Xenith Bankshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.01 - EXHIBIT 32.01 - Xenith Bankshares, Inc.	a20170930exhibit321.htm
EX-31.02 - EXHIBIT 31.02 - Xenith Bankshares, Inc.	a20170930exhibit312.htm
EX-31.01 - EXHIBIT 31.01 - Xenith Bankshares, Inc.	a20170930exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

Commission File Number: 001-32968

Xenith Bankshares, Inc.

(Exact name of registrant as specified in its charter)




Virginia	54-2053718
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(804) 433-2200

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company) Emerging growth company ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨ No x

The number of shares of the issuer's Common Stock, par value $0.01 per share, outstanding as of October 31, 2017 was 23,215,836 shares.

XENITH BANKSHARES, INC.

Table of Contents



PART I	FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

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

	Consolidated Statements of Income	4
	Three and Nine Months Ended September 30, 2017 and 2016

	Consolidated Statements of Comprehensive Income	5
	Three and Nine Months Ended September 30, 2017 and 2016

	Consolidated Statement of Changes in Shareholders' Equity	6
	Nine Months Ended September 30, 2017

	Consolidated Statements of Cash Flows	7
	Nine Months Ended September 30, 2017 and 2016

	Notes to Consolidated Financial Statements	9

ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION	46
	AND RESULTS OF OPERATIONS

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	68

ITEM 4	CONTROLS AND PROCEDURES	69

PART II	OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS	70

ITEM 1A	RISK FACTORS	70

ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	70

ITEM 6	EXHIBITS	71

	SIGNATURES	72

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

As of September 30, 2017 and December 31, 2016



(unaudited)
(in thousands, except share data)	September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	14,960		$	18,825
Interest-bearing deposits in other banks	13,398			4,797
Overnight funds sold and due from Federal Reserve Bank	136,795			103,372
Investment securities available for sale, at fair value	305,768			317,443
Restricted equity securities, at cost	22,044			24,313
Loans held for sale	19,397			—
Loans	2,424,140			2,464,056
Allowance for loan losses	(16,265		)	(21,940		)
Net loans	2,407,875			2,442,116
Premises and equipment, net	55,178			56,996
Interest receivable	8,673			8,806
Other real estate owned and repossessed assets,
net of valuation allowance	4,817			5,345
Goodwill	26,931			26,931
Core deposit intangible, net	3,393			3,787
Net deferred tax assets, net of valuation allowance	148,425			157,825
Bank-owned life insurance	73,431			72,104
Other assets	14,686			13,969
Assets of discontinued operations	—			10,563
Totals assets	$	3,255,771		$	3,267,192
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing demand	$	541,275		$	501,678
Interest-bearing:
Demand and money market	1,187,551			1,113,453
Savings	95,053			86,739
Time deposits less than $250	713,527			785,303
Time deposits $250 or more	67,984			84,797
Total deposits	2,605,390			2,571,970
Federal Home Loan Bank borrowings	105,000			172,000
Other borrowings	39,197			38,813
Interest payable	812			829
Other liabilities	20,439			19,093
Liabilities of discontinued operations	672			849
Total liabilities	2,771,510			2,803,554
Commitments and contingencies
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized; none issued
and outstanding	—			—
Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 23,215,318 and 23,123,518 shares issued
and outstanding on September 30, 2017 and December 31, 2016,
respectively	232			231
Capital surplus	711,377			710,916
Accumulated deficit	(226,252		)	(245,538		)
Accumulated other comprehensive loss, net of tax	(1,096		)	(2,428		)
Total shareholders' equity before non-controlling interest	484,261			463,181
Non-controlling interest of discontinued operations	—			457
Total shareholders' equity	484,261			463,638
Total liabilities and shareholders' equity	$	3,255,771		$	3,267,192

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2017 and 2016



(unaudited)	Three Months Ended						Nine Months Ended
(in thousands)	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Interest Income
Loans, including fees	$	28,168		$	25,513		$	82,676		$	58,797
Investment securities	1,986			1,763			6,251			4,476
Overnight funds sold and deposits in other banks	258			96			734			179
Total interest income	30,412			27,372			89,661			63,452
Interest Expense
Deposits:
Demand and money market	1,822			1,391			5,082			3,075
Savings	63			40			180			81
Time deposits	2,265			2,169			6,890			5,746
Interest expense on deposits	4,150			3,600			12,152			8,902
Federal Home Loan Bank borrowings	299			109			594			109
Other borrowings	738			652			2,128			1,706
Total interest expense	5,187			4,361			14,874			10,717
Net interest income	25,225			23,011			74,787			52,735
Provision for loan losses	—			10,685			9			10,704
Net interest income after provision for loan losses	25,225			12,326			74,778			42,031
Noninterest Income
Service charges on deposit accounts	1,258			1,191			3,561			3,447
Earnings from bank-owned life insurance	426			395			1,327			1,046
Gain on sale of loans	—			—			38			—
Net gain on sale of investment securities available for sale	977			—			977			15
Visa check card income	806			709			2,399			2,056
Other	705			575			2,822			1,430
Total noninterest income	4,172			2,870			11,124			7,994
Noninterest Expense
Salaries and employee benefits	9,914			9,880			30,186			24,990
Professional and consultant fees	830			978			2,792			2,101
Occupancy	1,802			1,594			5,586			4,428
FDIC insurance	349			679			1,498			1,524
Data processing and technology	1,367			1,446			3,909			3,985
Problem loan and repossessed asset costs	(1		)	219			306			420
Impairments on and (gains) and losses from sales of other real estate owned and repossessed assets	(48		)	685			63			112
Equipment	322			309			1,049			812
Board fees	350			493			596			1,133
Advertising and marketing	158			398			667			503
Merger-related	930			12,910			2,895			15,555
Other	2,806			2,944			8,202			6,854
Total noninterest expense	18,779			32,535			57,749			62,417
Income (loss) from continuing operations before provision (benefit) for income taxes	10,618			(17,339		)	28,153			(12,392		)
Provision (benefit) for income taxes - continuing operations	3,453			(64,840		)	8,997			(62,794		)
Net income from continuing operations	7,165			47,501			19,156			50,402
Net (loss) income from discontinued operations before (benefit) provision for income taxes	(26		)	2,011			(262		)	3,900
(Benefit) provision for income taxes - discontinued operations	(5		)	842			(65		)	877
Net (loss) income from discontinued operations attributable to non-controlling interest	(14		)	806			(129		)	1,556
Net (loss) income from discontinued operations	(7		)	363			(68		)	1,467
Net income attributable to Xenith Bankshares, Inc.	$	7,158		$	47,864		$	19,088		$	51,869

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended September 30, 2017 and 2016



(unaudited)	Three Months Ended					Nine Months Ended
(in thousands)	September 30, 2017			September 30, 2016		September 30, 2017			September 30, 2016
Net income attributable to Xenith Bankshares, Inc.	$	7,158		$	47,864	$	19,088		$	51,869
Other comprehensive income, net of tax:
Change in net unrealized gain on securities available for sale	339			475		3,026			$	4,178
Income tax effect	(119		)	—		(1,059		)	(1,340		)
Reclassification adjustment for net gain on sale of investment securities included in net income	(977		)	—		(977		)	(15		)
Income tax effect	342			—		342			5
Other comprehensive income, net of tax	(415		)	475		1,332			2,828
Comprehensive income attributable to Xenith Bankshares, Inc.	$	6,743		$	48,339	$	20,420		$	54,697

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the Nine Months Ended September 30, 2017



											Accumulated Other
(unaudited)	Common Stock				Capital			Accumulated			Comprehensive Income (Loss),			Non-controlling			Total Shareholders'
(in thousands, except share data)	Shares		Amount		Surplus			Deficit			Net of Tax			Interest			Equity
Balance at December 31, 2016	23,123,518		$	231	$	710,916		$	(245,538	)	$	(2,428	)	$	457		$	463,638
Net income	—		—		—			19,088			—			(129		)	18,959
Other comprehensive income, net of tax	—		—		—			—			1,332			—			1,332
Share-based compensation expense	—		—		1,530			—			—			—			1,530
Net settlement of restricted stock awards	36,824		—		(163		)	—			—			—			(163		)
Restricted stock awards issued under incentive plan	—		—		236						—			—			236
Restricted stock awards granted	14,823		—		—			—			—			—			—
Forfeiture of restricted stock awards	(404	)	—		—			—			—			—			—
Net exercises of stock options	40,557		1		529			—			—			—			530
Reclassification to other liabilities	—		—		—			—			—			(328		)	(328		)
Cumulative effect adjustment of adoption of accounting principle	—		—		—			198			—			—			198
Repurchase of U.S. Treasury warrant	—		$	—	$	(1,671	)	$	—		$	—		$	—		(1,671		)
Balance at September 30, 2017	23,215,318		$	232	$	711,377		$	(226,252	)	$	(1,096	)	$	—		$	484,261

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2017 and 2016



(unaudited)	Nine Months Ended
(in thousands)	September 30, 2017			September 30, 2016
Cash flows from operating activities
Net income from continuing operations	$	19,156		$	50,402
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	2,172			2,146
Deferred income tax expense	8,997			(67,536		)
Accretion and amortization of fair value adjustments	(2,246		)	(798		)
Amortization of core deposit intangible	394			—
Provision for loan losses	9			10,704
Share-based compensation expense	1,530			1,532
Net amortization of premiums and accretion of discounts on investment securities available for sale	4,587			1,541
Unrealized (gain) loss on investment securities available for sale	(2,049		)	—
Earnings from bank-owned life insurance	(1,327		)	(1,046		)
Gain on sale of investment securities available for sale	(977		)	(15		)
Impairments on and gains and losses from sales of other real estate owned and repossessed assets	63			56
Impairments on and gains and losses from sales of premises and equipment	(15		)	41
Gain on sale of loans	(38		)	—
Changes in:
Interest receivable	133			(625		)
Other assets	(768		)	10,883
Interest payable	(17		)	(103		)
Other liabilities	1,418			(37,483		)
Net cash provided by operating activities - continuing operations	31,022			(30,301		)
Net cash provided by operating activities - discontinued operations	9,796			1,835
Cash provided by operating activities	40,818			(28,466		)
Cash flows from investing activities
Cash acquired in acquisition	—			69,241
Proceeds from maturities and calls of investment securities available for sale	34,202			27,002
Proceeds from sale of investment securities available for sale	34,473			31,632
Purchase of investment securities available for sale	(56,512		)	(46,943		)
Proceeds from sale of restricted equity securities	18,573			11,317
Purchase of restricted equity securities	(16,303		)	(25,962		)
Proceeds from sale of guaranteed student loans	20,000			—
Net decrease (increase) in loans	(3,801		)	(107,841		)
Proceeds from sale of other real estate owned and repossessed assets, net	1,769			12,078
Purchases of premises and equipment, net	(339		)	(1,788		)
Net cash provided by (used in) investing activities - continuing operations	32,062			(31,264		)
Net cash (used in) investing activities - discontinued operations	—			1,473
Cash provided by (used in) investing activities	32,062			(29,791		)
Cash flows from financing activities
Net increase (decrease) in deposits	33,420			(74,615		)
Net (decrease) increase in short-term Federal Home Loan Bank borrowings	(67,000		)	172,500
Repayments of long term Federal Home Loan Bank borrowings	—			—
Net increase in other borrowings	—			8,405
Issuance of common stock related to bank acquisition	—			—
Proceeds from exercise of stock options	530			26
Repurchase of common stock in the settlement of restricted stock units	—			(970		)
Repurchase of treasury warrants	(1,671		)	—
Cash consideration paid in acquisition	—			(1		)
Reclassification to other liabilities	—			—
Distributed non-controlling interest	—			(925		)
Net cash (used in) provided by financing activities	(34,721		)	104,420
Increase in cash and cash equivalents	38,159			46,163
Cash and cash equivalents at beginning of period	126,994			63,746
Cash and cash equivalents at end of period	$	165,153		$	109,909
Supplemental cash flow information:

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



Cash paid for interest	$	14,870	$	10,140
Cash paid for income taxes	$	—	$	79
Supplemental non-cash information:
Change in unrealized gain on investment securities available for sale, net of tax	$	1,332	$	2,828
Transfer from other real estate owned and repossessed assets to loans	$	—	$	1,194
Transfer from loans to other real estate owned and repossessed assets	$	1,304	$	5,003
Transfer from premises and equipment to other real estate owned and repossessed assets	—		734
Non-cash transaction related to the Merger
Assets acquired	—		1,094,987
Liabilities assumed	—		1,002,793

See accompanying notes to unaudited consolidated financial statements.

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - Basis of Presentation

Xenith Bankshares, Inc. ("Xenith Bankshares" or the "Company") is the bank holding company for Xenith Bank (the "Bank"), a Virginia-based institution headquartered in Richmond, Virginia. As of September 30, 2017, the Company, through the Bank, operated 40 full-service branches and two loan production offices. Xenith Bank is a commercial bank specifically targeting the banking needs of middle market and small business, local real estate developers and investors, and retail banking clients. The Bank offers marine finance floorplan and end-user loans through its Shore Premier Finance unit. Xenith Bank's regional area of operations spans from Baltimore, Maryland, to Raleigh and eastern North Carolina, complementing its significant presence in greater Washington, D.C., greater Richmond, Virginia, and greater Hampton Roads, Virginia.

On May 19, 2017, the Company and Union Bankshares Corporation ("Union") entered into of an Agreement and Plan of Reorganization (the "Union Merger Agreement"), pursuant to which, and subject to terms and conditions set forth therein, Xenith Bankshares will merge with and into Union (the "Union Merger"), with Union surviving in the Union Merger. Pursuant to the Union Merger Agreement at the effective time of the Union Merger, holders of Xenith Bankshares' common stock will receive the right to 0.9354 shares of Union common stock in exchange for each share of the common stock outstanding at the effective time of the Union Merger, with cash paid in lieu of fractional shares.

The Company and Union have received regulatory approval for the Union Merger from the Federal Reserve Bank of Richmond and the Virginia State Corporation Commission. In addition, the shareholders of both the Company and Union have approved the Union Merger. The completion of the Union Merger is subject to certain normal and customary closing conditions, and it is currently anticipated that the closing of the Union Merger will occur during early January 2018.

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

Pursuant to the Legacy Xenith Merger Agreement, holders of Legacy Xenith common stock, par value $1.00 per share, received 4.4 shares of common stock of the Company, par value $0.01 per share (the "common stock"), for each share of Legacy Xenith common stock held immediately prior to the effective time of the Legacy Xenith Merger, with cash paid in lieu of fractional shares.

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

Unless otherwise stated herein or the context otherwise requires, references herein to "the Company" prior to the effective time of the Legacy Xenith Merger are to Hampton Roads Bankshares, Inc. and its wholly-owned subsidiaries, and references to "the Bank" are to The Bank of Hampton Roads. Unless otherwise stated herein or the context otherwise requires, references herein to "the Company" after the effective time of the Legacy Xenith Merger are to Xenith Bankshares, Inc. (f/k/a Hampton Roads Bankshares, Inc.) and its wholly-owned subsidiaries, and references to "the Bank" are to Xenith Bank (f/k/a The Bank of Hampton Roads). Information presented herein as of and for the three- and nine-month periods ended September 30, 2016 includes the operations of Legacy Xenith for the period since the effective time of the Legacy Xenith Merger, July 29, 2016.

