisition of Middleburg were $1.0 million for the three months ended September 30, 2017 and $6.7 million for the nine months ended September 30, 2017. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, operations integration, and employee severances, which have been expensed as incurred.

Note 15. Other Income and Other Operating Expenses

The Corporation had the following other income for the three and nine month periods ended September 30, 2017 and 2016.



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2017			2016
	(In Thousands)
Trust income	$	1,130		$	—		$	2,287		$	—
Wealth Management income	487			773			1,908			2,269
Bank owned life insurance income	342			112			869			338
Miscellaneous loan fees	315			97			704			436
Fair value marks on loans held for sale	(177		)	(293		)	(265		)	655
Hedging gains (losses), net	(223		)	(1,194		)	(777		)	(2,483		)
Gains (losses) on sale of securities, net	—			—			—			109
Other service charges and fees	329			152			623			357
Other	166			473			1,568			2,829
	$	2,369		$	120		$	6,917		$	4,510

The Corporation had the following other operating expenses for the three and nine month periods ended September 30, 2017 and 2016.



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
	(In Thousands)
Merger related expenses	$	1,012	$	—	$	6,747	$	—
Data processing	77		263		1,226		669
Amortization	839		13		1,642		37
Business and franchise tax	515		238		985		717
FDIC insurance	387		168		1,248		475
Consulting fees	314		284		870		584
Advertising and promotional	211		142		548		541
Accounting and auditing	255		154		694		460
Investor fees	162		212		463		541
Telephone	256		94		519		281
Regulatory examinations	100		69		282		207
Stock option	107		83		310		251
Director fees	192		93		496		279
Credit report	106		77		292		199
Legal fees	158		47		285		117
Insurance	99		82		322		188
Publication and subscription	118		61		281		218
Disaster recovery	93		46		204		151
Office supplies-stationary print	136		52		288		149
FRB and bank analysis charges	87		43		179		123
Dues and memberships	38		20		109		67
Management fees	137		448		295		935
Verification fees	38		46		119		118
Travel	39		28		156		125
SBA guarantee fee	36		35		104		112
Early payoff	71		4		121		215
Business development and meals	21		23		79		83
Automotive	17		15		50		41
Appraisal fee	9		11		33		30
Courier	31		13		79		42
Common stock	6		40		57		81
Education and training	26		24		57		151
Bank paid closing costs	8		4		55		23
Postage	6		22		95		69
Goodwill impairment	1,491		—		1,491		—
Other	1,476		239		2,813		761
	$	8,674	$	3,193	$	23,594	$	9,040

Note 16. Derivatives

The Corporation utilizes derivative instruments as a part of its asset-liability management program to control fluctuation of market values and cash flows to changes in interest rates associated with certain financial instruments. The Corporation accounts for derivatives in accordance with ASC 815, "Derivatives and Hedging". Under current guidance, derivative transactions are classified as either cash flow hedges or fair value hedges or they are not designated as hedging instruments. The Corporation obtained several designated derivative instruments as a result of the merger with Middleburg and continues to account for these items on a basis consistent with when the items were established by Middleburg which is in accordance with this guidance. Information concerning each of the Corporation's categories of derivatives as of September 30, 2017 is presented below.

Derivatives designated as cash flow hedges

During 2010, Middleburg entered into an interest rate swap which has been designated as a cash flow hedge intended to hedge the variability of cash flows associated with the trust preferred debentures. The swap hedges the cash flow associated with the trust preferred capital notes wherein the Corporation receives a floating rate based on LIBOR from a counterparty and pays a fixed rate of 2.59% to the same counterparty. The swap is calculated on a notional amount of $5.2 million. The term of the swap is 10 years and commenced on October 23, 2010. Cash collateral was reserved for this swap in the amount of $400 thousand as of September 30, 2017. The swap was entered into with a counterparty that met the Corporation’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in the contract is not significant.

During 2013, Middleburg entered into an interest rate swap which has been designated as a cash flow hedge intended to hedge the variability of cash flows associated with FHLB borrowings. The swap hedges the cash flows associated with the FHLB borrowings wherein the Corporation receives a floating rate based on LIBOR from a counterparty and pays a fixed rate of 1.43% to the same counterparty. The swap is calculated on a notional amount of $10.0 million. The term of the swap is 5 years and commenced on November 25, 2013. Collateral was reserved for this swap in the amount of $600 thousand as of September 30, 2017. The swap was entered into with a counterparty that met the Corporation's credit standards and the agreement contains collateral provisions protecting the at-risk party. The Corporation believes that the credit risk inherent in the contract is not significant.

Amounts receivable or payable are recognized as accrued under the terms of the agreement, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Corporation has assessed the effectiveness of the hedging relationships by comparing the changes in cash flows on the designated hedged item. As a result of this assessment, there was no hedge ineffectiveness identified for the three months ended September 30, 2017.

The amounts included in accumulated other comprehensive income as unrealized losses (fair value, net of tax) were $8 thousand as of September 30, 2017.

Information concerning the derivatives designated as cash flow hedges at September 30, 2017 is presented in the following table:



	September 30, 2017
	Positions (#)	Notional Amount (in thousands)		Asset (in thousands)		Liability (in thousands)		Receive Rate		Pay Rate		Life (Years)
Pay fixed - receive floating interest rate swap	1	$	5,155	$	—	$	121	1.36	%	2.59	%	3.1
Pay fixed - receive floating interest rate swap	1	$	10,000	$	6	$	—	1.24	%	1.43	%	1.2

Derivatives not designated as hedging instruments

Two-way client loan swaps

During 2012 and 2014, Middleburg entered into certain interest rate swap contracts that are not designated as hedging instruments. These derivative contracts relate to transactions in which we enter into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each swap transaction, the Corporation agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on an identical notional amount at a fixed interest rate. At the same time, the Corporation agrees to pay the counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows our customers to effectively convert a variable rate loan into a fixed rate loan. Because the Corporation acts as an intermediary for its customers, changes in the fair value of the underlying derivatives contracts offset each other and do not significantly impact its results of operations.