In September 2016, the Company decided to cease operations of its mortgage banking business. In connection with this decision, the Bank entered into a definitive asset purchase agreement to sell certain assets of Gateway Bank Mortgage, Inc., a wholly-owned subsidiary of the Bank ("GBMI"), and to transition GBMI's operations, which included originating, closing, funding and selling first lien residential mortgage loans, to an unrelated party (the "GBMI Sale"). The completion of the GBMI Sale occurred on October 17, 2016. The operations of GBMI have been reported as discontinued operations for all periods presented herein.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In December 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement – Standard Terms with the United States Department of the Treasury (the “Treasury”), pursuant to which the Treasury purchased (i) shares of the Company’s preferred stock and (ii) a warrant to purchase shares of the Company’s common stock (the “Warrant”). On September 13, 2017, the Company repurchased the Warrant from the Treasury for an aggregate cash purchase price of $1.7 million, the fair market value of the Warrant as agreed upon by the Company and the Treasury, and canceled the Warrant. Following the Company’s repurchase of the Warrant, the Treasury has no remaining equity interest in the Company.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year. The Company has one banking subsidiary, the Bank, which constitutes substantially all of the Company's assets and operations.

Certain comparative balances have been reclassified to reflect current presentation. Any reclassification had no effect on total assets, total shareholders' equity or net income. All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

Use of Estimates in the Preparation of Financial Statements

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

Recent Accounting Pronouncements

During the second quarter of 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 represents a comprehensive reform of many of the revenue recognition requirements in GAAP. ASU 2014-09 creates a new topic Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("ASC 606"). ASC 606 will supersede the current revenue recognition requirements in ASC 605, Revenue Recognition, and will supersede or amend much of the industry-specific revenue recognition guidance found throughout the ASC. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASC 606 creates a five-step process for achieving that core principle: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when an entity has completed the performance obligations. ASC 606 also requires additional disclosures that allow users of the financial statements to understand the nature, timing and uncertainty of revenue and cash flows resulting from contracts with customers. The effective date of ASC 606 is for the year beginning January 1, 2018. The new revenue standard permits the use of

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

retrospective or cumulative effect transition methods. The Company has evaluated those revenue types that are specifically excluded from the application of ASC 606, including the majority of the Company's contracts with customers (i.e., financial instruments), and does not expect the adoption of this standard to have a material effect on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which is intended to improve the accounting for share-based payment transactions as part of the FASB's simplification initiative. ASU 2016-09 changes seven aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes; (6) practical expedient - expected term (nonpublic entities only); and (7) intrinsic value (nonpublic entities only). ASU 2016-09 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years.

In accordance with ASU 2016-09, and beginning in 2017, the Company recognizes excess tax benefits and tax deficiencies as income tax benefit or expense, respectively, in the reporting period in which they occur. Prior to the adoption of this standard, the Company recognized excess tax benefits as capital surplus only when the amounts reduced taxes payable. The adoption of the standard resulted in a cumulative effect adjustment to accumulated deficit of $198 thousand, which represents the amount of excess tax benefits that had not been previously recognized due to the Company's net operating loss position.

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

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

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"), which clarifies what constitutes a modification of a share-based payment award. ASU 2017-09 is effective for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company believes the adoption of this standard will not have a material effect on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), which changes the recognition and presentation requirements of hedge accounting, including eliminating the requirement to separately measure and report hedge ineffectiveness and presenting all items that affect earnings in the same income statement line as the hedged item. The ASU also provides new alternatives for applying hedge accounting to additional hedging strategies, measuring the hedged items in fair value hedges of interest rate risk, reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method, and reducing the risk of material error correction if a company applies the shortcut method inappropriately. ASU 2017-12 is effective for annual and interim periods in fiscal years beginning after December 15, 2018. The Company has not begun its evaluation of the effect this standard will have on its consolidated financial statements.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - Business Combination

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

The Legacy Xenith Merger combined two banks with complementary capabilities and geographical focus, therefore providing the opportunity for the organization to leverage its existing infrastructure, including people, processes and systems, across a larger asset base.

In accordance with the framework established by ASC Topic 820, Fair Value Measurements and Disclosure, the Company used a fair value hierarchy to prioritize the information used to form assumptions and estimates in determining fair values. These fair value hierarchies are further discussed in "Note 14 - Fair Value Measurements" in these consolidated financial statements.

The following table presents the summary unaudited balance sheet of Legacy Xenith as of the date of the Legacy Xenith Merger inclusive of the estimated fair value adjustments and the allocation of consideration paid in the Legacy Xenith Merger to the acquired assets and assumed liabilities. The allocation resulted in goodwill of $26.9 million, which represents the growth opportunities and franchise value the Bank has in the markets it serves.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Fair value of assets acquired:
Cash and cash equivalents	$	69,241
Securities	139,025
Loans	827,987
Premises and equipment	6,180
Other real estate owned	738
Core deposit intangible	4,006
Accrued interest receivable	4,464
Deferred tax asset	5,156
Bank owned life insurance	19,917
Other assets	17,879
Total assets	$	1,094,593
Fair value of liabilities assumed:
Deposits	$	956,078
Accrued interest payable	285
Supplemental executive retirement plan	2,162
Borrowings	36,533
Other liabilities	8,112
Total liabilities	$	1,003,170
Net identifiable assets acquired	$	91,423

Consideration paid:
Company's common shares issued (1)	58,915,439
Purchase price per share (2)	$	1.97
Value of common stock issued	$	116,063
Estimated fair value of stock options	2,290
Cash in lieu of fractional shares	1
Total consideration paid	118,354
Goodwill	$	26,931
_______________________
(1) The issuance of shares of common stock in the Legacy Xenith Merger preceded the Reverse Stock Split and the number of shares of common stock is presented on a pre-Reverse Stock Split basis.
(2) The value of the shares of common stock exchanged for shares of Legacy Xenith common stock was based upon the closing price of common stock at July 28, 2016, the last trading day prior to the date of completion of the Legacy Xenith Merger.

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



	Purchased Performing			Purchased Impaired			Total
Principal payments receivable	$	830,613		$	9,851		$	840,464
Fair value adjustment - credit and interest	(9,318		)	(3,159		)	(12,477		)
Fair value of acquired loans	$	821,295		$	6,692		$	827,987

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 - Discontinued Operations

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

As of December 31, 2016, there were no remaining loans to be funded and $9.9 million of loans related to GMBI were held for sale to investors, which are included in assets from discontinued operations in the Company's consolidated balance sheet as of December 31, 2016. As of the end of the first quarter of 2017, the operations of GBMI had been transitioned to the purchaser and there were no remaining loans held for sale and no assets remaining related to GBMI. Management believes, as of September 30, 2017, there are no significant on-going obligations with respect to the mortgage banking business that have not been recorded in the Company's consolidated financial statements. As of September 30, 2017, the Company had a liability of $672 thousand recorded as liabilities of discontinued operations on its consolidated balance sheets, which is a reserve for any future obligations.

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



	Three Months Ended						Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
Net interest income	$	7		$	133		$	11		$	440
Provision for loan losses	—			(3		)	(5		)	(22		)
Net interest income after provision for loan losses	7			136			16			462
Noninterest income	—			6,760			164			16,987
Noninterest expense:
Salaries and employee benefits	(1		)	3,901			247			10,368
Professional and consultant fees				73			5			204
Occupancy	2			176			7			590
Data processing	—			146			51			371
Equipment	10			13			2			56
Advertising and marketing	—			137			6			568
Other	22			439			124			1,392
Total noninterest expense	33			4,885			442			13,549
Net (loss) income before provision for income taxes	(26		)	2,011			(262		)	3,900
(Benefit) provision for income taxes	(5		)	842			(65		)	877
Net (loss) income	(21		)	1,169			(197		)	3,023
Net (loss) income attributable to non-controlling interest	(14		)	806			(129		)	1,556
Net (loss) income attributable to Xenith Bankshares, Inc.	$	(7	)	$	363		$	(68	)	$	1,467

NOTE 4 - Cash Reserves

To comply with regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirements for the periods closest to September 30, 2017 and December 31, 2016 were $62.9 million and $63.9 million, respectively. The Bank was in compliance with these requirements at September 30, 2017 and December 31, 2016.

NOTE 5 - Investment Securities

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	September 30, 2017
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Mortgage-backed securities
Agencies	$	127,298	$	450	$	495	$	127,253
Collateralized	63,716		68		800		62,984
Collateralized mortgage obligations	27,194		41		176		27,059
Asset-backed securities	6,686		—		75		6,611
Municipals
Tax-exempt	63,486		32		719		62,799
Taxable	17,958		—		277		17,681
Corporate bonds	975		—		—		975
Equity securities	141		265		—		406
Total securities available for sale	$	307,454	$	856	$	2,542	$	305,768



	December 31, 2016
			Gross		Gross
			Unrealized		Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Mortgage-backed securities
Agencies	$	135,054	$	793	$	957	$	134,890
Collateralized	63,837		61		1,145		62,753
Collateralized mortgage obligations	19,626		288		104		19,810
Asset-backed securities	14,866		—		108		14,758
Municipals
Tax-exempt	67,738		—		2,983		64,755
Taxable	18,105		1		430		17,676
Corporate bonds	983		1		—		984
Equity securities	969		848		—		1,817
Total securities available for sale	$	321,178	$	1,992	$	5,727	$	317,443

As of September 30, 2017 and December 31, 2016, the Company had available-for-sale securities with a fair value of $60.3 million and $83.0 million, respectively, pledged as collateral for public deposits, borrowings and other depositor requirements.

Unrealized Losses

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

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



		September 30, 2017
		Less than 12 Months				12 Months or More				Total
	Number of			Unrealized				Unrealized				Unrealized
	Securities	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
Mortgage-backed securities
Agencies	16	$	49,514	$	356	$	11,389	$	139	$	60,903	$	495
Collateralized	17	13,199		150		29,956		650		43,155		800
Collateralized mortgage obligations	7	25,499		176		—		—		25,499		176
Asset-backed securities	2	—		—		6,611		75		6,611		75
Municipals
Tax-exempt	36	8,998		143		8,682		134		17,680		277
Taxable	10	13,937		82		37,302		637		51,239		719
Total securities available for sale	88	$	111,147	$	907	$	93,940	$	1,635	$	205,087	$	2,542



		December 31, 2016
		Less than 12 Months				12 Months or More				Total
	Number of			Unrealized				Unrealized				Unrealized
	Securities	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
Mortgage-backed securities
Agencies	33	$	88,315	$	945	$	695	$	12	$	89,010	$	957
Collateralized	19	42,272		1,145		—		—		42,272		1,145
Collateralized mortgage obligations	6	7,216		104		—		—		7,216		104
Asset-backed securities	6	5,443		64		9,315		44		14,758		108
Municipals
Tax-exempt	44	64,755		2,983		—		—		64,755		2,983
Taxable	9	17,149		430		—		—		17,149		430
Total securities available for sale	117	$	225,150	$	5,671	$	10,010	$	56	$	235,160	$	5,727

Management evaluates investment securities for other-than-temporary impairment ("OTTI") at least quarterly and more frequently when economic or market conditions warrant such an evaluation. In evaluating OTTI, management considers many factors, including: (1) the length of time and the extent to which fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before its anticipated recovery. The assessment of whether an OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

In instances where an unrealized loss did occur, there was no indication of an adverse change in credit on any of the underlying securities noted in the tables above, and management believes no individual unrealized loss represented an OTTI as of those dates. The Company does not intend to sell, and it is not more likely than not that it will be required to sell, the investment securities before the recovery of their amortized cost basis, which may be at maturity.

Maturities of Investment Securities

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

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	September 30, 2017				December 31, 2016
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Municipals
Due in one year or less	$	254	$	254	$	502	$	502
Due after one year
but less than five years	14,121		13,950		11,300		11,072
Due after five years
but less than ten years	64,487		63,732		69,900		66,880
Due after ten years	2,582		2,544		4,141		3,977
Mortgage-backed securities
Agencies	127,298		127,253		135,054		134,890
Collateralized	63,716		62,984		63,837		62,753
Collateralized mortgage obligations	27,194		27,059		19,626		19,810
Corporate Bonds	975		975		983		984
Asset-backed securities	6,686		6,611		14,866		14,758
Equity securities	141		406		969		1,817
Total securities available for sale	$	307,454	$	305,768	$	321,178	$	317,443

Restricted Equity Securities

The Company's holds stock in the Federal Home Loan Bank ("FHLB") in the amount of $7.4 million and $10.1 million at September 30, 2017 and December 31, 2016, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, as it is required to be held in order to access FHLB advances (i.e., borrowings). The Company earns dividends from its investment in FHLB stock, and for the three months and nine months ended September 30, 2017 recorded an annualized dividend rate of 5.16% and 5.05%, respectively. The investment in FHLB stock is carried at cost as there is no active market or exchange for the stock other than the FHLB or member institutions.

The Company holds stock in the Federal Reserve Bank ("FRB") in the amount of $14.5 million and $14.0 million at September 30, 2017 and December 31, 2016, respectively. FRB stock is generally viewed as a long-term investment and as a restricted investment security, as it is required to be held to effect membership in the Federal Reserve. It is carried at cost as there is not an active market or exchange for the stock other than the FRB or member institutions.

The remaining restricted stock held by the Company, in the amount of $178 thousand at September 30, 2017 and December 31, 2016, is stock in other banks with which the Bank conducts or has the ability to conduct correspondent activity. These investments are also carried at cost as there is no readily available market for these securities.

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 - Loans and Allowance for Loan Losses

Loans are carried at their unpaid principal amount outstanding net of unamortized fees and origination costs, partial charge-offs, if any, and in the case of acquired loans, unaccreted fair value or purchase accounting adjustments. All lending decisions are based upon a thorough evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan.

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

The Company held guaranteed student loans ("GSLs"), which were originated under the Federal Family Education Loan Program ("FFELP"), authorized by the Higher Education Act of 1965, as amended. Pursuant to the FFELP, the student loans are substantially guaranteed by a guaranty agency and reinsured by the U.S. Department of Education. The Company had an agreement with a third-party servicer of student loans to provide all day-to-day operational requirements for the servicing of the loans. The GSLs carried a nearly 98% guarantee of principal and accrued interest. The GSLs were acquired in the Legacy Xenith Merger, and the carrying amount of the GSLs approximated the guaranteed portion of the loans. In each of the three-month periods ended June 30, 2017 and March 31, 2017, the Company sold a portion of the GSLs. In both periods, the proceeds from the sales were $9.9 million, and the gain on the sales was $19 thousand, which is recorded in noninterest income on the Company's consolidated statements of income. At September 30, 2017, GSLs are reported as held for sale in the consolidated balance sheet, as the Company had entered into an agreement to sell the remaining GSLs subsequent to September 30, 2017. Such sale occurred in October 2017, and the Company recorded a gain of $214 thousand on the sale.

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



	September 30, 2017		December 31, 2016
Commercial & Industrial	$	766,506	$	895,952
Construction	274,441		257,712
Commercial real estate	655,001		585,727
Residential real estate	390,071		405,291
Consumer	336,832		274,008
Guaranteed student loans	—		44,043
Deferred loan fees and related costs	1,289		1,323
Total loans	$	2,424,140	$	2,464,056

As of September 30, 2017 and December 31, 2016, the Company had $585.4 million and $625.0 million, respectively, of loans pledged to the FRB and the FHLB as collateral for borrowings.

Acquired Loans

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

Loans acquired with evidence of credit deterioration since origination and for which it is probable at the date of acquisition that contractually required principal and interest payments will not be collected are accounted for under ASC 310-30, Loans and Debt

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

ASC 310-30 requires periodic re-evaluation of expected cash flows for purchased credit-impaired loans subsequent to acquisition date. Decreases in expected cash flows attributable to credit will generally result in an impairment charge to earnings such that the accretable yield remains unchanged. Increases in expected cash flows will result in an increase in the accretable yield recognized in income over the remaining period of expected cash flows from the loan. Any impairment charge recorded as a result of a re-evaluation is recorded as an increase in the allowance for loan and lease losses.

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

Allowance for Loan Losses

The following table presents the allowance for loan loss activity by loan type for the periods stated:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016
Balance at beginning of period	$	17,027	$	22,903		$	21,940	$	23,157
Charge-offs:
Commercial & Industrial	186		84			5,199		1,160
Construction	6		—			61		635
Commercial real estate	21		—			743		663
Residential real estate	1,355		340			1,690		2,234
Consumer	8		3			671		45
Overdrafts	52		43			162		106
Total charge-offs	1,628		470			8,526		4,843
Recoveries:
Commercial & Industrial	418		173			840		2,833
Construction	37		167			732		911
Commercial real estate	95		11			398		341
Residential real estate	116		253			613		603
Consumer	183		7			221		23
Overdrafts	17		1			38		1
Total recoveries	866		612			2,842		4,712
Net charge-offs	762		(142		)	5,684		131
Provision for loan losses	—		10,685			9		10,704
Balance at end of period	$	16,265	$	33,730		$	16,265	$	33,730

The Company had recorded no allowance for loan losses on its GSL portfolio, as the carrying amount of the portfolio approximated the portion of the loans subject to federal guarantee.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	September 30, 2017
			Individually Evaluated		Collectively Evaluated
	Total Amount		for Impairment		for Impairment
Allowance for loan losses applicable to:
Purchased credit-impaired loans
Commercial & Industrial	$	—	$	—	$	—
Construction	—		—		—
Commercial real estate	—		—		—
Residential real estate	9		9		—
Consumer	—		—		—
Total purchased credit-impaired loans	9		9		—
Originated and other purchased loans
Commercial & Industrial	2,381		172		2,209
Construction	1,613		240		1,373
Commercial real estate	3,320		654		2,666
Residential real estate	3,126		1,306		1,820
Consumer	1,876		—		1,876
Unallocated qualitative	3,940		—		3,940
Total originated and other purchased loans	16,256		2,372		13,884
Total allowance for loan losses	$	16,265	$	2,381	$	13,884
Loan balances applicable to:
Purchased credit-impaired loans
Commercial & Industrial	$	758	$	758	$	—
Construction	935		935		—
Commercial real estate	987		987		—
Residential real estate	1,618		1,618		—
Consumer	45		45		—
Total purchased credit-impaired loans	4,343		4,343		—
Originated and other purchased loans
Commercial & Industrial	765,748		15,643		750,105
Construction	273,506		7,030		266,476
Commercial real estate	654,014		7,284		646,730
Residential real estate	388,453		11,312		377,141
Consumer	336,787		213		336,574
Deferred loan fees and related costs	1,289		—		1,289
Total originated and other purchased loans	2,419,797		41,482		2,378,315
Total loans	$	2,424,140	$	45,825	$	2,378,315

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	December 31, 2016
			Individually Evaluated		Collectively Evaluated
	Total Amount		for Impairment		for Impairment
Allowance for loan losses applicable to:
Purchased credit-impaired loans
Commercial & Industrial	$	—	$	—	$	—
Construction	—		—		—
Commercial real estate	—		—		—
Residential real estate	—		—		—
Consumer	—		—		—
Total purchased credit-impaired loans	—		—		—
Originated and other purchased loans
Commercial & Industrial	5,816		3,327		2,489
Construction	1,551		161		1,390
Commercial real estate	2,410		734		1,676
Residential real estate	5,205		1,275		3,930
Consumer	1,967		606		1,361
Guaranteed student loans	—		—		—
Unallocated qualitative	4,991		—		4,991
Total originated and other purchased loans	21,940		6,103		15,837
Total allowance for loan losses	$	21,940	$	6,103	$	15,837
Loan balances applicable to:
Purchased credit-impaired loans
Commercial & Industrial	$	897	$	897	$	—
Construction	992		992		—
Commercial real estate	1,090		1,090		—
Residential real estate	2,122		2,122		—
Consumer	55		55		—
Total purchased credit-impaired loans	5,156		5,156		—
Originated and other purchased loans
Commercial & Industrial	895,055		24,052		871,003
Construction	256,720		7,982		248,738
Commercial real estate	584,637		9,184		575,453
Residential real estate	403,169		12,637		390,532
Consumer	273,953		1,551		272,402
Guaranteed student loans	44,043		—		44,043
Deferred loan fees and related costs	1,323		—		1,323
Total originated and other purchased loans	2,458,900		55,406		2,403,494
Total loans	$	2,464,056	$	60,562	$	2,403,494

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	September 30, 2017
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	$	758	$	1,099	$	—
Construction	935		1,389		—
Commercial real estate	987		1,402		—
Residential real estate	1,571		2,067		—
Consumer	45		80		—
Originated and other purchased loans
Commercial & Industrial	10,871		12,398		—
Construction	6,559		15,513		—
Commercial real estate	5,026		5,745		—
Residential real estate	5,518		7,015		—
Consumer	213		235		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	—		—		—
Construction	—		—		—
Commercial real estate	—		—		—
Residential real estate	47		65		9
Consumer	—		—		—
Originated and other purchased loans
Commercial & Industrial	4,772		4,772		172
Construction	471		471		240
Commercial real estate	2,258		2,258		654
Residential real estate	5,794		5,832		1,306
Consumer	—		—		—
Total loans individually evaluated for impairment	$	45,825	$	60,341	$	2,381

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	$	897	$	1,298	$	—
Construction	992		1,448		—
Commercial real estate	1,090		1,520		—
Residential real estate	2,122		2,989		—
Consumer	55		92		—
Originated and other purchased loans
Commercial & Industrial	12,809		14,185		—
Construction	7,078		16,327		—
Commercial real estate	7,131		9,214		—
Residential real estate	7,038		7,816		—
Consumer	8		28		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	—		—		—
Construction	—		—		—
Commercial real estate	—		—		—
Residential real estate	—		—		—
Consumer	—		—		—
Originated and other purchased loans
Commercial & Industrial	11,243		16,297		3,327
Construction	904		1,054		161
Commercial real estate	2,053		2,053		734
Residential real estate	5,599		5,631		1,275
Consumer	1,543		1,546		606
Total loans individually evaluated for impairment	$	60,562	$	81,498	$	6,103

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Three Months Ended September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	$	769	$	—	$	878	$	1
Construction	944		—		1,826		6
Commercial real estate	998		—		1,608		12
Residential real estate	1,659		5		2,368		6
Consumer	46		1		17		—
Originated and other purchased loans
Commercial & Industrial	11,221		58		12,664		74
Construction	6,568		70		5,395		48
Commercial real estate	4,409		52		8,007		68
Residential real estate	6,159		15		6,396		1
Consumer	222		—		14		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	—		—		—		—
Construction	—		—		—		—
Commercial real estate	—		—		—		—
Residential real estate	48		—		—		—
Consumer	—		—		—		—
Originated and other purchased loans
Commercial & Industrial	4,808		47		16,391		51
Construction	488		—		10,297		3
Commercial real estate	2,260		12		2,229		3
Residential real estate	5,823		31		5,148		43
Consumer	—		—		1,393		—
Total loans individually evaluated for impairment	$	46,422	$	291	$	74,631	$	316

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Nine Months Ended September 30,
	2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	$	801	$	—	$	878	$	1
Construction	963		—		1,826		6
Commercial real estate	1,031		—		1,608		12
Residential real estate	1,951		25		2,368		6
Consumer	51		3		17		—
Originated and other purchased loans
Commercial & Industrial	11,321		173		12,839		224
Construction	6,760		210		5,478		144
Commercial real estate	5,199		155		8,101		204
Residential real estate	6,217		46		6,466		4
Consumer	223		—		14		—
With an allowance recorded:
Purchased credit-impaired loans
Commercial & Industrial	—		—		—		—
Construction	—		—		—		—
Commercial real estate	—		—		—		—
Residential real estate	51		—		—		—
Consumer	—		—		—		—
Originated and other purchased loans
Commercial & Industrial	4,894		140		16,721		153
Construction	496		—		14,485		7
Commercial real estate	2,319		37		2,316		9
Residential real estate	5,850		94		5,345		131
Consumer	—		—		1,412		—
Total loans individually evaluated for impairment	$	48,127	$	883	$	79,874	$	901

The following table presents accretion of acquired loan discounts for the periods stated. The amount of accretion recognized in the periods is dependent on discounts recorded to reflect acquired loans at their estimated fair values as of the date of the Legacy Xenith Merger. The amount of accretion recognized within a period is based on many factors, including, among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Balance at beginning of period	$	6,472		$	—		$	9,030		$	—
Additions	—			11,584			—			11,584
Accretion (1)	(594		)	(1,509		)	(2,630		)	(1,509		)
Disposals (2)	(201		)	—			(723		)	—
Balance at end of period	$	5,677		$	10,075		$	5,677		$	10,075
_______________________
(1) Accretion amounts are reported in interest income.
(2) Disposals represent the reduction of purchase accounting adjustments (loan discounts) due to the resolution of acquired loans at amounts less than the contractually-owed receivable.

Of the $12.5 million fair value adjustment recorded as part of the Legacy Xenith Merger, $3.2 million was related to $9.9 million of purchased credit-impaired loans. As of September 30, 2017, the remaining carrying value and fair value adjustment on the purchased credit-impaired loans were $4.3 million and $1.8 million, respectively.

Management believes the Company's allowance for loan losses as of September 30, 2017 is adequate to absorb losses inherent in the portfolio. Although various data and information sources are used to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary, if conditions, circumstances or events are substantially different from the assumptions used in making the assessments. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates. In addition, the allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations.

Impaired Loans

Total impaired loans were $45.8 million and $60.6 million at September 30, 2017 and December 31, 2016, respectively. Collateral dependent impaired loans were $36.7 million and $50.2 million at September 30, 2017 and December 31, 2016, respectively, and are measured at the estimated fair value of the underlying collateral less costs to sell. Impaired loans for which no allowance is provided totaled $32.5 million and $39.2 million at September 30, 2017 and December 31, 2016, respectively. Loans written down to their estimated fair value of collateral less costs to sell account for $7.3 million and $8.1 million of the impaired loans for which no allowance has been provided as of September 30, 2017 and December 31, 2016, respectively.

Nonperforming Assets

Nonperforming assets consist of nonaccrual loans and other real estate owned and repossessed assets. As of September 30, 2017, the Company had no loans other than GSLs, which are reported as held for sale, that were past due greater than 90 days and accruing interest.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents nonperforming assets as of the dates stated:



	September 30, 2017		December 31, 2016
Purchased credit-impaired loans:
Commercial & Industrial	$	758	$	897
Construction	935		992
Commercial real estate	987		1,090
Residential real estate	1,318		1,549
Consumer	33		39
Total purchased credit-impaired loans	4,031		4,567
Originated and other purchased loans:
Commercial & Industrial	5,782		11,805
Construction	2,027		2,830
Commercial real estate	2,257		3,686
Residential real estate	6,692		7,931
Consumer	213		1,551
Total originated and other purchased loans	16,971		27,803
Total nonaccrual loans	21,002		32,370
Other real estate owned	4,817		5,345
Total nonperforming assets	$	25,819	$	37,715

The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated:



	September 30, 2017		December 31, 2016
Nonaccrual loans	$	21,002	$	32,370
TDRs on accrual	24,513		27,603
Impaired loans on accrual	310		589
Total impaired loans	$	45,825	$	60,562

The following table presents a rollforward of nonaccrual loans for the period stated:



	Commercial & Industrial			Construction			Commercial real estate			Residential real estate			Consumer			Total
Balance at December 31, 2016	$	12,702		$	3,822		$	4,776		$	9,480		$	1,590		$	32,370
Transfers in	4,169			468			1,294			5,005			491			11,427
Transfers to other real estate owned	—			(75		)	—			(630		)	—			(705		)
Charge-offs	(5,196		)	(62		)	(742		)	(1,688		)	(838		)	(8,526		)
Payments	(4,343		)	(1,191		)	(1,587		)	(2,569		)	(980		)	(10,670		)
Return to accrual	(748		)	—			(497		)	(1,632		)	(17		)	(2,894		)
Loan type reclassification	(44		)	—			—			44			—			—
Balance at September 30, 2017	$	6,540		$	2,962		$	3,244		$	8,010		$	246		$	21,002

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Age Analysis of Past Due Loans

The following presents an age analysis of loans as of the dates stated:



	September 30, 2017
			30-89 days		90+ days		Total		Total
	Current		Past Due		Past Due		Past Due		Loans
Purchased credit-impaired loans:
Commercial & Industrial	$	169	$	—	$	589	$	589	$	758
Construction	860		—		75		75		935
Commercial real estate	611		—		376		376		987
Residential real estate	1,200		87		331		418		1,618
Consumer	12		—		33		33		45
Total purchased credit-impaired loans	2,852		87		1,404		1,491		4,343
Originated and other purchased loans:
Commercial & Industrial	760,670		567		4,511		5,078		765,748
Construction	271,539		161		1,806		1,967		273,506
Commercial real estate	651,756		—		2,258		2,258		654,014
Residential real estate	380,395		3,485		4,573		8,058		388,453
Consumer	336,474		105		208		313		336,787
Guaranteed student loans	—		—		—		—		—
Deferred loan fees and related costs	1,289		—		—		—		1,289
Total originated and other purchased loans	2,402,123		4,318		13,356		17,674		2,419,797
Total loans	$	2,404,975	$	4,405	$	14,760	$	19,165	$	2,424,140

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	December 31, 2016
			30-89 days		90+ days		Total		Total
	Current		Past Due		Past Due		Past Due		Loans
Purchased credit-impaired loans:
Commercial & Industrial	$	145	$	11	$	741	$	752	$	897
Construction	774		181		37		218		992
Commercial real estate	1,090		—		—		—		1,090
Residential real estate	1,261		297		564		861		2,122
Consumer	16		—		39		39		55
Total purchased credit-impaired loans	3,286		489		1,381		1,870		5,156
Originated and other purchased loans:
Commercial & Industrial	883,531		1,714		9,810		11,524		895,055
Construction	254,058		53		2,609		2,662		256,720
Commercial real estate	580,355		2,911		1,371		4,282		584,637
Residential real estate	395,579		5,124		2,466		7,590		403,169
Consumer	272,147		1,630		176		1,806		273,953
Guaranteed student loans	30,909		5,562		7,572		13,134		44,043
Deferred loan fees and related costs	1,323		—		—		—		1,323
Total originated and other purchased loans	2,417,902		16,994		24,004		40,998		2,458,900
Total loans	$	2,421,188	$	17,483	$	25,385	$	42,868	$	2,464,056

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Quality

The following tables present information about the credit quality of the loan portfolio using the Company's internal rating system as an indicator as of the dates stated:



	September 30, 2017
			Special Mention
	Pass		Special Mention		Substandard		Total
Purchased credit-impaired loans:
Commercial & Industrial	$	—	$	—	$	758	$	758
Construction	—		—		935		935
Commercial real estate	—		—		987		987
Residential real estate	—		203		1,415		1,618
Consumer	—		—		45		45
Total purchased credit-impaired loans	—		203		4,140		4,343
Originated and other purchased loans:
Commercial & Industrial	745,020		14,351		6,377		765,748
Construction	264,271		6,781		2,454		273,506
Commercial real estate	644,781		3,083		6,150		654,014
Residential real estate	354,201		19,961		14,291		388,453
Consumer	331,937		4,625		225		336,787
Deferred loan fees and related costs	1,289		—		—		1,289
Total originated and other purchased loans	2,341,499		48,801		29,497		2,419,797
Total loans	$	2,341,499	$	49,004	$	33,637	$	2,424,140



	December 31, 2016
			Special Mention
	Pass		Special Mention		Substandard		Total
Purchased credit-impaired loans:
Commercial & Industrial	$	—	$	—	$	897	$	897
Construction	—		—		992		992
Commercial real estate	—		—		1,090		1,090
Residential real estate	—		—		2,122		2,122
Consumer	—		—		55		55
Total purchased credit-impaired loans	—		—		5,156		5,156
Originated and other purchased loans:
Commercial & Industrial	873,180		9,391		12,484		895,055
Construction	247,335		6,460		2,925		256,720
Commercial real estate	571,781		3,689		9,167		584,637
Residential real estate	366,940		21,646		14,583		403,169
Consumer	270,919		1,467		1,567		273,953
Guaranteed student loans	44,043		—		—		44,043
Deferred loan fees and related costs	1,323		—		—		1,323
Total originated and other purchased loans	2,375,521		42,653		40,726		2,458,900
Total loans	$	2,375,521	$	42,653	$	45,882	$	2,464,056

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Troubled Debt Restructuring ("TDRs")

Loans meeting the criteria to be classified as TDRs are included in impaired loans. The following table presents the number of and recorded investment in loans classified as TDRs by management as of the dates stated:



	September 30, 2017			December 31, 2016
		Recorded Investment			Recorded Investment
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial & Industrial	9	$	10,636	13	$	13,067
Construction	5	5,065		5	5,225
Commercial real estate	6	5,026		7	5,498
Residential real estate	11	4,763		14	5,082
Consumer	—	—		—	—
Total	31	$	25,490	39	$	28,872

Of TDRs, amounts totaling $24.5 million were accruing and $977 thousand were nonaccruing at September 30, 2017, and $27.6 million were accruing and $1.3 million were nonaccruing at December 31, 2016. Loans classified as TDRs that are on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers whether such loans may return to accrual status. Loans classified as TDRs in nonaccrual status may be returned to accrual status after a period of performance under which the borrower demonstrates the ability and willingness to repay the loan in accordance with the modified terms. For the nine months ended September 30, 2017, none of the nonaccrual TDRs were returned to accrual status.