Certain additional risks arise from interest rate swap contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Corporation does not expect any counterparty to fail to meet its obligations.

Information concerning two-way client interest rate swaps not designated as either fair value or cash flow hedges is presented in the following table:



	September 30, 2017
	Positions (#)	Notional Amount (in thousands)		Asset (in thousands)		Liability (in thousands)		Receive Rate		Pay Rate		Life (Years)
Pay fixed - receive floating interest rate swap	1	$	3,313	$	15	$	—	1 month LIBOR plus 200 BP		3.90	%	10.2
Pay fixed - receive floating interest rate swap	1	1,630		—		29		1 month LIBOR plus 180 BP		4.09	%	7.2
Pay floating - receive fixed interest rate swap	1	3,313		—		15		3.90	%	1 month LIBOR plus 200 BP		10.2
Pay floating - receive fixed interest rate swap	1	1,630		29		—		4.09	%	1 month LIBOR plus 180 BP		7.2
Total derivatives not designated		$	9,886	$	44	$	44

Rate Cap Transaction

During 2016, the Corporation had one derivative instrument in the form of an interest rate cap agreement with a notional amount of $10.0 million. The notional amount of the financial derivative instrument does not represent exposure to credit loss. The Corporation is exposed to credit loss only to the extent the counterparty defaults in its responsibility to pay interest under the terms of the agreement. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy and by limiting the amount of exposure to each counterparty. The Corporation does not expect any counterparty to fail to meet its obligations.

The details of the interest rate cap agreement as of September 30, 2017 are summarized below:



September 30, 2017
(Dollars in thousands)
Notional Amount		Termination Date	3-Month LIBOR Strike Rate		Premium Paid		Unamortized Premium at September 30, 2017		Fair Value September 30, 2017		Cumulative Cash Flows Received
$	10,000	September 8, 2018	2.00	%	$	70	$	70	$	1	$	—

The interest rate cap agreement was purchased to limit the Corporation's exposure to rising interest rates. Under the terms of the agreement, the Corporation paid a premium of $70 thousand for the right to receive cash flow payments if the 3-month LIBOR rises above the cap of 2.00%, thus effectively ensuring interest expense is capped at a maximum rate of 2.00% for the duration of the agreement. The interest rate cap agreement is a derivative not designated as a hedging instrument.

At September 30, 2017, the total fair value of the interest rate cap agreement was $1 thousand. The fair value of the interest rate cap agreement is included in other assets on the Corporation's consolidated balance sheets. Changes in fair value are recorded in earnings in other operating expenses. For the nine months ended September 30, 2017, $4 thousand was recognized in other operating expenses. No expense was recognized in the third quarter in relation to this agreement.

The premium paid on the interest rate cap agreement is recognized as a decrease in interest income over the duration of the agreement using the caplet method. For the three months ended September 30, 2017, no premium amortization was required.

Note 17. Goodwill and Intangible Assets

The following table summarizes the Corporation's carrying amount for intangible assets:



	September 30, 2017		December 31, 2016
(Dollars in thousands)
Intangible assets subject to amortization
Core deposit intangible	$	14,452	$	—
Customer lists	295		332
Total	$	14,747	$	332

Amortization expense was $839 thousand and $13 thousand for the three months ended September 30, 2017 and 2016, respectively and $1,642 thousand and $37 thousand for the nine months ended September 30, 2017 and 2016, respectively.

Changes in the carrying amount of goodwill are summarized in the table as follows:




(Dollars in thousands)
Balance, December 31, 2016	$	1,501
Additions - acquisition of Middleburg	167,399
Impairments	(1,491		)
Balance, September 30, 2017	$	167,409

The goodwill impairment was in relation to a reporting unit within the Wealth Management segment. The unexpected departure of underperforming personnel and the loss of accounts associated with those individuals caused management to evaluate the goodwill associated with that reporting unit at an interim basis rather than at the annual impairment evaluation date previously utilized. While the departure dates of the personnel were second quarter 2017, the financial impacts of the departing accounts associated with those individuals was not felt until the third quarter of 2017 thus creating the need for the impairment charge. While management believes the full impact from these changes is reflected in this reporting period, continued analysis of goodwill impairment will be made to determine if the complete write-off remains warranted and will make any recapture adjustments in the fourth quarter of 2017. The impairment charge was determined using a combination of the present value and market approaches and is included in Other Operating Expenses on the Consolidated Statements of Operations for the three and nine months ended September 30, 2017.


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

The following discussion and analysis should be read in conjunction with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results for the year ending December 31, 2017 or any future period.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Examples of forward-looking statements include discussions as to our expectations, beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters discussed in this document. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not related strictly to historical or current facts. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding the Corporation’s beliefs regarding the future strength of the economy and labor markets and anticipated interest rates and the effect of such rates on the Corporation’s performance and net interest margin and

the volume of future mortgage refinancing, as well as the Corporation’s expectations concerning operating losses and the profitability of its mortgage segment. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: collateral values, especially in the real estate market; continued challenging economic conditions or deterioration in general business and economic conditions and in the financial markets; mergers and acquisitions, including the degree of success in integrating operations following the Corporation's merger with Middleburg such as potential deposit attrition, higher than expected costs, the effect on earnings of integrating our legacy wealth services operations into those of Middleburg, customer loss and business disruption associated with the integration of Middleburg, including, without limitation, potential difficulties in maintaining relationships with key personnel and other integration related-matters; the impact of any laws, regulations, policies or programs implemented pursuant to the Dodd-Frank Act or other legislation or regulation; unemployment levels; branch expansion plans; interest rates; general economic conditions; monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency (“Comptroller”), the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond; the economy of Northern Virginia, including governmental spending and real estate markets; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; the effect of goodwill impairment on net income; the liquidity of the Corporation; and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.