The following table presents a rollforward of accruing and nonaccruing TDRs for the period stated:



	Accruing			Nonaccruing			Total
Balance at December 31, 2016	$	27,603		$	1,269		$	28,872
Charge-offs	—			(7		)	(7		)
Payments	(3,090		)	(285		)	(3,375		)
New TDR designation	—			—			—
Release TDR designation	—			—			—
Transfer	—			—			—
Balance at September 30, 2017	$	24,513		$	977		$	25,490

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

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	September 30, 2017		December 31, 2016
Performing TDRs:
Commercial & Industrial	$	9,861	$	12,247
Construction	5,002		5,152
Commercial real estate	5,026		5,498
Residential real estate	4,624		4,706
Consumer	—		—
Total performing TDRs	24,513		27,603
Nonperforming TDRs:
Commercial & Industrial	775		820
Construction	63		73
Commercial real estate	—		—
Residential real estate	139		376
Consumer	—		—
Total nonperforming TDRs	977		1,269
Total TDRs	$	25,490	$	28,872

The allowance for loan losses allocated to TDRs was $850 thousand and $705 thousand at September 30, 2017 and December 31, 2016, respectively. TDR balances charged off were $7 thousand in the nine months ended September 30, 2017.

There were no loans designated as TDRs by management during the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2017, the Company had no loans for which there was a payment default and subsequent movement to nonaccrual status that were modified as TDRs within the previous 12 months. The Company had no commitments to lend additional funds to debtors owing receivables whose terms have been modified in TDRs at September 30, 2017 and December 31, 2016.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - Goodwill and Other Intangible Assets

Goodwill of $26.9 million and core deposit intangible of $4.0 million were recorded in the allocation of the purchase consideration in the Legacy Xenith Merger. The core deposit intangible is being amortized over approximately eight years on a straight-line basis.

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



	September 30, 2017			December 31, 2016
Amortizable core deposit intangible:
Gross amount	$	4,006		$	4,006
Accumulated amortization	(613		)	(219		)
Net core deposit intangible	$	3,393		$	3,787
Goodwill	$	26,931		$	26,931

NOTE 8 - Other Real Estate Owned and Repossessed Assets

The following table presents a rollforward of other real estate owned and repossessed assets for the period stated:



	Amount
Balance at December 31, 2016	$	5,345
Transfers in (via foreclosure)	1,304
Sales	(1,769		)
Gain on sales	74
Impairments	(137		)
Balance at September 30, 2017	$	4,817

As of September 30, 2017, there were $316 thousand of residential real estate properties included in the balance of other real estate owned and repossessed assets, and the Company held $1.4 million of residential mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process.

Other real estate owned and repossessed assets are presented net of a valuation allowance. The following table presents an analysis of the valuation allowance on these assets for the periods stated:



	September 30, 2017			September 30, 2016
Balance at beginning of year	$	3,031		$	9,875
Impairments	137			1,320
Charge-offs	(1,776		)	(8,137		)
Balance at end of period	$	1,392		$	3,058

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents amounts applicable to other real estate owned and repossessed assets included in the consolidated statements of income for the periods stated:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Loss (gain) on sales	$	(82	)	$	(52	)	$	(74	)	$	(1,208	)
Impairments	34			737			137			1,320
Operating expenses	12			104			147			276
Total noninterest expense	$	(36	)	$	789		$	210		$	388

NOTE 9 - Derivative Instruments

Derivatives are financial instruments whose value is based on one or more underlying assets. The Company, through GBMI, originated residential mortgage loans for sale into the secondary market on a best efforts basis. In connection with the underwriting process, the Company entered into commitments to lock-in the interest rate of the loan with the borrower prior to funding ("interest rate-lock commitments"). Generally, such interest rate-lock commitments were for periods less than 60 days. These interest rate-lock commitments are considered derivatives. The Company managed its exposure to changes in fair value associated with these interest rate-lock commitments by entering into simultaneous agreements to sell the residential loans to third-party investors shortly after their origination and funding. At September 30, 2017 and December 31, 2016, the Company had loans held for sale of $0 and $9.9 million, respectively, which were reported in assets from discontinued operations on the Company's consolidated balance sheet.

Under the contractual relationship in the best efforts method, the Company was obligated to sell the loans only if the loans closed. As a result of the terms of these contractual relationships, the Company was not exposed to changes in fair value nor would it realize gains or losses related to its interest rate-lock commitments due to subsequent changes in interest rates. At September 30, 2017 and December 31, 2016, the Company had interest rate-lock commitments to originate residential mortgage loans (unfunded par amount of loans) on a best efforts basis in the amounts of $0 and $1.4 million, respectively, which were reported as discontinued operations.

The Company has derivative financial instruments not designated as hedges and result from a service the Company provides to meet the needs of certain commercial customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Derivative contracts are executed between the Company and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap arrangement enabling the commercial loan customers to effectively exchange variable-rate interest payments under their existing obligations to the Company for fixed-rate interest payments. These derivatives do not meet hedge accounting requirements; therefore, changes in the fair value of both the customer derivative and the offsetting derivative are recognized in net income. For the nine months ended September 30, 2017 and 2016, the Company recorded $941 thousand and $35 thousand, respectively, of income related to its back-to-back interest rate swap program, which were included in other noninterest income on the consolidated statements of income.

The Company has minimum collateral requirements with its financial institution counterparties for these back-to-back interest rate swaps that contain provisions, whereby if the Company fails to maintain its status as a well or an adequately capitalized institution, the Company could be required to terminate or fully collateralize the derivative contract. Additionally, if the Company defaults on any of its indebtedness, including default where repayment has not been accelerated by the lender, the Company could also be in default on its derivative obligations. As of September 30, 2017, the Bank had cash and securities in the amount of $3.0 million pledged as collateral under the agreements. If the Company is not in compliance with the terms of the derivative agreements, it could be required to settle its obligations under the agreements at termination value.

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company's derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association (ISDA) master agreements, which include right of setoff provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. However, the Company has not offset financial instruments for financial reporting purposes.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present information about derivatives that are eligible for offset in the consolidated balance sheets as of the dates stated:

Gross

Net Amounts

Gross Amounts

Amounts

of Assets

Not Offset in the

Gross

Offset in

Presented

Consolidated Balance Sheets

Amounts

the

in the

Consolidated

Cash and Security

Recognized

Balance

Financial

Collateral

Net

Assets

Sheets

Instruments

Received

Amount

Derivative assets:

September 30, 2017

Interest rate swap agreements

1,813

—

1,813

128

—

1,685

December 31, 2016

Interest rate swap agreements

1,223

—

1,223

—

1,170

Gross

Net Amounts

Gross Amounts

Amounts

of Liabilities

Not Offset in the

Gross

Offset in

Presented

Consolidated Balance Sheets

Amounts

the

in the

Consolidated

Cash and Security

Recognized

Balance

Financial

Collateral

Net

Liabilities

Sheets

Instruments

Requirement

Amount

Derivative liabilities:

September 30, 2017

Interest rate swap agreements

1,722

—

1,722

128

808

786

December 31, 2016

Interest rate swap agreements

1,226

—

1,226

341

832

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - Income Taxes

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. Certain items of income and expense are reported in different periods for financial reporting and tax return purposes resulting in temporary differences. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit on the Company's consolidated statement of operations. As of September 30, 2017, the Company had a net deferred tax asset of $148.4 million recorded on its consolidated balance sheets, which is net of a valuation allowance of $780 thousand.

The following table presents the federal statutory tax rate reconciled to the Company's effective tax rate from continuing operations for the period stated:



	Nine Months Ended September 30, 2017
	Tax			Rate
Effective tax rate from continuing operations:
Income tax at statutory rate	$	9,853		35.00	%
Tax-exempt income	(750		)	(2.66	)%
Nondeductible expenses	40			0.14	%
Other	(146		)	(0.53	)%
Income tax provision from continuing operations	$	8,997		31.95	%

Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities. These differences will result in deductible or taxable amounts in a future year(s) when the reported amounts of assets or liabilities are recovered or settled. Deferred assets and liabilities are stated at tax rates expected to be in effect in the year(s) the differences reverse. A valuation allowance is recorded against that portion of the deferred tax assets when it is not more likely than not that all or a portion of the asset will be realized.

A valuation allowance related to all components of net deferred tax assets was established in 2009 and was adjusted, as necessary, each reporting period. The valuation allowance was established based upon a determination at the time that it was not more likely than not that the deferred tax assets would be fully realized primarily as a result of the significant operating losses experienced by the Company during 2009 and several years thereafter.

ASC 740, Accounting for Income Taxes, paragraph 740-10-30-18, states that four possible sources of taxable income may be available under the tax law to realize a tax benefit for deductible temporary differences. In determining the need for a valuation allowance and in accordance with ASC 740-10-30-17, management evaluated all available evidence, both positive and negative, assessing the objectivity of the evidence and giving more weight to that evidence which is more objective than evidence which is subjective. Positive and negative evidence refers to factors affecting the predictability of one or more of the four sources of taxable income.

The positive evidence in the third quarter of 2016 included the fact that the Company had been in a positive cumulative pre-tax income position for the previous three years and the Company expected to generate taxable income in future years sufficient to absorb substantially all of its net deferred tax assets. A significant component of the Company's deferred tax asset, as of September 30, 2016, related to federal net operating losses ("NOLs") of approximately $300.0 million, which under current law can be carried forward 20 years.

Management's estimate of future taxable income is based on internal projections, which consider historical performance, various internal estimates and assumptions, as well as certain external data, all of which, while inherently subject to judgment, management believes to be reasonable. At December 31, 2015, management concluded that the Company did not have sufficient future income to absorb all NOLs and only a portion of the deferred tax asset related to NOLs would be realized, thus releasing only a portion of the valuation allowance ($95.1 million). In the third quarter of 2016, as a result of the Legacy Xenith Merger, management believed the Company had sufficient future income to absorb substantially all of the deferred tax assets, including assets relating to NOLs, and substantially all of the remaining valuation allowance ($60.0 million) was released. The remaining valuation allowance relates to the deferred tax asset resulting from NOLs in the Commonwealth of Virginia, where Xenith

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bankshares, Inc. (the parent company) files a standalone tax return. The parent company is not expected to generate taxable income in future periods; therefore, management has concluded that it is not more likely than not that the deferred tax assets of $780 thousand related to these NOLs will be utilized.

If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of the Company's net deferred tax assets. An increase to the deferred tax asset valuation allowance could have a material adverse effect on the Company's financial condition and results of operations.

NOTE 11 - Borrowings

The Bank has secured borrowing facilities with the FHLB and the FRB. As of September 30, 2017, total credit availability under the FHLB facility was $794.7 million, limited to a pledged lendable collateral value of $303.0 million. Under this facility, as of September 30, 2017, there were short-term, non-amortizing borrowings outstanding of $105.0 million. Credit availability under the FRB facility as of September 30, 2017 was $112.8 million, which is also based on pledged collateral value. As of September 30, 2017, the Bank had no borrowings under the FRB facility.

Short-term borrowing sources also include lines of credit with eight banks to borrow federal funds up to $153.0 million on an unsecured basis. The lines are uncommitted and can be canceled by the lender at any time. Two of the lines expire within one year; the remaining lines have no stated expiration. At September 30, 2017, no amounts were outstanding under these uncommitted lines of credit. Borrowings under these arrangements bear interest at the prevailing Federal Funds Rate.

The Company has four placements of trust preferred securities. In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by the Company. The trust preferred securities pay cumulative cash distributions quarterly at an annual rate, which resets quarterly. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Company's obligation under the guarantee is unsecured and subordinate to other senior and subordinated indebtedness. The trust preferred securities are redeemable only at the Company's discretion, subject to regulatory approval. The aggregate carrying value of these debentures as of September 30, 2017 was $30.6 million, The difference between the par amounts and the carrying amounts of the debentures, which is due to purchase accounting adjustments recorded at the acquisition of Gateway Financial Holdings, Inc. in 2008, is being amortized using the interest method as an adjustment to interest expense. Effective interest rates for the trust preferred securities for the three and nine month periods ended September 30, 2017 were between 7.60% and 8.21% and 7.33% and 8.01%, respectively.

In the Legacy Xenith Merger, the Company assumed $8.5 million in aggregate principal amount of Legacy Xenith's outstanding 6.75% subordinated notes due 2025 (the "Subordinated Notes"). The Subordinated Notes bear interest at an annual rate of 6.75%, which is payable quarterly in arrears on March 31, June 30, September 30 and December 31 and qualify as Tier 2 capital for the Company. As of September 30, 2017, the carrying value of the Subordinated Notes, including the remaining fair value adjustment recorded at the Legacy Xenith Merger, was $8.6 million. For the three- and nine-month periods ended September 30, 2017, the effective interest rate, including the amortization of the purchase accounting adjustment, on the Subordinated Notes was 6.40%. As of September 30, 2017, the Company and the Bank, as applicable, were in compliance with all covenants of the Subordinated Notes.