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

Critical Accounting Policies

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

Allowance for Loan Losses

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

Other Than Temporary Impairment of Investment Securities

Securities in the Corporation’s securities portfolio are classified as either available-for-sale or held-to-maturity. At September 30, 2017, there were no non-agency mortgage backed securities or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component of other comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary. Management evaluates the securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms of each security. A decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the anticipated holding period of the investment will cause the security to be considered other than temporarily impaired. Other than temporary impairments result in reducing the security’s carrying value by the amount of the estimated credit loss. The credit component of the other than temporary impairment loss is realized through the statement of income and the remainder of the loss remains in other comprehensive income. At September 30, 2017, there were no securities with other than temporary impairment.

Income Taxes

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

Fair Value

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

Mergers and Acquisitions

Mergers and acquisitions are accounted for using the acquisition method, as required by ASC 805, Business Combinations. Under this method, the cost of the acquired entity is allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. The excess of the cost over the fair value of the acquired net assets is recognized as goodwill.

Goodwill and Other Intangibles

We record all assets and liabilities acquired in purchase acquisitions, including goodwill, intangibles with indefinite lives, and other intangibles, at fair value as required by ASC 805, Business Acquisitions. The initial recording of goodwill and other intangibles requires subjective decisions concerning estimates of the fair value of the acquired assets and liabilities. Goodwill is reviewed for potential impairment at the reporting unit level (one level below the business segments) on an annual basis, or more often if events or circumstances indicate there may be impairment. Testing is conducted in two steps: identifying the potential impairment and then, if necessary, identifying the amount of impairment. The first step compares the fair value of the reporting unit to its carrying amount. If the fair value is less than the carrying amount, a second test is conducted by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.

Other identifiable intangible assets are evaluated for impairment if events or changes in circumstances indicate a possible impairment. Such evaluation is based on undiscounted cash flow projections, which may extend far into the future and, by their nature, are difficult to determine over an extended time-frame. Fair value may be influenced by market prices, comparison to similar assets, market multiples, discounted cash flow analysis, and other determinants. Factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, changes in discount rates, and specific industry or market sector conditions. Other key judgments in accounting for intangibles include useful life and classification between goodwill and intangibles with indefinite lives or other intangibles that require amortization.

Acquisition of Middleburg Financial Corporation

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

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

Middleburg equity compensation plan that was outstanding immediately prior to the effective date of the Merger was, pursuant to the terms of each such grant, vested in full immediately prior to the effective date of the Merger and converted into unrestricted shares of Access common stock based on the exchange ratio. Each share of the Corporation's common stock outstanding immediately prior to the Merger remained outstanding and was unaffected by the Merger.

Shortly after the effective time of the Merger, Middleburg Bank, Middleburg’s wholly-owned bank subsidiary, was merged with and into Access National Bank, the Corporation’s wholly-owned bank subsidiary (“Access Bank”) with Access Bank surviving. Data/office integrations were completed on schedule as of August 4, 2017.

This description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which was included as Exhibit 2.1 to the Form 8-K filed October 25, 2016 and incorporated by reference herein.

Financial Condition

Executive Summary

At September 30, 2017, the Corporation’s assets totaled $2.87 billion, an increase of $1.44 billion, from $1.43 billion, at December 31, 2016. The increase in assets was primarily due to the strategic merger with Middleburg Financial Corporation as of April 1, 2017. Loans held for investment grew $919.96 million during the nine months ended September 30, 2017, with $104.2 million of the increase attributable to organic growth and the remaining attributable to the acquired loan portfolio from Middleburg.

Deposits totaled $2.29 billion at September 30, 2017, compared to $1.05 billion at December 31, 2016, an increase of $1.23 billion with $175.3 million attributable to organic growth and the remaining attributable to the acquired deposit portfolio from Middleburg. At September 30, 2017, noninterest bearing deposits, which represent 31.1% of the deposit portfolio were $710.7 million, an increase of $348.7 million from December 31, 2016. While noninterest bearing demand deposits remain the largest and most attractive source of funding for the Corporation, the combination of legacy Middleburg’s significant low cost interest-bearing demand deposits and legacy Access’ noninterest bearing demand deposits accounted for $1.2 billion or 52.6% of total deposits at September 30, 2017. Interest-bearing deposits increased to $1.58 billion at September 30, 2017, an increase of $883.2 million from December 31, 2016. Brokered deposits as a percentage of the deposit portfolio decreased to 3.2% of the portfolio at September 30, 2017. The go-forward strategy places a high priority on the maintenance and expansion of core deposits, particularly high value demand deposit relationships.

Third quarter 2017 pre-tax earnings were $9.42 million, an increase of $2.52 million from the third quarter 2016 and $19.46 million for the nine month period ended September 30, 2017, a decrease of $1.20 million from the nine month period ended September 30, 2016. This decrease is primarily attributable to pre-tax merger related costs of $6.7 million as well as $1.5 million in pre-tax goodwill impairment charges related to a reporting unit within the Wealth Management segment.

The commercial banking segment’s total revenues grew $16.19 million and $32.90 million for the three and nine months ended September 30, 2017, respectively, when compared to the same periods in 2016. This growth was offset by an increase in interest expense of $1.43 million and $3.14 million, salaries and employee benefits of $3.36 million and $7.93 million and other expenses of $6.15 million and $13.89 million, for the three and nine month periods ended September 30, 2017 compared to the same periods in 2016. The mortgage banking segment has been relatively unaffected by the merger, contributing pre-tax earnings of $1.13 million or 12% of the consolidated total, but pre-tax earnings for the mortgage banking segment decreased $1.28 million in the three months ended September 30, 2017 compared to the same period in 2016. The trust and wealth management segment saw a $848 thousand and $1.93 million increase in revenue, which was offset by an increase in operating expenses of $1.92 million and $2.79 million for the three and nine month periods ended September 30, 2017 when compared to the same periods in 2016. Impacting the trust and wealth management segment was a $1.49 million pre-tax impairment to goodwill in relation to a reporting unit within the Wealth Management segment. The unexpected departure of underperforming personnel and the loss of accounts associated with those individuals caused management to evaluate the goodwill associated with that reporting unit at an interim basis rather than at the annual impairment evaluation date previously utilized. While the departure dates of the personnel were second quarter 2017, the financial impacts of the departing accounts associated with those individuals was not felt until the third quarter of 2017 thus creating the need for the impairment charge. The impairment charge was determined using a combination of the present value and market approaches. We expect that the earnings contributions from the trust and wealth management segment will be developing over the next few quarters as the unprofitable operations of the legacy Access segment are integrated with and suppress the profitable operations of Middleburg Investment Group. Management anticipates that the departure of underperforming personnel and loss of select underpriced accounts during the transition will result in reduced overhead of a greater magnitude than loss of revenue contribution from associated lost business. Management believes that the leadership of Middleburg Investment Group and the expanded capabilities resulting from the strategic Merger are enhancing the client value proposition in a way that we expect will produce consistent and growing fee income.

The net interest margin increased to 3.76% from 3.49% when comparing third quarter of 2017 to third quarter of 2016 and increased to 3.84% from 3.54% when comparing the nine months ended September 30, 2017 to the same period in 2016.

Non-performing assets (“NPAs”) increased to $7.82 million at September 30, 2017 from $6.92 million at December 31, 2016, representing 0.27% and 0.48% of total assets, respectively. Included in the NPAs total is $1.98 million in other real estate owned. The allowance for loan loss was $15.69 million and $16.01 million at September 30, 2017 and December 31, 2017, respectively, and represented 0.80% of total loans held for investment at September 30, 2017 and 1.53% of total loans held for investment at December 31, 2016. The remaining credit and fair value marks on the loans acquired in the Merger totaled $13.14 million at September 30, 2017.

At the regional level, the Washington, DC MSA unemployment remained unchanged at 3.7% as of August 2017 and still well below the 3.8% unemployment rate for the state of Virginia and 4.4% for the nation. The August 2017 Federal Reserve Beige Book noted that national economic activity expanded at a modest pace across all twelve Federal Reserve Districts at various rates. Consumer spending increased in most Districts, with gains reported for non-auto retail sales and tourism, but mixed for vehicle sales. Manufacturing activity expanded modestly on balance. Both residential and commercial real estate activity increased slightly. Hurrican Harvey created broad disruptions across the Dallas and Atlanta districts and may weigh on future economic output measures.

The latest Case-Shiller Home Price data available shows home prices increased 5.8% for the twelve months ended July 2017. The Consumer Confidence Index improved to 120.6 at the end of September 2017 from 117.3 at the end of June 2017. Retail sales for the third quarter 2017 were 3.8% greater than a year earlier. While economic expansion continues at a moderate pace, we are mindful of the prolonged duration and increasing risks to the Bank’s customer base in the event of an economic downturn. As such, we are reticent to relax credit risk underwriting parameters to match or beat competitors as a means of meeting growth objectives. Rather than compete on a transactional basis, we are proactive in cultivating deep client relationships within our target market profile: business-to-business and business-to-government companies with annual revenue of $1 million to $100 million and the various banking services needed by the business and the professionals associated with the businesses. The Corporation is optimistic with a strong capital base and being positioned for continued growth yet prepared to absorb the effects of economic challenge.

Securities

The Corporation’s securities portfolio is comprised of U.S. government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, certificates of deposit, and asset backed securities as well as municipal bonds. At September 30, 2017, the fair value of the securities portfolio totaled $411.46 million, compared to $203.4 million at December 31, 2016. Included in the fair value totals are held-to-maturity securities with an amortized cost of $15.78 million (fair value of $16.42 million) at September 30, 2017 compared to amortized cost of $9.20 million (fair value of $9.29 million) at December 31, 2016. Securities classified as available-for-sale are accounted for at fair market value with unrealized gains and losses recorded directly to a separate component of shareholders' equity, net of associated tax effect while held-to-maturity securities are carried at amortized cost. Investment securities are used to provide liquidity, to generate income, and to temporarily supplement loan growth as needed.

Restricted Stock

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

Loans

The loan portfolio constitutes the largest component of earning assets and is comprised of commercial real estate - owner occupied, commercial real estate - non-owner occupied, residential real estate, commercial, real estate construction, and consumer loans. The loan portfolio does not have any pay option adjustable rate mortgages, loans with teaser rates or subprime loans or any other loans considered “high risk loans”. Loans totaled $1.97 billion at September 30, 2017 compared to $1.05 billion at December 31, 2016, an increase of $919.96 million, of which increase $104.2 million was attributable to organic growth and the remaining was attributable to the acquired loan portfolio from Middleburg. The organic increase in loans reflects results from our marketing outreach as well as continued improvement in loan demand by local businesses. Please see Note 4 to the consolidated financial

statements for a table that summarizes the composition of the Corporation’s loan portfolio. The following is a summary of the loan portfolio at September 30, 2017.

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

Commercial Real Estate Loans - Owner Occupied: This category of loans was comprised of owner occupied loans secured by the commercial property. Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.

Commercial Real Estate Loans - Non-Owner Occupied: This category of loans was comprised of loans secured by income producing commercial property. Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.

Residential Real Estate Loans: Residential real estate loans represented the largest segment of the loan portfolio. This category included loans secured by first or second mortgages on one to four family residential properties. This category is comprised of following sub-categories of the whole residential real estate loan portfolio: home equity lines of credit, first trust mortgage loans, and junior trust loans.

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

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

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

Loans Held for Sale (“LHFS”)

LHFS are residential mortgage loans originated by the Mortgage Division of the Bank to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans are sold with the servicing released to the investor. At September 30, 2017, LHFS at fair value totaled $26.23 million compared to $35.68 million at December 31, 2016.

The LHFS are closed by the Mortgage Division and held on average fifteen to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries of large financial institutions. During the third quarter of 2017, we originated $107.7 million of loans processed in this manner, compared to $168.8 million for the third quarter of 2016. For the nine month period of 2017, we originated $319.2 million of loans processed in this manner, compared to $429.4 million for the same period of 2016. Loans are sold without recourse and subject to industry standard representations and warranties that may require the repurchase by the Bank of loans previously sold. The repurchase risks associated with this activity center around early payment defaults and borrower fraud.