NOTE 12 - Earnings Per Share

The following tables present weighted average basic and diluted shares outstanding and basic and diluted earnings per share for the periods stated. Earnings per share is presented for continuing operations, discontinued operations and total net income attributable to the Company. All stock options were included in the diluted earnings per share calculations for the three and nine months ended September 30, 2017. There were 505,029 and 557,121 stock options not included in the diluted earnings per share calculations for the three and nine months ended September 30, 2016, respectively, because their inclusion would have been antidilutive.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	Three Months Ended		Nine Months Ended
	September 30, 2017	September 30, 2016	September 30, 2017	September 30, 2016
Weighted average shares outstanding, basic	23,209,041	21,005,458	23,184,307	18,462,161
Dilutive effect of warrants	75,718	50,247	72,251	47,263
Dilutive effect of equity awards	234,593	65,145	218,614	51,191
Dilutive shares	310,311	115,392	290,865	98,454
Weighted average shares outstanding, diluted	23,519,351	21,120,850	23,475,172	18,560,615



	Three Months Ended					Nine Months Ended
	September 30, 2017			September 30, 2016		September 30, 2017			September 30, 2016
Net Income:
Net income from continuing operations	$	7,165		$	47,501	$	19,156		$	50,402
Net (loss) income from discontinued operations	(7		)	363		(68		)	1,467
Net income attributable to Xenith Bankshares	$	7,158		$	47,864	$	19,088		$	51,869

Basic earnings per share:
Earnings per share from continuing operations	$	0.31		$	2.26	$	0.83		$	2.74
Earnings per share from discontinued operations	$	—		$	0.02	$	—		$	0.07
Earnings per share attributable to Xenith Bankshares	$	0.31		$	2.28	$	0.82		$	2.81

Diluted earnings per share:
Earnings per share from continuing operations	$	0.30		$	2.25	$	0.82		$	2.72
Earnings per share from discontinued operations	$	—		$	0.02	$	—		$	0.07
Earnings per share attributable to Xenith Bankshares	$	0.30		$	2.27	$	0.81		$	2.79

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 13 - Commitments and Contingencies

On September 7, 2017, Paul Parshall, a purported shareholder of Xenith Bankshares, filed a putative class action lawsuit (the "Parshall Lawsuit") in the United States District Court for the Eastern District of Virginia against the Company, the current members of the Company's board of directors, and Union on behalf of all of the Company's public shareholders. The plaintiff in the Parshall Lawsuit alleges that Union's registration statement on Form S-4, as amended, filed with the SEC relating to the Union Merger omitted certain material information in violation of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and further that the individual defendants are liable for those omissions under Section 20(a) of the Exchange Act. The relief sought in the Parshall Lawsuit includes preliminary and permanent injunction to prevent the completion of the Union Merger, rescission or rescissory damages if the Union Merger is completed, costs and attorneys' fees. On November 6, 2017, the plaintiff in the Parshall Lawsuit filed a notice of voluntary dismissal, terminating the Parshall Lawsuit without prejudice.

On September 19, 2017, Shannon Rowe, a purported shareholder of Xenith Bankshares, also filed a putative class action lawsuit (the "Rowe Lawsuit") in the United States District Court for the Eastern District of Virginia against the Company and the current members of the Company's board of directors. The allegations in the Rowe Lawsuit are similar to the allegations in the Parshall Lawsuit, described above.

At this time, it is not possible to predict the outcome of the Rowe Lawsuit or its impact on the Company or the Union Merger. Management believes the claims in the Rowe Lawsuit are without merit, and the Company and its board of directors intend to defend vigorously against them.

In addition to the Rowe Lawsuit, in the ordinary course of operations, the Company may become a party to legal proceedings. Based upon information currently available, management believes that any such legal proceedings, in the aggregate, will not have a material adverse effect on the Company's business, financial condition, cash flows, or results of operations.

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

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

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



	September 30, 2017		December 31, 2016
Commercial lines of credit	$	391,645	$	372,083
Construction	172,571		113,364
Commercial real estate	36,858		44,790
Residential real estate	91,976		93,981
Consumer	8,102		11,108
Letters of credit	24,935		20,476
Total commitments	$	726,087	$	655,802

NOTE 14 - Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Valuation methodologies for the fair value hierarchy are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include values that are determined using pricing models, discounted cash flow methodologies, or similar techniques as well as assets and liabilities for which the determination of fair value requires significant management judgment or estimation.

The categorization of an asset or liability within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recurring Basis

The Company measures or monitors certain of its assets on a fair value basis. Fair value is used on a recurring basis for those assets and liabilities for which an election was made, as well as for certain assets and liabilities in which fair value is the primary basis of accounting. The following tables present the fair value of assets measured and recognized at fair value on a recurring basis in the consolidated balance sheets as of the dates stated:



	September 30, 2017		Fair Value Measurements at Reporting Date Using
Assets	September 30, 2017		Level 1		Level 2		Level 3
Investment securities available for sale
Mortgage-backed securities
Agencies	$	127,253	$	—	$	127,253	$	—
Collateralized	62,984		—		62,984		—
Collateralized mortgage obligations	27,059		—		27,059		—
Asset-backed securities	6,611		—		6,611		—
Municipals
Tax-exempt	62,799		—		62,799		—
Taxable	17,680		—		17,680		—
Corporate bonds	976		—		976		—
Equity securities	406		307		—		99
Total securities available for sale	305,768		307		305,362		99
Interest rate swaps	1,813		—		1,813		—
Investments in rabbi trust	1,800		1,800		—		—
Total assets	$	309,381	$	2,107	$	307,175	$	99

Liabilities
Interest rate swaps	$	1,722	$	—	$	1,722	$	—
Total liabilities	$	1,722	$	—	$	1,722	$	—

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



	December 31, 2016		Fair Value Measurements at Reporting Date Using
Assets	December 31, 2016		Level 1		Level 2		Level 3
Investment securities available for sale
Mortgage-backed securities
Agencies	$	134,890	$	—	$	134,890	$	—
Collateralized	62,753		—		62,753		—
Collateralized mortgage obligations	19,810		—		19,810		—
Asset-backed securities	14,758		—		14,758		—
Municipals
Tax-exempt	64,755		—		64,755		—
Taxable	17,676		—		17,676		—
Corporate bonds	984		—		984		—
Equity securities	1,817		1,718		—		99
Total securities available for sale	317,443		1,718		315,626		99
Derivative loan commitments	126		—		—		126
Interest rate swaps	1,223		—		1,223		—
Investments in rabbi trust	1,804		1,804		—		—
Total assets	$	320,596	$	3,522	$	316,849	$	225

Liabilities
Interest rate swaps	$	1,226	$	—	$	1,226	$	—
Total liabilities	$	1,226	$	—	$	1,226	$	—

The following table presents a rollforward of recurring fair value measurements categorized within Level 3 of the fair value hierarchy for the periods stated:



	Activity in Level 3					Activity in Level 3
	Fair Value Measurements					Fair Value Measurements
	Nine Months Ended September 30, 2017					Year Ended December 31, 2016
	Investment Securities Available for Sale		Derivative Loan Commitments			Investment Securities Available for Sale		Derivative Loan Commitments


Beginning of period balance	$	99	$	126		$	99	$	1,020
Unrealized gains included in:
Earnings	—		—			—		—
Other comprehensive income	—		—			—		—
Purchases	—		—			—		—
Sales	—		—			—		—
Reclassification from level 3 to level 1	—		—			—		—
Issuances	—		—			—		470
Settlements	—		(126		)	—		(1,364		)
End of period balance	$	99	$	—		$	99	$	126

The Company's policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer.

The following describes the valuation techniques used to estimate fair value for assets and liabilities that are measured on a recurring basis.

Investment Securities Available for Sale: Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly-liquid government bonds, mortgage products and

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities would include U.S. agency securities, mortgage-backed securities, obligations of states and political subdivisions, and certain corporate, asset-backed and other securities valued using third-party quoted prices in markets that are not active. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Interest Rate Swaps: The Company uses observable inputs to determine fair value of its interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques that are based on discounted cash flow analysis using the expected cash flows of each derivative over the contractual terms of the derivatives, including the period to maturity and market-based interest rate curves. The fair value of the interest rate swaps is determined using a market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments were based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Accordingly, the Company categorizes these financial instruments within Level 2 of the fair value hierarchy.

Investments in Rabbi Trust: Assets held by the Company in the rabbi trust consist of readily-marketable securities where quoted prices are available in active markets and are classified as Level 1 securities.

Nonrecurring Basis

Certain assets, specifically collateral dependent impaired loans and other real estate owned and repossessed assets, are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment and an allowance is established to adjust the asset to its estimated fair value). The adjustments are based on appraisals of underlying collateral or other observable market prices when current appraisals or observable market prices are available. If an appraisal that is less than 12 months old is not available, an existing appraisal or other valuation would be utilized after adjusting it to reflect current market conditions and, as such, may include significant management assumptions and input with respect to the determination of fair value.

The adjustments are based in part upon externally derived statistical data and upon management's knowledge of market conditions and prices of sales of other real estate owned. It is the Company's policy to classify these as Level 3 assets within the fair value hierarchy. Management periodically reviews the adjustments as compared to valuations from updated appraisals and modifies the adjustments accordingly should updated appraisals reflect valuations significantly different than those derived utilizing the adjustments. Management believes the valuations are reasonable for the collateral underlying the loan portfolio; however, while appraisals are indicators of fair value, the amount realized upon the sale of these assets could be significantly different.

The following tables present the fair value of assets measured and recognized at fair value on a nonrecurring basis in the consolidated balance sheets as of the dates stated:



	Assets Measured at Fair Value		Fair Value Measurements at
			September 30, 2017 Using
			Level 1		Level 2		Level 3
Impaired loans	$	39,541	$	—	$	—	$	39,541
Other real estate owned and repossessed assets	4,817		—		—		4,817



	Assets Measured at Fair Value		Fair Value Measurements at
			December 31, 2016 Using
			Level 1		Level 2		Level 3
Impaired loans	$	49,378	$	—	$	—	$	49,378
Other real estate owned and repossessed assets	5,345		—		—		5,345

Table of Contents

XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following describes the valuation techniques used to estimate fair value for assets that are required to be measured on a nonrecurring basis.

Impaired Loans: The majority of the Company's impaired loans are considered collateral dependent. For collateral dependent impaired loans, fair value is measured based upon the estimated fair value of the underlying collateral less costs of disposal or other observable market prices when current appraisals or observable market prices are available. If an appraisal that is less than 12 months old is not available, an existing appraisal or other valuation would be utilized after adjusting it to reflect current market conditions and, as such, may include significant management assumptions and input with respect to the determination of fair value.

Other Real Estate Owned and Repossessed Assets: The fair value of other real estate owned and repossessed assets is based primarily on appraisals of the real estate or other observable market prices. The Company's policy is to have current appraisals of these assets; however, if a current appraisal is not available, an existing appraisal would be utilized after adjusting it to reflect changes in market conditions from the date of the existing appraisal and, as such, may include significant management assumptions and input with respect to the determination of fair value.

Significant Unobservable Inputs

The following table presents the significant unobservable inputs used to value the Company's significant Level 3 assets as of the date stated. These factors represent the significant unobservable inputs that were used in measurement of fair value.




		Significant Unobservable	Significant Unobservable
	Fair Value at	Inputs by	Inputs as of
	September 30, 2017	Valuation Technique	September 30, 2017
Impaired loans	39,541	Appraised value	9%
		Average discounts to reflect current
		market conditions, estimated ultimate
		collectability, and estimated costs to sell
Other real estate owned	4,817	Appraised value	10%
		Weighted average discounts to reflect
		current market conditions, abbreviated
		holding period and estimated costs to sell

Other Fair Value Measurements

Accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. For the financial instruments that the Company does not record at fair value, estimates of fair value are made at a point in time based on relevant market data and information about the financial instrument. No readily available market exists for a significant portion of the Company's financial instruments. Fair value estimates for these instruments are based on current economic conditions, interest rate risk characteristics and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision; therefore, the calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by the Company in estimating fair value of these financial instruments.

Cash and Cash Equivalents: Cash and cash equivalents include cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from the FRB. The carrying amount approximates fair value.

Investment Securities Available for Sale: Fair values are based on published market prices where available. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Investment securities available for sale are carried at their aggregate fair value.

Restricted Equity Securities: These investments are carried at cost. The carrying amount approximates fair value.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans: To determine the fair values of loans other than those deemed impaired, the Company uses discounted cash flow analyses using discount rates that are similar to the interest rates and terms currently being offered to borrowers of similar terms and credit quality. In valuing acquired loans, the Company also uses valuation techniques that include default rates for similar risk rated loans and estimates of expected cash flows as well as other factors.

Interest Receivable and Interest Payable: The carrying amount approximates fair value.

Bank-owned Life Insurance: The carrying amount approximates fair value.

Deposits: The fair values disclosed for non-maturity deposits such as demand, including money market, and savings accounts are equal to the amount payable on demand at the reporting date (i.e., carrying values). Fair values for certificates of deposit are estimated using discounted cash flows that apply market interest rates on comparable instruments.

Borrowings: The fair value of short-term FHLB borrowings approximates the carrying amount. Other borrowings include the Subordinated Notes and the junior subordinated debentures. The fair value of the Subordinated Notes approximates the carrying value. The fair value of the junior subordinated debentures approximates the par value of such borrowings.

Commitments to Extend Credit and Standby Letters of Credit: The only amounts recorded for commitments to extend credit and standby letters of credit are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at September 30, 2017 and December 31, 2016, and, as such, the related fair values have not been estimated.

The following tables present the carrying amounts and fair values of those financial instruments that were not recorded at fair value of have carrying amounts that approximate fair value as of the dates stated:



	September 30, 2017
	Carrying Amount		Fair Value		Fair Value Measurements at Reporting Date Using
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Loans, net (1)	$	2,407,875	$	2,412,741	$	—	$	—	$	2,412,741
Financial Liabilities:
Deposits	2,605,390		2,603,279		—		2,603,279		—
FHLB borrowings	105,000		105,000		—		105,000		—
Other borrowings	39,197		65,276		—		65,276		—



	December 31, 2016
	Carrying Amount		Fair Value		Fair Value Measurements at Reporting Date Using
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Loans, net (1)	$	2,442,116	$	2,448,581	$	—	$	—	$	2,448,581
Financial Liabilities:
Deposits	2,571,970		2,573,070		—		2,573,070		—
FHLB borrowings	172,000		172,000		—		172,000		—
Other borrowings	38,813		65,303		—		65,303		—

(1) The carrying amount and fair value include impaired loans, and the carrying amount is net of the allowance for loan losses.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - Subsequent Events

Management has evaluated subsequent events through November 9, 2017, which is the date the consolidated financial statements were available to be issued. There were no subsequent events that required adjustment to or disclosure in the consolidated financial statements.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Forward-Looking Statements

This Quarterly Report on Form 10-Q ("Form 10-Q") contains "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. When or if used in this Form 10-Q or any filings with the Securities and Exchange Commission (the "SEC"), other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "anticipate," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "is estimated," "is projected" or similar expressions are intended to identify "forward-looking statements."

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance; therefore, we caution you against relying on any of these forward-looking statements.