Allowance for Loan Losses

The allowance for loan losses totaled $15.69 million at September 30, 2017, compared to $16.01 million at December 31, 2016. The allowance for loan losses was equivalent to 0.80% and 1.53% of total loans held for investment at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017, the allowance for loan losses of $15.69 million and the remaining credit and fair value marks on the purchased loan portfolio of $13.14 million was equivalent to 1.46% of total loans held for investment. Adequacy of the allowance is assessed and increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible. For additional information about the allowance for loan losses, please see Note 5 to the consolidated financial statements.

Non-performing Assets

At September 30, 2017 and December 31, 2016, the Bank had non-performing assets totaling $7.82 million and $6.92 million, respectively. Non-performing assets consist of non-accrual loans and other real estate owned. All non-performing loans are carried at the expected liquidation value of the underlying collateral.

The following table is a summary of our non-performing assets at September 30, 2017 and December 31, 2016.



	September 30,			December 31,
(In Thousands)	2017			2016
Nonaccrual loans:
Commercial real estate - owner occupied	$	—		$	—
Commercial real estate - non-owner occupied	—			—
Real estate construction	26			940
Residential real estate	572			431
Commercial	5,236			5,551
Consumer	3			—
Total nonaccrual loans	5,837			6,922
OREO	1,980			—
Total non-performing assets	$	7,817		$	6,922

Restructured loans included above in non-accrual loans	$	903		$	2,940

Ratio of non-performing assets to:
Total loans plus OREO	0.40		%	0.66		%
Total assets	0.27		%	0.48		%

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

Deposits

Deposits are the primary sources of funding loan growth. At September 30, 2017, deposits totaled $2.29 billion compared to $1.05 billion at December 31, 2016, an increase of $1.23 billion. Noninterest-bearing deposits increased $348.66 million from $362.0 million at December 31, 2016 to $710.7 million at September 30, 2017. Interest-bearing demand deposits increased $364.6 million from $126.2 million at December 31, 2016 to $490.8 million at September 30, 2017. Savings and money market deposits increased $344.4 million from $314.4 million at December 31, 2016 to $658.8 million at September 30, 2017. Time deposits increased $174.3 million from $251.7 million at December 31, 2016 to $426.0 million at September 30, 2017.

Shareholders’ Equity

Shareholders’ equity totaled $420.2 million at September 30, 2017 compared to $120.53 million at December 31, 2016. The increase in shareholders’ equity is due mainly to the issuance of 9,516,097 of common shares in conjunction with the strategic merger with Middleburg. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are classified as well capitalized, which is the highest rating.

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



	September 30,			December 31,
	2017			2016
	(In Thousands)
Tier 1 Capital:
Common stock	$	17,076		$	8,881
Additional paid in capital	305,682			21,779
Retained earnings	98,607			91,439
Less: Disallowed goodwill and other disallowed intangible assets	(179,900		)	(1,432		)
Less: Disallowed servicing assets and loss on equity security	(170		)	(350		)
Total Tier 1 capital	241,295			120,317

Allowance for loan losses	16,492			14,692

Total risk based capital	$	257,787		$	135,009

Risk weighted assets	$	2,106,301		$	1,173,330

Quarterly average assets	$	2,922,105		$	1,351,708
							Regulatory
							Minimum
Risk-Based Capital Ratios:
Common equity tier 1 capital ratio	11.46%			10.25%			5.25%
Tier 1 capital ratio	11.46%			10.25%			6.75%
Total capital ratio	12.24%			11.51%			8.75%
Leverage Capital Ratios:
Tier 1 leverage ratio	8.80%			8.90%			4.00%

Results of Operations

Summary

Third quarter 2017 pre-tax earnings were $9.42 million, up $2.52 million from the third quarter of 2016 due mainly to an increase in net interest income. Net income for the third quarter of 2017 totaled $7.00 million compared to $4.43 million for the same period in 2016. Earnings per diluted share were $0.34 for the third quarter of 2017, compared to $0.41 per diluted share in the same period of 2016.

Pre-tax earnings for the nine months ended September 30, 2017 were $19.46 million, down $1.20 million from the same period in 2016 due mainly to merger-related costs of $6.7 million, a goodwill impairment charge of $1.49 million, and an increase in the provision for loan losses of $2.33 million. Net income for the nine months ended September 30, 2017 totaled $13.46 million

compared to $13.40 million for the same period in 2016. Earnings per diluted share were $0.77 for the nine month period of 2017, compared to $1.26 per diluted share in the same period of 2016.

The commercial banking segment’s net interest income was $24.36 million for the third quarter of 2017 when compared to $10.89 million for the third quarter of 2016. This was offset by salaries and employee benefit expenses of $7.33 million for the third quarter of 2017 compared to $3.98 million for the third quarter of 2016. The mortgage banking segment has been relatively unaffected by the merger, contributing pre-tax earnings of $1.13 million or 12% of the consolidated total compared to $2.41 million for the third quarter of 2016. The trust and wealth management segment saw a $848 thousand and $1.93 million increase in revenue, which was offset by an increase in operating expenses of $1.92 million and $2.79 million for the three and nine month periods ended September 30, 2017 when compared to the same periods in 2016. Impacting the trust and wealth management segment was a $1.49 million pre-tax impairment to goodwill. We expect that the earnings contributions from the trust and wealth management segment will be developing over the next few quarters as the unprofitable operations of the legacy Access segment are integrated with and suppress the profitable operations of Middleburg Investment Group. Management anticipates that the departure of underperforming personnel and loss of select underpriced accounts during the transition will result in reduced overhead of a greater magnitude than loss of revenue contribution from associated lost business. Management believes that the leadership of Middleburg Investment Group and the expanded capabilities resulting from the strategic Merger are enhancing the client value proposition in a way that we expect will produce consistent and growing fee income.

The commercial banking segment’s net interest income was $59.94 million for the first nine months of 2017 when compared to $31.72 million for the first nine months of 2016. This was offset by salaries and employee benefit expenses of $19.99 million for the nine months ended September 30, 2017 compared to $12.07 million for the same period of 2016. The mortgage banking segment contributed pre-tax earnings of $3.14 million for the nine months ended September 30, 2017 compared to $5.70 million for the same period of 2016. The trust and wealth management segment saw a $1.93 million increase in revenue when comparing the first nine months of 2017 to 2016, which was offset by an increase in operating expenses of $2.79 million when comparing the first nine months of 2017 to the same period of 2016. Included in the increase to operating expenses was a goodwill impairment charge totaling $1.49 million.

Net Interest Income

Net interest income, the principal source of earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan losses totaled $24.59 million for the three months ended September 30, 2017 compared to $11.14 million for the same period in 2016. The annualized yield on earning assets was 4.23% for the quarter ended September 30, 2017 compared to 4.01% for the same period in 2016. The cost of interest-bearing demand deposits and borrowings decreased to 0.70% for the quarter ended September 30, 2017 compared to the quarter ended September 30, 2016 at 0.81%. Net interest margin was 3.76% for the quarter ended September 30, 2017 compared to 3.49% for the same period in 2016.

Net interest income before the provision for loan losses totaled $60.46 million for the nine months ended September 30, 2017 compared to $32.45 million for the same period in 2016. The annualized yield on earning assets was 4.34% for the nine months ended September 30, 2017 compared to 4.04% for the same period in 2016. The cost of interest-bearing demand deposits and borrowings decreased to 0.73% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 at 0.78%. Net interest margin was 3.84% for the nine months ended September 30, 2017 compared to 3.54% for the same period in 2016.

Volume and Rate Analysis

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



	Three Months Ended September 30,									Nine Months Ended September 30,
	2017 compared to 2016									2017 compared to 2016
	Change Due To:									Change Due To:
	Increase /									Increase /
	(Decrease)			Volume			Rate			(Decrease)			Volume			Rate
	(In Thousands)
Interest Earning Assets:
Investments	$	1,959		$	1,665		$	294		$	4,434		$	3,378		$	1,056
Loans held for sale	(275		)	(352		)	77			(509		)	(635		)	126
Loans	12,934			12,643			291			26,883			25,407			1,476
Interest-bearing deposits	296			128			168			482			175			307
Total increase in interest income	14,914			14,084			830			31,290			28,325			2,965

Interest-Bearing Liabilities:
Interest-bearing demand deposits	285			296			(11		)	550			566			(16		)
Money market deposit accounts	564			336			228			1,122			638			484
Savings accounts	43			90			(47		)	255			310			(55		)
Time deposits	398			517			(119		)	859			977			(118		)
Total interest-bearing deposits	1,290			1,239			51			2,786			2,491			295
FHLB Short-term borrowings	173			64			109			459			65			394
Securities sold under agreements to repurchase	12			12			—			47			35			12
FHLB Long-term borrowings	(12		)	22			(34		)	(7		)	14			(21		)
Total increase in interest expense	1,463			1,337			126			3,285			2,605			680

Increase in net interest income	$	13,451		$	12,747		$	704		$	28,005		$	25,720		$	2,285

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

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



Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities

	Three Months Ended
	September 30, 2017						September 30, 2016
	Average			Income/		Yield /	Average			Income/		Yield /
(In Thousands)	Balance			Expense		Rate	Balance			Expense		Rate
Assets:
Interest-earning assets:
Securities	$	449,645		$	2,992	2.66%	$	191,794		$	1,033	2.15%
Loans held for sale	28,734			299		4.16%	63,667			574		3.61%
Loans ⁽¹⁾	2,002,842			24,007		4.79%	947,622			11,073		4.67%
Interest-bearing balances and federal funds sold	136,222			394		1.16%	72,680			98		0.54%
Total interest-earning assets	2,617,443			27,692		4.23%	1,275,763			12,778		4.01%
Noninterest-earning assets:
Cash and due from banks	36,260						13,251
Premises, land and equipment	30,382						6,819
Other assets	253,424						42,642
Less: allowance for loan losses	(15,404		)				(13,964		)
Total noninterest-earning assets	304,662						48,748
Total Assets	$	2,922,105					$	1,324,511

Liabilities and Shareholders' Equity:
Interest-bearing deposits:
Interest-bearing demand deposits	$	483,370		$	412	0.34%	$	137,387		$	127	0.37%
Money market deposit accounts	435,241			821		0.75%	224,548			257		0.46%
Savings accounts	199,109			90		0.18%	37,892			47		0.50%
Time deposits	448,566			1,316		1.17%	277,014			918		1.33%
Total interest-bearing deposits	1,566,286			2,639		0.67%	676,841			1,349		0.80%
Borrowings:
FHLB short-term borrowings and subordinated debt	62,726			242		1.54%	38,043			69		0.73%
Securities sold under agreements to repurchase and federal funds purchased	58,149			16		0.11%	14,881			4		0.11	%
FHLB long-term borrowings	82,790			201		0.97%	75,000			213		1.14%
Total borrowings	203,665			459		0.90%	127,924			286		0.89%
Total interest-bearing deposits and borrowings	1,769,951			3,098		0.70%	804,765			1,635		0.81%
Noninterest-bearing liabilities:
Demand deposits	711,474						390,997
Other liabilities	22,002						10,095
Total liabilities	2,503,427						1,205,857
Shareholders' Equity	418,678						118,654
Total Liabilities and Shareholders' Equity	$	2,922,105					$	1,324,511
Interest Spread ⁽²⁾						3.53%						3.19%
Net Interest Margin ⁽³⁾				$	24,594	3.76%				$	11,143	3.49%

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

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

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



Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities

	Nine Months Ended
	September 30, 2017						September 30, 2016
	Average			Income/		Yield /	Average			Income/		Yield /
(In Thousands)	Balance			Expense		Rate	Balance			Expense		Rate
Assets:
Interest-earning assets:
Securities	$	354,529		$	7,388	2.78%	$	183,182		$	2,954	2.15%
Loans held for sale	27,165			846		4.15%	47,935			1,355		3.77%
Loans ⁽¹⁾	1,614,893			59,405		4.90%	922,821			32,522		4.70%
Interest-bearing balances and federal funds sold	105,360			746		0.94%	69,860			264		0.50%
Total interest-earning assets	2,101,947			68,385		4.34%	1,223,798			37,095		4.04%
Noninterest-earning assets:
Cash and due from banks	21,552						12,493
Premises, land and equipment	21,692						6,782
Other assets	265,578						38,142
Less: allowance for loan losses	(14,666		)				(13,733		)
Total noninterest-earning assets	294,156						43,684
Total Assets	$	2,396,103					$	1,267,482