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the risk factors summarized below and the more detailed discussion in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 (as amended, the "2016 Form 10-K"). Our risks include the following:


•	Our future success is dependent on our ability to compete effectively in the highly competitive banking industry;


•	Economic, market or operational developments may negatively impact our ability to maintain required capital levels or otherwise negatively impact our financial condition;


•	General economic conditions in the markets in which we do business may decline and may have a material adverse effect on our results of operations and financial condition;


•	We do not pay dividends on our common stock and absent regulatory approval are prevented from doing so. The inability to pay dividends on our common stock may adversely affect the market price of our common stock;


•	Sales, or the perception that sales could occur, of large amounts of our common stock by our institutional investors may depress our stock price. Sales of a significant portion of our stock by our institutional investors could limit our ability to utilize our deferred tax asset, which also could depress our stock price;

•

Before the Union Merger (defined below) may be completed, which is expected to occur during early January 2018, Union Bankshares Corporation ("Union") and the Company must meet certain customary conditions as set forth in the Union Merger Agreement (defined below). These conditions may delay the completion of the Union Merger or not be met; both of which could have an adverse effect on our operations and/or stock price;


•	The Union Merger may distract management from their other responsibilities, which could have an adverse effect on our operations;


•	The significant portion of our loan portfolio is in commercial real estate, residential real estate and construction loans, which may expose us to greater risk of loss;


•	We have had large numbers of problem loans. Although problem loans have declined significantly, there is no assurance that they will continue to do so;

•

The determination of the appropriate balance of our allowance for loan losses is merely an estimate of the inherent risk of loss in our existing loan portfolio and may prove to be incorrect. If such estimate is proven to be materially incorrect and we are required to increase our allowance for loan losses, our results of operations, our financial condition and the market price of our common stock could be materially adversely affected;


•	Our ability to maintain adequate sources of funding and liquidity may be negatively impacted by the economic environment, which may, among other things, impact our ability to grow, satisfy our obligations, and pay dividends, if approved;


•	We may face increasing deposit-pricing pressures, which may, among other things, reduce our ability to grow and our profitability;


•	Our profitability will be jeopardized if we are unable to successfully manage interest rate risk;


•	Our success is largely dependent on attracting and retaining key management team members;

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


•	We may not be able to realize our deferred income tax assets, requiring us to record a valuation allowance against our deferred tax assets. Additionally, a reduction in corporate income tax rates would require us to reduce our deferred tax assets. Both of these events could adversely affect the market price of our common stock;


•	We may experience failures or breaches to our systems and network security, including "hacking," "cyber fraud" or "identity theft" resulting in operating losses and/or litigation;


•	Our operations and customers might be affected by the occurrence of a natural disaster or other catastrophic event in our market area;


•	Our business, financial condition and results of operations are highly regulated and could be adversely affected by new or changed regulations and by the manner in which such regulations are applied by regulatory authorities;


•	Banking regulators have broad enforcement power, and regulations are meant to protect depositors and not investors;


•	The fiscal, monetary and regulatory policies of the federal government and its agencies could have a material adverse effect on our results of operations;


•	Government legislation and regulation may adversely affect our business, financial condition and results of operations;


•	The soundness of other financial institutions could adversely affect us; and


•	The obligations from our mortgage banking operations could be more costly than anticipated and could adversely impact our results of operations.

Our forward-looking statements could be incorrect in light of these risks, uncertainties and assumptions. The future events, developments or results described in this Form 10-Q could turn out to be materially different. Except as required by applicable law or regulations, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statement.

Overview

Xenith Bankshares, Inc. ("Xenith Bankshares," the "Company," "we," "us" or "our") is the bank holding company for Xenith Bank ("Xenith Bank" or the "Bank"), a commercial bank targeting the banking needs of middle market and small businesses, local real estate developers and investors, and retail banking clients ("target customers"). The Bank's regional area of operations spans from Baltimore, Maryland, to Raleigh and eastern North Carolina, complementing our significant presence in greater Washington, D.C., greater Richmond, Virginia, and greater Hampton Roads, Virginia, which we refer to as our target markets. The Bank conducts its principal banking activities through 40 full-service branches and two loan production offices across these areas with its headquarters centrally located in Richmond, Virginia.

As of September 30, 2017, we had total assets of $3.3 billion, loans, net of our allowance for loan losses, of $2.4 billion, total deposits of $2.6 billion, and shareholders' equity of $484.3 million.

Our service and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial retail banking products, including commercial and industrial ("C&I"), construction, commercial real estate ("CRE"), residential real estate ("RRE") and consumer loans, including marine finance floorplan and end-user loans for U.S. documented vessels through our Shore Premier Finance unit. We offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, Internet and mobile banking, and bill pay service. We do not engage in any activities other than banking activities.

Our largest investor shareholders are Anchorage Capital Group, L.L.C. ("Anchorage"), CapGen Capital Group VI LP ("CapGen"), The Carlyle Group, L.P. ("Carlyle") and BCP Fund I Virginia Holdings, LLC (collectively with BankCap Partners Fund I, L.P., BankCap Partners GP, L.P. and BankCap Equity Fund, LLC, "BankCap Partners"). Anchorage, CapGen, Carlyle and BankCap Partners owned 18.3%, 22.1%, 18.3% and 6.9%, respectively, of the outstanding shares of our common stock as of September 30, 2017.

Proposed Merger with Union

On May 19, 2017, the Company and Union entered into an Agreement and Plan of Reorganization (the "Union Merger Agreement"), pursuant to which, and subject to terms and conditions set forth therein, Xenith Bankshares will merge with and into Union ("the Union Merger"), with Union surviving the Union Merger. Pursuant to the Union Merger Agreement, at the effective time of the Union Merger, holders of our common stock will receive the right to 0.9354 shares of Union common stock

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

in exchange for each share of our common stock outstanding at the effective time of the Union Merger, with cash paid in lieu of fractional shares.

Merger with Legacy Xenith

Effective July 29, 2016, we completed a merger (the "Legacy Xenith Merger") with legacy Xenith Bankshares, Inc. ("Legacy Xenith") pursuant to an Agreement and Plan of Reorganization (the "Legacy Xenith Merger Agreement"), dated as of February 10, 2016, by and between us and Legacy Xenith. At the effective time of the Legacy Xenith Merger, Legacy Xenith merged with and into us. Also at the effective time of the Legacy Xenith Merger, we changed our name from "Hampton Roads Bankshares, Inc." to "Xenith Bankshares, Inc." and changed our ticker symbol to "XBKS."

Pursuant to the Legacy Xenith Merger Agreement, holders of Legacy Xenith common stock, par value $1.00 per share, received 4.4 shares of our common stock for each share of Legacy Xenith common stock held immediately prior to the effective time of the Legacy Xenith Merger, with cash paid in lieu of fractional shares.

Pursuant to the Legacy Xenith Merger Agreement and immediately following the completion of the Legacy Xenith Merger, legacy Xenith Bank, a wholly-owned subsidiary of Legacy Xenith, merged (the "Bank Merger") with and into the Bank, with the Bank surviving the Bank Merger. In connection with the Bank Merger, the Bank changed its name from "The Bank of Hampton Roads" to "Xenith Bank."

Information contained herein as of periods prior to the effective date of the Legacy Xenith Merger (July 29, 2016) does not include the balances or operations of Legacy Xenith.

Disposition of Mortgage Banking Business

Through Gateway Bank Mortgage, Inc., a wholly-owned subsidiary of the Bank ("GBMI"), the Bank provided mortgage banking services, including the origination and processing of mortgage loans for sale into the secondary market. In September 2016, we decided to cease operations of our mortgage banking business. In connection with this decision, the Bank entered into a definitive asset purchase agreement to sell certain assets of GBMI, and to transition GBMI's operations, which included originating, closing, funding and selling first lien residential mortgage loans, to an unrelated party (the "GBMI Sale"). The completion of the GBMI Sale occurred on October 17, 2016. In connection with the GBMI Sale, GBMI ceased taking new mortgage loan applications, and all applications with prospective borrowers that were in process as of the completion of the GBMI Sale were managed by GBMI through funding and sale to investors in the ordinary course of business. As of September 30, 2017, there were no loans held for sale to investors, and we believe there are no significant on-going obligations with respect to the mortgage banking business that have not been recorded in our financial statements. For purposes of this Form 10-Q, the operations of GBMI have been reported as discontinued operations for all periods presented.

Reverse Stock Split

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

Certain Performance Measures

The primary source of our revenue is net interest, which represents the difference between interest and fees earned on interest-bearing assets and interest expense on interest-bearing liabilities. Our primary interest-earning assets are loans and investment securities, and our interest-bearing liabilities include deposits and borrowings. Noninterest income is derived primarily from service charges on deposit accounts and other banking services, gains or losses on the sale of investment securities, and earnings on bank-owned life insurance. Other significant factors that affect our net income are the provision for loan losses and noninterest expenses. Our largest noninterest expenses are salaries and related employee benefits.

The following table presents selected financial performance measures for the periods stated:

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Net interest margin (1)	3.51%	3.59%	3.51%	3.43%
Return on average assets ("ROAA") (2)	0.89%	6.67%	0.8%	2.24%
Return on average common equity ("ROAE") (3)	5.86%	51.42%	5.35%	16.18%
Average common equity to average assets (4)	15.14%	12.97%	14.87%	13.84%
Efficiency ratio (5)	64%	126%	67%	103%
_______________________
(1) Net interest margin is net interest income divided by average interest-earning assets. For the purposes of the calculation, tax-exempt interest income from tax-exempt municipal securities is computed on a taxable-equivalent yield basis. Average interest-earning assets are presented within the average balances, income and expenses, yields and rates table below.
(2) Return on average assets is net income (from continuing and discontinued operations) divided by average total assets. Average total assets are presented within the average balances, income and expenses, yields and rates table below.
(3) Return on average equity is net income (from continuing and discontinued operations) divided by average shareholders' equity before non-controlling interest.
(4) Average equity to average assets is average shareholders' equity before non-controlling interest divided by average total assets. Average total assets are presented within the average balances, income and expenses, yields and rates table below.
(5) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income (continuing operations).

The direct lending activities in which we engage carry the risk that the borrowers will be unable to perform on their obligations. As such, interest rate policies of the Federal Reserve and general economic conditions, nationally and in our target markets, have a significant impact on our results of operations. To the extent that economic conditions deteriorate, business and individual borrowers may be less able to meet their obligations to us in full, or in a timely manner, resulting in decreased earnings or losses to us. We make fixed rate loans, whereby general increases in interest rates will tend to reduce our net interest income as the interest rates we must pay for deposits may increase while interest income may be unchanged. Economic conditions may also adversely affect the value of property pledged as security for loans and the ability to liquidate that property to satisfy a loan, if necessary.

Our goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures and modifying those policies on occasion to account for changing or emerging risks or changing market conditions, evaluating each borrower's business plan and financial condition during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and maintaining sufficient collateral to mitigate economic loss in the event of liquidation. Our allowance for loan losses is a reserve for inherent losses in our loan portfolio and consists of general, specific and unallocated qualitative components.

A risk rating system is employed to estimate loss exposure and provide a measuring system for setting general reserve allocations. The general component relates to groups of homogeneous loans not designated for specific impairment analysis and are collectively evaluated for potential loss. The specific component relates to loans that are determined to be impaired and, therefore, individually evaluated for impairment. An unallocated qualitative component is maintained to cover uncertainties that could affect management's estimate of probable losses and considers internal portfolio management effectiveness and external macroeconomic factors.

Industry Conditions

The national unemployment rate, seasonally adjusted and as published by the Bureau of Labor Statistics, for September 2017 was reported at 4.2%, a decline from 4.9% in September 2016. In the Fifth District of the Federal Reserve Bank (the "Fifth District"), which includes substantially all of our target markets, the August 2017 unemployment rate was 4.1%, down from 4.6% at August 2016. More specifically, the unemployment rate in Virginia in September 2017 was 3.7%, based on data published by the Fifth District. Additionally, as published by the Fifth District, in the three months ended September 30, 2017, most industry sectors in the Fifth District expanded.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The Federal Open Market Committee (the "FOMC") stated in a September 20, 2017 release that the labor market had continued to strengthen and that economic activity has been rising moderately so far this year. The FOMC indicated that job gains have remained solid in recent months, household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. The FOMC said that inflation measured on a 12-month basis has been running below the 2% longer-run objective.

The FOMC maintained its view of a 1% to 1-1/4% target range for the Federal Funds Rate. Further, the FOMC stated that it is closely monitoring actual and expected inflation developments relative to its symmetric inflation goal. The FOMC also stated that it expects that economic conditions will evolve in a manner that will warrant gradual increases in the Federal Funds Rate.

Low interest rates and intense competition have put pressure on net interest margins of banks, including the Bank. Companies with which we compete are offering aggressive terms and may be loosening credit underwriting standards. We have seen a particularly sharp increase in competition in our target markets over the last several years, as new companies have entered our target markets. We expect this competition in our target markets to continue.

OUTLOOK

In spite of industry and market conditions, we believe we are well positioned to effectively compete in our target markets due to: (1) our team of skilled bankers; (2) our advantageous market locations in our target markets; (3) our variety of banking services and products; and (4) our experienced management team. We focus on developing long-term relationships with our target customers through a team of bankers with significant experience in our target markets.

Upon the completion of the Union Merger, the combined company, on a pro forma basis, will have approximately $12.0 billion in assets and over $9.0 billion in deposits (based on financial data as of June 30, 2017). The combined bank will have a retail footprint spanning the Commonwealth of Virginia, with presence in eastern Maryland and northeastern North Carolina. We believe the combined company will have an attractive diversified customer base and will have broad product and service offerings. These factors, along with scale, should position the combined company to compete effectively in its target markets.

For further discussion of the material trends and uncertainties that may affect our results and financial condition, refer to the risk factors discussed Part I, Item IA - Risk Factors in our 2016 Form 10-K.

CRITICAL ACCOUNTING POLICIES

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

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

Our critical accounting policies are discussed in detail in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Critical Accounting Policies" and Part II, Item 8 - Financial Statements and Supplementary Data under the caption "Note 1 - Summary of Significant Accounting Policies" in the notes to the consolidated financial statements, each in our 2016 Form 10-K. Since December 31, 2016, there have been no changes in these policies that have had or could reasonably be expected to have a material effect on our results of operations or financial condition.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

OVERVIEW OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion and analysis of our financial performance as of September 30, 2017 and for the three and nine months then ended should be read in conjunction with the consolidated financial statements and related notes included in this Form 10-Q.


•	Total assets decreased $11.4 million to September 30, 2017 from December 31, 2016, primarily attributable to a $20.5 million decline in gross loans, including loans reported as held for sale, a $11.7 million reduction in available-for-sale investment securities, and a $10.6 million reduction in the assets of discontinued operations, partially offset by higher cash balances of $38.2 million.

•

Gross loans, including loans reported as held for sale, declined $20.5 million, to September 30, 2017 from December 31, 2016; however, excluding reductions in loans associated with mortgage warehouse participations arrangements of $66.8 million and our guaranteed student loan portfolio of $24.6 million, loans increased $71.0 million over this period. Our guaranteed student loan portfolio is reported as held for sale as of September 30, 2017, as we had entered into an agreement to sell the remaining portfolio, which occurred in October 2017.


•	Allowance for loan losses decreased $5.7 million to $16.3 million at September 30, 2017 from December 31, 2016, primarily due to charge-offs of specific reserves on several problem loans.


•	Deposits increased $33.4 million to September 30, 2017 from December 31, 2016, primarily due to core deposit growth.

•

Net interest income was $25.2 million and $74.8 million for the three and nine months ended September 30, 2017, respectively, compared to $23.0 million and $52.7 million for the three and nine months ended September 30, 2016, respectively. Higher net interest income in the 2017 periods was primarily attributable to higher average interest-earning assets, which were $2.86 billion and $2.87 billion in the three- and nine-month periods of 2017, respectively, compared to average interest-earning assets of $2.59 billion and $2.09 billion in the respective 2016 periods. Average interest-earning assets due to the Legacy Xenith Merger is reflected only from the effective date of the Legacy Xenith Merger, July 29, 2016.


•	Net interest margin was 3.51% for both the three and nine months ended September 30, 2017, and 3.56% and 3.40% for the three and nine months ended September 30, 2016, respectively. Net interest margin in the 2017 and 2016 periods include accretion of acquired loan discounts further discussed below.