Liabilities and Shareholders' Equity:
Interest-bearing deposits:
Interest-bearing demand deposits	$	352,647		$	910	0.34%	$	131,859		$	360	0.36%
Money market deposit accounts	352,525			1,644		0.62%	185,839			522		0.37%
Savings accounts	146,773			392		0.36%	35,047			137		0.52%
Time deposits	405,419			3,614		1.19%	296,099			2,755		1.24%
Total interest-bearing deposits	1,257,364			6,560		0.70%	648,844			3,774		0.78%
Borrowings:
FHLB short-term borrowings and subordinated debt	70,063			739		1.41%	58,467			280		0.64%
Securities sold under agreements to repurchase and federal funds purchased	46,209			58		0.17%	15,433			11		0.10%
FHLB long-term borrowings	73,040			569		1.04%	71,332			576		1.08%
Total borrowings	189,312			1,366		0.96%	145,232			867		0.80%
Total interest-bearing deposits and borrowings	1,446,676			7,926		0.73%	794,076			4,641		0.78%
Noninterest-bearing liabilities:
Demand deposits	552,775						349,339
Other liabilities	16,274						9,229
Total liabilities	2,015,725						1,152,644
Shareholders' Equity	380,378						114,838
Total Liabilities and Shareholders' Equity	$	2,396,103					$	1,267,482
Interest Spread ⁽²⁾						3.61%						3.26%
Net Interest Margin ⁽³⁾				$	60,459	3.84%				$	32,454	3.54%

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

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

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

Noninterest Income

Noninterest income consists of revenue generated from financial services and activities other than lending and investing. Total noninterest income was $8.52 million for the third quarter of 2017 compared to $8.69 million for the same period in 2016. Gains on the sale of loans originated by the Bank’s mortgage segment are the largest component of noninterest income. Gains on the sale of loans totaled $5.59 million for the quarter ended September 30, 2017, compared to $8.32 million for the same period of

2016. Gains on the sale of loans fluctuate with the volume of mortgage loans originated. During the three months ended September 30, 2017, the Bank’s mortgage segment originated $107.71 million in mortgage and brokered loans, down from $168.77 million for the same period in 2016.

Total noninterest income was $23.41 million for the nine months ended September 30, 2017 compared to $24.68 million for the same period in 2016. Gains on the sale of loans totaled $14.99 million for the nine months ended September 30, 2017, compared to $19.42 million for the same period of 2016. During the nine months ended September 30, 2017, the Bank’s mortgage segment originated $319.16 million in mortgage and brokered loans, down from $429.42 million for the same period in 2016.

Noninterest Expense

Noninterest expense totaled $22.79 million for the three months ended September 30, 2017, compared to $12.17 million for the same period in 2016, an increase of $10.62 million. Salaries and employee benefits totaled $11.10 million for the three months ended September 30, 2017, compared to $8.21 million for the same period in 2016. Other operating expenses totaled $8.67 million for the three months ended September 30, 2017, compared to $3.19 million for the same period in 2016.

Noninterest expense totaled $61.21 million for the nine months ended September 30, 2017, compared to $35.60 million for the same period in 2016, an increase of $25.61 million. Salaries and employee benefits totaled $31.80 million for the nine months ended September 30, 2017, compared to $24.28 million for the same period in 2016. Other operating expenses totaled $23.59 million for the nine months ended September 30, 2017, compared to $9.04 million for the same period in 2016.

The table below provides the composition of other operating expenses.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In Thousands)
Merger related expenses	$	1,012	$	—	$	6,747	$	—
Data processing	77		263		1,226		669
Amortization	839		13		1,642		37
Business and franchise tax	515		238		985		717
FDIC insurance	387		168		1,248		475
Consulting fees	314		284		870		584
Advertising and promotional	211		142		548		541
Accounting and auditing	255		154		694		460
Investor fees	162		212		463		541
Telephone	256		94		519		281
Regulatory examinations	100		69		282		207
Stock option	107		83		310		251
Director fees	192		93		496		279
Credit report	106		77		292		199
Legal fees	158		47		285		117
Insurance	99		82		322		188
Publication and subscription	118		61		281		218
Disaster recovery	93		46		204		151
Office supplies-stationary print	136		52		288		149
FRB and bank analysis charges	87		43		179		123
Dues and memberships	38		20		109		67
Management fees	137		448		295		935
Verification fees	38		46		119		118
Travel	39		28		156		125
SBA guarantee fee	36		35		104		112
Early payoff	71		4		121		215
Business development and meals	21		23		79		83
Automotive	17		15		50		41
Appraisal fee	9		11		33		30
Courier	31		13		79		42
Common stock	6		40		57		81
Education and training	26		24		57		151
Bank paid closing costs	8		4		55		23
Postage	6		22		95		69
Goodwill impairment	1,491		—		1,491		—
Other	1,476		239		2,813		761
	$	8,674	$	3,193	$	23,594	$	9,040

Liquidity Management

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

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and maturities of investment securities. Other short-term investments such as federal funds sold and interest-bearing deposits with other banks provide an additional source of liquidity funding. At September 30, 2017, overnight interest-bearing balances totaled $117.2 million and unpledged available-for-sale investment securities totaled approximately $39.66 million.

The Bank proactively manages a portfolio of short-term time deposits issued to local municipalities and wholesale depositors in order to fund loans held for sale and short-term investments. As of September 30, 2017, the portfolio of CDARS deposits, Insured Cash Sweep (ICS) deposits, and wholesale time deposits totaled $157.91 million compared to $132.60 million at December 31, 2016, respectively.