•

Noninterest income for the three and nine months ended September 30, 2017 was $4.2 million and $11.1 million, respectively, compared to $2.9 million and $8.0 million, respectively, for the same periods in 2016. Higher noninterest income in 2017 periods was primarily due to income from net gains on the sale of investment securities, income from our back-to-back interest rate swap program, and Visa check card income.

•

Noninterest expense for the three and nine months ended September 30, 2017 was $18.8 million and $57.7 million, respectively, compared to $32.5 million and $62.4 million, respectively, for the same periods in 2016. Amounts in the three- and nine-month periods of 2017 included merger-related expenses of $930 thousand and $2.9 million, respectively, while noninterest expense in the same periods of 2016 included $12.9 million and $15.6 million, respectively, of merger-related expenses. Merger-related expenses in the 2017 periods were primarily in connection with the Union Merger, while merger-related expenses in the 2016 periods were in connection with the Legacy Xenith Merger.


•	Income before income taxes from continuing operations for the three and nine months ended September 30, 2017 was $10.6 million and $28.2 million, respectively, while loss before income taxes from continuing operations for the same periods in 2016 was $17.3 million and $12.4 million, respectively.

•

Provision for income taxes from continuing operations was $3.5 million and $9.0 million for the three and nine months ended September 30, 2017, respectively, compared to a benefit from income taxes of $64.8 million and $62.8 million, respectively, for the same periods in 2016. The benefit from income taxes in the 2016 periods was due to the reversal of substantially all of the remaining valuation allowance on our net deferred tax asset in the third quarter of 2016.

•

At September 30, 2017, our ratio of nonperforming assets to total assets was 0.79% compared to 1.15% as of December 31, 2016; our ratio of nonperforming loans to gross loans was 0.87% compared to 1.31% as of December 31, 2016, and the ratio of our allowance for loan losses to nonaccrual loans was 77.5% compared to 67.8% as of December 31, 2016. Other real estate owned and repossessed assets was $4.8 million at September 30, 2017, a reduction of $528 thousand from December 31, 2016.

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PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


•	Regulatory capital ratios of the Company and the Bank were considered "well capitalized" under the risk-based capital standards as of September 30, 2017.

ANALYSIS OF RESULTS OF OPERATIONS

The following table presents our net income and earnings per share information for the periods stated:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Net income:
Net income from continuing operations	$	7,165		$	47,501	$	19,156		$	50,402
Net (loss) income from discontinued operations	(7		)	363		(68		)	1,467
Net income attributable to Xenith Bankshares	$	7,158		$	47,864	$	19,088		$	51,869

Basic earnings per share:
Earnings per share from continuing operations	$	0.31		$	2.26	$	0.83		$	2.74
Earnings per share from discontinued operations	$	—		$	0.02	$	—		$	0.07
Earnings per share attributable to Xenith Bankshares	$	0.31		$	2.28	$	0.82		$	2.81

Diluted earnings per share:
Earnings per share from continuing operations	$	0.30		$	2.25	$	0.82		$	2.75
Earnings per share from discontinued operations	$	—		$	0.02	$	—		$	0.07
Earnings per share attributable to Xenith Bankshares	$	0.30		$	2.27	$	0.81		$	2.79

Net Interest Income and Net Interest Margin

For the three and nine months ended September 30, 2017, our net interest income was $25.2 million and $74.8 million, respectively, compared to $23.0 million and $52.7 million for the three and nine months ended September 30, 2016, respectively. As presented in the table below, net interest margin decreased by 5 basis points to 3.51% for the three months ended September 30, 2017 from 3.56% for the three months ended September 30, 2016, while net interest margin increased 11 basis points to 3.51% for the nine months ended September 30, 2017 from 3.40% for the same period of 2016.

Interest income was $30.4 million for the three months ended September 30, 2017 compared to $27.4 million for the same period of 2016. Interest income in the 2017 period was based on average interest-earning assets of $2.86 billion, while interest income in the 2016 period was on average interest-earning assets of $2.59 billion. Asset yields, on a tax-equivalent basis, were 4.23% in both three-month periods ended September 30, 2017 and 2016. Loan yields in both three-month periods include accretion of acquired loan discounts (discussed below).

Interest expense was $5.2 million for the three months ended September 30, 2017 compared to $4.4 million for the same period of 2016. Average interest-bearing liabilities for the three months ended September 30, 2017 were $2.17 billion compared to $2.03 billion for the three months ended September 30, 2016. Costs of interest-bearing liabilities were 0.95% for the three months ended September 30, 2017 compared to 0.85% for the same period of 2016. Higher costs of interest-bearing liabilities in the 2017 period were primarily due to higher costs of variable rate trust preferred securities and lower average balances of lower cost Federal Home Loan Bank ("FHLB") borrowings.

Interest income was $89.7 million and $63.5 million for the nine months ended September 30, 2017 and 2016, respectively, on $2.87 billion and $2.09 billion, respectively, of average-interest earning assets. Yields on interest-earning assets were 4.20% and 4.09% for the nine-months ended September 30, 2017 and 2016, respectively. Higher yields in the 2017 period were primarily due to higher yields on and average balances of loans. Loan yields in both nine-month periods include accretion of acquired loan discounts (discussed below).

Interest expense was $14.9 million and $10.7 million for the nine months ended September 30, 2017 and 2016, respectively, on average interest-bearing liabilities of $2.20 billion and $1.64 billion, respectively, for these same periods of 2016. Liability costs

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

in the nine-month period of 2017 was 0.90% compared to 0.87% in the 2016 period; the increase was primarily due to higher costs of variable rate trust preferred securities.

Our loans acquired in the Legacy Xenith Merger were discounted to estimated fair value (for credit and interest rates) as of the effective date of the Legacy Xenith Merger. A portion of the purchase accounting adjustments (discounts) to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans or the period of expected cash flows from the loans. Amounts received in excess of the carrying value of loans accounted for on cost recovery are also accreted into interest income at the time of recovery. Accretion of loan discounts was $594 thousand and $2.6 million for the three- and nine-month periods ended September 30, 2017, respectively. Accretion of loan discounts was $1.5 million for both the three- and nine-month periods ended September 30, 2016. The amount of accretion recognized within a period is based on many factors, including, among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility.

The following table presents the effect of purchase accounting adjustments (accretion) on our net interest margin for the periods stated:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Net interest margin	3.51%	3.56%	3.51%	3.40%
Purchase accounting adjustments impact (1)	0.08%	0.23%	0.12%	0.10%
Net interest margin excluding the effect of purchase accounting adjustments	3.43%	3.33%	3.39%	3.30%
_______________________
(1) Accretion of discounts on acquired loans in the three and nine months ended September 30, 2017 was $594 thousand and $2.6 million, respectively. Accretion of discounts on acquired loans in the three and nine months ended September 30, 2016 was $1.5 million.

The following table presents average interest-earning assets and liabilities, average yields earned on such assets and rates paid on such liabilities, net interest margin, and income and expense variances caused by changes in average balances and rates as of and for the periods stated:

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	Average Balances, Income and Expenses, Yields and Rates As of and for the Three Months Ended September 30,
	2017						2016						2017 Compared to 2016
													Interest
			Interest		Average				Interest		Average		Income/		Variance
	Average		Income/		Yield/		Average		Income/		Yield/		Expense		Attributable to (2)
	Balances (1)		Expense (7) (8) (9)		Rate		Balance		Expense		Rate		Variance		Rate			Volume
Assets:
Loans (3)	$	2,412,871	$	28,168	4.63	%	$	2,201,627	$	25,639	4.63	%	$	2,529	$	63		$	2,466
Investment securities	319,069		1,792		2.23	%	287,998		1,594		2.20	%	198		24			174
Restricted equity securities	21,550		312		5.74	%	19,856		251		5.03	%	61		38			23
Overnight funds sold
and due from FRB	101,335		233		0.91	%	79,706		94		0.47	%	139		108			31
Interest-bearing deposits
in other banks	7,171		25		1.38	%	3,850		2		0.21	%	23		20			3
Total interest-earning assets	2,861,996		30,530		4.23	%	2,593,037		27,580		4.23	%	2,950		253			2,697
Noninterest-earning assets	337,599						261,883
Total assets	$	3,199,595					$	2,854,920
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	1,158,260	$	1,815	0.62	%	$	980,423	$	1,384	0.56	%	$	431	$	163		$	268
Savings deposits	93,879		63		0.27	%	78,461		40		0.20	%	23		14			9
Time deposits	778,835		2,264		1.15	%	808,132		2,169		1.07	%	95		176			(81		)
Total interest-bearing deposits	2,030,974		4,142		0.81	%	1,867,016		3,593		0.77	%	549		353			196
Borrowings	137,920		1,037		2.98	%	164,089		760		1.84	%	277		414			(137		)
Total interest-bearing liabilities	2,168,894		5,179		0.95	%	2,031,105		4,353		0.85	%	826		767			59
Noninterest-bearing liabilities
Demand deposits	525,603						431,583
Other liabilities	20,816						21,225
Total noninterest-bearing liabilities	546,419						452,808
Total liabilities	2,715,313						2,483,913
Shareholders' equity	484,282						371,007
Total liabilities and shareholders' equity	$	3,199,595					$	2,854,920
Net interest income (5)			$	25,351					$	23,227			$	2,124	$	(514	)	$	2,638
Net interest spread (4)					3.28	%					3.38	%
Net interest margin (6)					3.51	%					3.56	%
_________________________
(1) Average balances are computed on a daily basis.
(2) Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.
(3) Nonaccrual loans have been included in the average balances.
(4) Net interest spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.
(5) Net interest income is interest income less interest expense.
(6) Net interest margin is net interest income divided by average interest-earning assets.
(7) Tax-exempt interest income is stated on a taxable-equivalent basis.
(8) Interest income from loans in 2017 and 2016 includes approximately $594 thousand and $1.5 million, respectively, in accretion related to acquired loans.
(9) Interest income from loans includes fees of $470 thousand and $257 thousand for the three months ended September 30, 2017 and 2016, respectively.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	Average Balances, Income and Expenses, Yields and Rates As of and for the Nine Months Ended September 30,
	2017						2016						2017 Compared to 2016
													Interest
			Interest		Average				Interest		Average		Income/		Variance
	Average		Income/		Yield/		Average		Income/		Yield/		Expense		Attributable to (2)
	Balances (1)		Expense (7) (8) (9)		Rate		Balance		Expense		Rate		Variance		Rate		Volume
Assets:
Loans (3)	$	2,403,346	$	82,719	4.60	%	$	1,787,481	$	59,216	4.43	%	$	23,503	$	2,387	$	21,116
Investment securities	319,367		5,702		2.39	%	228,734		3,988		2.33	%	1,714		98		1,616
Restricted equity securities	20,857		909		5.83	%	14,629		570		5.20	%	339		74		265
Overnight funds sold
and due from FRB	115,143		685		0.80	%	56,836		176		0.41	%	509		241		268
Interest-bearing deposits
in other banks	6,560		49		0.10	%	1,752		3		0.23	%	46		25		21
Total interest-earning assets	2,865,273		90,064		4.20	%	2,089,432		63,953		4.09	%	26,111		2,825		23,286
Noninterest-earning assets	341,075						226,891
Total assets	$	3,206,348					$	2,316,323
Liabilities and Shareholders' Equity:
Interest-bearing liabilities
Interest-bearing demand deposits	$	1,156,000	$	5,061	0.59	%	$	785,757	$	3,054	0.52	%	$	2,007	$	425	$	1,582
Savings deposits	91,858		180		0.26	%	69,071		81		0.16	%	99		66		33
Time deposits	825,100		6,890		1.12	%	689,925		5,746		1.11	%	1,144		15		1,129
Total interest-bearing deposits	2,072,958		12,131		0.78	%	1,544,753		8,881		0.77	%	3,250		506		2,744
Borrowings	125,032		2,722		2.91	%	92,603		1,815		2.62	%	907		218		689
Total interest-bearing liabilities	2,197,990		14,853		0.90	%	1,637,356		10,696		0.87	%	4,157		724		3,433
Noninterest-bearing liabilities
Demand deposits	511,533						340,305
Other liabilities	20,097						17,609
Total noninterest-bearing liabilities	531,630						357,914
Total liabilities	2,729,620						1,995,270
Shareholders' equity	476,728						321,053
Total liabilities and shareholders' equity	$	3,206,348					$	2,316,323
Net interest income (5)			$	75,211					$	53,257			$	21,954	$	2,101	$	19,853
Net interest spread (4)					3.30	%					3.22	%
Net interest margin (6)					3.51	%					3.40	%
_________________________
(1) Average balances are computed on a daily basis.
(2) Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.
(3) Nonaccrual loans have been included in the average balances.
(4) Net interest spread is the yield on average interest-earning assets less the rate on average interest-bearing liabilities.
(5) Net interest income is interest income less interest expense.
(6) Net interest margin is net interest income divided by average interest-earning assets.
(7) Tax-exempt interest income is stated on a taxable-equivalent basis.
(8) Interest income from loans in 2017 and 2016 includes approximately $2.6 million and $1.5 million, respectively, in accretion related to acquired loans.
(9) Interest income from loans includes fees of $1.4 million and $632 thousand for the nine months ended September 30, 2017 and 2016, respectively.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Provision for Loan Losses

The following table presents our provision for loan losses and the dollar and percentage change for the periods stated:



	Three Months Ended September 30,
	2017		2016		$ Change			% Change
Provision for loan losses	$	—	$	10,685	$	(10,685	)	n/m

n/m - Rate not meaningful



	Nine Months Ended September 30,
	2017		2016		$ Change			% Change
Provision for loan losses	$	9	$	10,704	$	(10,695	)	n/m

n/m - Rate not meaningful

Provision for loan losses for the three and nine months ended September 30, 2016 reflects specific reserves for several problem loans.

Noninterest Income

The following table presents a summary of noninterest income and the dollar and percentage change for the periods stated:



	Three Months Ended September 30,
	2017		2016		$ Change		% Change
Service charges on deposit accounts	$	1,258	$	1,191	$	67	5.6	%
Earnings from bank-owned life insurance	426		395		31		7.8	%
Gain on sale of loans	—		—		—		—	%
Net gain on sale of investment securities available for sale	977		—		977		100.0	%
Visa check card income	806		709		97		13.7	%
Other	705		575		130		22.6	%
Total noninterest income	$	4,172	$	2,870	$	1,302	45.4	%



	Nine Months Ended September 30,
	2017		2016		$ Change		% Change
Service charges on deposit accounts	$	3,561	$	3,447	$	114	3.3	%
Earnings from bank-owned life insurance	1,327		1,046		281		26.9	%
Gain on sale of loans	38		—		38		100.0	%
Net gain on sale of investment securities available for sale	977		15		962		6,413.3	%
Visa check card income	2,399		2,056		343		16.7	%
Other	2,822		1,430		1,392		97.3	%
Total noninterest income	$	11,124	$	7,994	$	3,130	39.2	%

The increase in earnings from bank-owned life insurance ("BOLI") in the 2017 periods compared to the same periods of 2016 was primarily due to higher investment in BOLI, a portion of which was acquired in the Legacy Xenith Merger. In the third quarter of 2017, the Company sold a number of investment securities, which had amortized to relatively low carrying values and certain equity securities for a net gain of $977 thousand. The increase in Visa check card income in the 2017 periods was due to greater usage volumes resulting from the Legacy Xenith Merger. Higher other noninterest income was primarily due to income from our back-to-back customer interest rate swap program, from which the Company entered into a greater number of transactions in the three and nine months ended September 30, 2017 compared to the same periods of 2016.