The liability portion of the balance sheet provides liquidity through various interest-bearing and noninterest-bearing deposit accounts, federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings. At September 30, 2017, the Bank had a line of credit with the FHLB totaling $505.99 million and had outstanding $24.93 million in short-term borrowings, $60.0 million in long-term loans, and a $65.00 million public deposit letter of credit from the Commonwealth of Virginia Treasury Board. In addition to the line of credit at the FHLB, the Bank issues repurchase agreements. As of September 30, 2017, outstanding repurchase agreements totaled $54.60 million. The Bank also maintains federal funds lines of credit with its correspondent banks and, at September 30, 2017, these lines totaled $62.40 million and were available as an additional funding source.

The following table presents the composition of borrowings at September 30, 2017 and December 31, 2016 as well as the average balances for the nine months ended September 30, 2017 and the twelve months ended December 31, 2016.



Borrowed Funds Distribution
(In Thousands)	September 30, 2017			December 31, 2016
Borrowings:
FHLB short-term borrowings	$	24,925		$	129,000
Trust preferred debentures	3,863			—
Securities sold under agreements to repurchase and federal funds purchased	54,602			57,009
FHLB long-term borrowings	60,000			60,000
Total	$	143,390		$	246,009

	September 30, 2017			December 31, 2016
Borrowings - Average Balances:
FHLB short-term borrowings and subordinated debt	$	70,063		$	40,252
Securities sold under agreements to repurchase and federal funds purchased	46,209			16,038
FHLB long-term borrowings	73,040			68,525
Total	$	189,312		$	125,047

Average rate paid on all borrowed funds	0.96		%	0.91		%

Management believes the Corporation is well positioned with liquid assets, the ability to generate liquidity through liability funding and the availability of borrowed funds, to meet the liquidity needs of depositors and customers’ borrowing needs. The Corporation’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on the Corporation’s liquidity levels, its capital position, conditions in the capital markets and other factors, the Corporation may from time to time consider the issuance of debt, equity or other securities, or other possible capital markets transactions, the proceeds of which could provide additional liquidity for its operations.

Contractual Obligations

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Sensitivity Management

The Corporation uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities. The table below reflects the outcome of these analyses at September 30, 2017 and December 31, 2016, assuming budgeted growth in the balance sheet. According to the model run for the nine month period ended September 30, 2017, and projecting forward over a twelve month period, an immediate 100 basis point increase in interest rates would result in a decrease in net interest income of 0.06%. Modeling for an immediate 100 basis point decrease in interest rates has been suspended due to the current rate environment. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to mitigate any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

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



Increase in Federal Funds Target Rate	Hypothetical Percentage Change in Net Interest Income September 30, 2017	Hypothetical Percentage Change in Net Interest Income December 31, 2016
3.00%	(0.31)%	2.63%
2.00%	(0.15)%	1.80%
1.00%	(0.06)%	0.90%

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Corporation’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit 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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As previously noted, we completed the acquisition of Middleburg on April 1, 2017. We have begun the process of analyzing Middleburg’s systems of disclosure controls and procedures and internal controls over financial reporting and integrating them within our framework of controls. In accordance with the SEC’s rules, we plan to complete this process by the first anniversary of the Middleburg acquisition. There have been no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the fiscal quarter ended September 30, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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




(In thousands, except for per share amounts)	Total number of shares purchased	Average price paid per share ($)		Total number of shares purchased as part of a publicly announced plan	Maximum number of shares that may yet be purchased under the plan
July 1, 2017 - July 31, 2017	—	$	—	—	$	768,781
August 1, 2017 - August 31, 2017	—	$	—	—	$	768,781
September 1, 2017 - September 30, 2017	—	$	—	—	$	768,781
Total	—	$	—	—	$	768,781

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



2.1	Agreement and Plan of Reorganization, dated as of October 21, 2016, between Access National Corporation and Middleburg Financial Corporation (incorporated by reference to Exhibit 2.1 to Form 8-K filed October 25, 2016 (file number 000-49929))
3.1	Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed July 18, 2006 (file number 000-49929))
3.1.1	Articles of Amendment to Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1.1 to Form 10-Q filed August 15, 2011 (file number 000-49929))
3.2	Amended and Restated Bylaws of Access National Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K filed October 24, 2007 (file number 000-49929))Certain instruments relating to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of Access National Corporation's total assets have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
10.13	Employment Agreement, dated as of August 8, 2017 and effective April 1, 2017, by and between Access National Bank, Access National Corporation and Michael W. Clarke (incorporated by reference to Exhibit 10.13 to Form 10-Q filed August 11, 2017)
10.14	Employment Agreement, dated as of August 8, 2017 and effective April 1, 2017, by and between Access National Bank, Access National Corporation and Robert C. Shoemaker (incorporated by reference to Exhibit 10.14 to Form 10-Q filed August 11, 2017)
10.15	Employment Agreement, dated as of August 8, 2017 and effective April 1, 2017, by and between Access National Bank and Dean F. Hackemer (incorporated by reference to Exhibit 10.15 to Form 10-Q filed August 11, 2017)
10.16	Employment Agreement, dated as of August 8, 2017 and effective April 1, 2017, by and between Access National Bank, Access National Corporation and Margaret M. Taylor (incorporated by reference to Exhibit 10.16 to Form 10-Q filed August 11, 2017)
10.2	Access National Corporation 2017 Equity Compensation Plan, effective October 26, 2017 (incorporated by reference to Exhibit 10.18 to Form 8-K filed November 1, 2017
31.1*	Rule 13a-14(a) Certification of Chief Executive Officer
31.2*	Rule 13a-14(a) Certification of Chief Financial Officer
32*	Statement of Chief Executive Officer and Chief Financial Officer Pursuant to §906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350)
101	The following materials from Access National Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in Extensible Business Reporting Language (XBRL), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited)
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	XBRL Taxonomy Extension Definition Linkbase
101.LAB*	XBRL Taxonomy Extension Label Linkbase
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

*filed herewithin

SIGNATURES

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



		ACCESS NATIONAL CORPORATION
		(Registrant)
Date:	November 9, 2017	/s/ Michael W. Clarke
		Michael W. Clarke
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	November 9, 2017	/s/ Margaret M. Taylor
		Margaret M. Taylor
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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