Noninterest Expense

The following table presents a summary of noninterest expense and the dollar and percentage change for the periods stated:

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	Three Months Ended September 30,
	2017			2016		$ Change			% Change
Salaries and employee benefits	$	9,914		$	9,880	$	34		0.3	%
Professional and consultant fees	830			978		(148		)	(15.1	)%
Occupancy	1,802			1,594		208			13.0	%
FDIC insurance	349			679		(330		)	(48.6	)%
Data processing and technology	1,367			1,446		(79		)	(5.5	)%
Problem loan and repossessed asset costs	(1		)	219		(220		)	(100.5	)%
Impairments on and (gains) and losses on sales of other real estate owned and repossessed assets	(48		)	685		(733		)	(107.0	)%
Equipment	322			309		13			4.2	%
Board fees	350			493		(143		)	(29.0	)%
Advertising and marketing	158			398		(240		)	(60.3	)%
Merger-related	930			12,910		(11,980		)	(92.8	)%
Other	2,806			2,944		(138		)	(4.7	)%
Total noninterest expense	$	18,779		$	32,535	$	(13,756	)	(42.3	)%



	Nine Months Ended September 30,
	2017		2016		$ Change			% Change
Salaries and employee benefits	$	30,186	$	24,990	$	5,196		20.8	%
Professional and consultant fees	2,792		2,101		691			32.9	%
Occupancy	5,586		4,428		1,158			26.2	%
FDIC insurance	1,498		1,524		(26		)	(1.7	)%
Data processing and technology	3,909		3,985		(76		)	(1.9	)%
Problem loan and repossessed asset costs	306		420		(114		)	(27.1	)%
Impairments on and (gains) and losses on sales of other real estate owned and repossessed assets	63		112		(49		)	(43.8	)%
Equipment	1,049		812		237			29.2	%
Board fees	596		1,133		(537		)	(47.4	)%
Advertising and marketing	667		503		164			32.6	%
Merger-related	2,895		15,555		(12,660		)	(81.4	)%
Other	8,202		6,854		1,348			19.7	%
Total noninterest expense	$	57,749	$	62,417	$	(4,668	)	(7.5	)%

Noninterest expenses in the three months ended September 30, 2017 were $18.8 million ($17.8 million excluding merger-related expenses) compared to $32.5 million ($19.6 million excluding merger-related expenses) in the three months ended September 30, 2016, a decrease of $1.8 million when excluding merger-related expenses. Noninterest expenses were $57.7 million ($54.9 million excluding merger-related expenses) in the nine months ended September 30, 2017 compared to $62.4 million ($46.9 million excluding merger-related expenses) in the nine months ended September 30, 2016, an increase of $8.0 million when excluding merger-related expenses.

Higher salaries and employee benefits and occupancy expenses in the 2017 periods were primarily due to the Legacy Xenith Merger. Personnel costs in the three-month period ended September 30, 2017 have lesser of an effect due to certain duplicative personnel in the third quarter 2016 and turnover resulting from the pending Union Merger. Professional and consultant fees in the nine-month period of 2017 reflect greater audit fees associated with the 2016 audit and greater out-sourced legal and internal audit services. Lower impairments and gains and losses on other real estate owned and the costs associated with these assets in the 2017 periods is due to the significant reduction in problem loans and repossessed assets. Lower board fees in the 2017 periods are primarily due to certain payments made in 2016 on account of the Legacy Xenith Merger. Higher other noninterest expense in the nine-month period of 2017 is partially due to bank franchise taxes due to equity balances after the Legacy Xenith Merger. Higher unfunded commitment expense also contributed to higher other noninterest expense.

Income Taxes

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following table presents income tax provision and the dollar and percentage change for the periods stated:



	Three Months Ended September 30,
	2017		2016			$ Change		% Change
Provision (benefit) for income taxes - continuing operations	$	3,453	$	(64,840	)	$	68,293	(105.3	)%



	Nine Months Ended September 30,
	2017		2016			$ Change		% Change
Provision (benefit) for income taxes - continuing operations	$	8,997	$	(62,794	)	$	71,791	(114.3	)%

Our effective tax rate from continuing operations was 32.5% and 32.0% for the three and nine months ended September 30, 2017, respectively. Effective tax rates below the statutory rate were primarily due to tax-exempt income from both tax-exempt municipal investment securities and earnings on BOLI. The benefit from income taxes in the comparable 2016 periods is due to the reversal of substantially all of the remaining valuation allowance on our net deferred tax asset in the third quarter of 2016.

ANALYSIS OF FINANCIAL CONDITION

Cash and Cash Equivalents

Cash and cash equivalents includes cash and due from banks, interest-bearing deposits in other banks, and overnight funds sold and due from the Federal Reserve Bank ("FRB"). Cash and cash equivalents are used for daily cash management purposes, management of short-term interest rate opportunities, and liquidity. Cash and cash equivalents as of September 30, 2017 were $165.2 million compared to $127.0 million at December 31, 2016. Higher cash and cash equivalents at September 30, 2017 compared to December 31, 2016 were primarily attributable to core deposit growth.

Investment Securities

Our available-for-sale securities are reported at fair value and are used primarily for liquidity, pledging, earnings and asset / liability management purposes. We perform due diligence of each security on a pre-purchase basis and review securities periodically for impairment.

The following tables present information about our investment securities portfolio as of the dates stated. Yields on tax-exempt securities are calculated on a taxable-equivalent yield basis. The decline in our available-for-sale securities portfolio of $11.7 million from December 31, 2016 to September 30, 2017 is primarily due to the disposition of certain investment securities, which had amortized to relatively low carrying values and certain equity securities. We recorded a net gain of $977 thousand on the sale of these investment securities.

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PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	September 30, 2017
	Amortized Cost		Fair Value		Weighted Average Life in Years	Weighted Average Yield
Mortgage-backed securities
Agencies	$	127,298	$	127,253	4.25	2.20	%
Collateralized	63,716		62,984		3.64	1.85	%
Collateralized mortgage obligations	27,194		27,059		5.37	2.43	%
Asset-backed securities	6,686		6,611		4.98	2.84	%
Municipals
Tax-exempt	63,486		62,799		7.15	2.99	%
Taxable	17,958		17,681		4.52	2.00	%
Corporate bonds	975		975		1.00	2.98	%
Equity securities	141		406		—	—	%
Total securities available for sale	$	307,454	$	305,768	4.99	2.30	%



	December 31, 2016
	Amortized Cost		Fair Value		Weighted Average Life in Years	Weighted Average Yield
Mortgage-backed securities
Agencies	$	135,054	$	134,890	4.18	2.04	%
Collateralized	63,837		62,753		4.24	1.84	%
Collateralized mortgage obligations	19,626		19,810		2.65	2.69	%
Asset-backed securities	14,866		14,758		5.58	2.60	%
Municipals
Tax-exempt	67,738		64,755		7.87	2.85	%
Taxable	18,105		17,676		5.47	2.00	%
Corporate bonds	983		984		1.70	2.62	%
Equity securities	969		1,817		—	—	%
Total securities available for sale	$	321,178	$	317,443	5.01	2.25	%

The following table presents a maturity analysis of our securities portfolio as of the date stated. Weighted average yield calculations are based on the current level of contractual maturities and expected prepayments as of the date stated. Yields on tax-exempt securities are calculated on a taxable-equivalent yield basis.

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PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	September 30, 2017
	Within 1 Year		Weighted Average Yield		After 1 Year Through 5 Years		Weighted Average Yield		After 5 Years Through 10 Years		Weighted Average Yield		After 10 Years		Weighted Average Yield		Total		Weighted Average Yield
Mortgage-backed securities
Agencies	$	4,721	2.23	%	$	91,532	2.03	%	$	28,679	2.54	%	$	2,321	3.19	%	$	127,253	2.20	%
Collateralized	993		1.21	%	46,475		1.84	%	15,516		1.93	%	—		—	%	62,984		1.85	%
Collateralized mortgage obligations	164		3.60	%	6,010		2.31	%	20,885		2.46	%	—		—	%	27,059		2.43	%
Asset-backed securities	—		—	%	2,681		3.09	%	3,930		2.66	%	—		—	%	6,611		2.84	%
Municipals
Taxable	—		—	%	10,516		1.90	%	7,165		2.16	%	—		—	%	17,681		2.00	%
Tax exempt	253		0.81	%	3,435		2.05	%	56,567		3.08	%	2,544		2.69	%	62,799		2.99	%
Corporate bonds	975		2.98	%	—		—	%	—		—	%	—		—	%	975		2.98	%
Equity securities	—		—	%	—		—	%	—		—	%	406		—	%	406		—	%
Total securities available for sale	$	7,106	2.25	%	$	160,649	2.02	%	$	132,742	2.65	%	$	5,271	2.95	%	$	305,768	2.30	%

Loans

Our loan portfolio is comprised of C&I, CRE, RRE, and consumer loans. In the first and second quarters of 2017, we sold a portion of our guaranteed student loan ("GSLs") portfolio. As of September 30, 2017, our remaining GSLs are reported as held for sale as we had entered into an agreement to sell the remaining portfolio subsequent to the end of the quarter. In October, the remaining GSLs were sold resulting in a gain of $214 thousand.

Lending decisions are based upon evaluation of the financial strength and credit history of the borrower and the quality and value of the collateral securing the loan. Personal guarantees are required on most loans; however, prudent exceptions are made on occasion based upon the financial viability of the borrowing entity or the underlying project that is being financed. Gross loans, including GSLs, decreased by $20.5 million to $2.44 billion at September 30, 2017 from $2.46 billion at December 31, 2016. Reductions in loans were primarily associated with mortgage warehouse participations arrangements, which decreased $66.8 million, and the reduction of GSLs of $24.6 million. Excluding the decline in balances in these two portfolios, loans increased $71.0 million to September 30, 2017 from December 31, 2016.

We make owner-occupied real estate ("OORE") loans, which are secured in part by the real estate that is generally the offices or production facilities of the borrower. In some cases, the real estate is not held by the commercial enterprise, rather it is owned by the principals of the business or an entity controlled by the principals. We classify OORE loans as commercial and industrial, as the primary source of repayment of the loan is generally dependent on the financial performance of the commercial enterprise occupying the property, with the real estate being a secondary source of repayment.

The following table presents our composition of loans, net of capitalized origination costs and unearned income, in dollar amounts and as a percentage of total loans, as of the dates stated:

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	September 30, 2017					December 31, 2016
	Amount			Percent of Total		Amount			Percent of Total
Commercial & Industrial	$	766,506		31.6	%	$	895,952		36.4	%
Construction	274,441			11.4	%	257,712			10.5	%
Commercial real estate	655,001			27.0	%	585,727			23.8	%
Residential real estate	390,071			16.1	%	405,291			16.4	%
Consumer	336,832			13.9	%	274,008			11.1	%
Guaranteed student loans	—			—	%	44,043			1.8	%
Deferred loan fees and related costs	1,289			—	%	1,323			—	%
Total loans	2,424,140			100.0	%	2,464,056			100.0	%
Allowance for loan losses	(16,265		)			(21,940		)
Total loans, net of allowance	$	2,407,875				$	2,442,116

Allowance for Loan Losses

Our allowance for loan losses was $16.3 million or 0.67% of total loans as of September 30, 2017 compared to $21.9 million or 0.89% of gross loans as of December 31, 2016. The decline in our allowance for loan losses to September 30, 2017 from December 31, 2016 was primarily due to charge-offs of several problem loans for which we had specific reserves.

Legacy Xenith's allowance for loan losses existing at the effective time of the Legacy Xenith Merger was not carried over in the Legacy Xenith Merger, rather discounts (for credit and interest) were recorded to reflect the loans at estimated fair value as of the date of the Legacy Xenith Merger; therefore, our allowance for loan losses does not include remaining discounts recorded on our acquired loan portfolio. Any decline in the credit quality related to the acquired loan portfolio and the reduction of loan discounts through accretion may result in the need to increase in our allowance for loan losses and record additional provision expense. The ratio of our allowance for loan losses plus our remaining discount (fair value adjusted allowance for loan losses) to gross loans (adjusted for the discount) was 0.90% at September 30, 2017 compared to 1.25% at December 31, 2016.

The following table presents our allowance for loan losses by loan type and the percent of loans in each category to total loans, as of the dates stated. The unallocated component of our allowance for loan losses is shown separately.



	September 30, 2017				December 31, 2016
	Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans
Balance at end of period applicable to:
Commercial & Industrial	$	2,381	31.6	%	$	5,816	36.4	%
Construction	1,613		11.4	%	1,551		10.5	%
Commercial real estate	3,320		27.0	%	2,410		23.8	%
Residential real estate	3,135		16.1	%	5,205		16.4	%
Consumer	1,876		13.9	%	1,967		11.1	%
Guaranteed student loans	—		—	%	—		1.8	%
Unallocated qualitative	3,940		—	%	4,991		—	%
Total allowance for loan losses	$	16,265	100.0	%	$	21,940	100.0	%

Our allowance consists of specific, general and unallocated qualitative components. The following table presents an allocation of the allowance for loan losses and other related information as of the dates stated:

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	September 30, 2017			December 31, 2016
Allowance for loan losses:
Specific component	$	2,381		$	6,103
General component	9,944			10,846
Unallocated qualitative component	3,940			4,991
Total	$	16,265		$	21,940
Impaired loans	$	45,825		$	60,562
Non-impaired loans	2,378,315			2,403,494
Total loans	$	2,424,140		$	2,464,056

Specific component as % of impaired loans	5.20		%	10.08		%
General component as % of non-impaired loans	0.42		%	0.45		%

The specific component of our allowance for loan losses relates to loans that are individually evaluated for impairment. Impaired loans decreased to $45.8 million at September 30, 2017 from $60.6 million at December 31, 2016. Of these loans, $21.0 million were on nonaccrual status at September 30, 2017 compared to $32.4 million at December 31, 2016. The general component of our allowance relates to groups of loans collectively evaluated for reserve needs. An unallocated qualitative component is maintained to cover uncertainties that could affect management's estimate of probable losses.

In the period since the Legacy Xenith Merger through September 30, 2017, no provision expense has been recorded with respect to GSLs, as the carrying amount in these loans approximates the guaranteed portion of the loans.

The following table presents certain asset quality ratios as of the dates stated:



	September 30, 2017		December 31, 2016
Nonperforming loans with no allowance due to previous charge-offs as a percentage of total loans	0.30	%	0.33	%
Nonperforming loans with no allowance due to previous charge-offs as a percentage of nonperforming loans	35.03	%	24.88	%
Charge-off rate for nonperforming loans with no allowance due to previous charge-offs	63.75	%	62.59	%
Coverage ratio net of nonperforming loans with no allowance due to previous charge-offs	119.14	%	90.23	%
Total allowance divided by total loans less nonperforming loans with no allowance due to previous charge-offs	0.67	%	0.89	%
Allowance for individually impaired loans divided by impaired loans for which an allowance has been provided	17.85	%	28.59	%
Nonperforming assets as a percentage of total loans	1.07	%	1.53	%
Nonperforming assets as a percentage of total assets	0.79	%	1.15	%
Net charge-offs as a percentage of average loans (year-to-date)	0.24	%	0.65	%
Allowance for loan losses as a percentage of total loans	0.67	%	0.89	%
Allowance for loan losses to nonaccrual loans	77.45	%	67.78	%

Our allowance for loan losses is an estimate based upon the data in hand at a particular time and that estimate involves judgment regarding data available at that time. Our allowance is subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance in comparison to peer banks identified by regulatory agencies. Such agencies may require us to recognize additions to the allowance for loan losses based on their judgments about information available at the time of the examinations. At September 30, 2017, we believe the level of our allowance for loan losses was adequate.

Nonperforming Assets

We classify nonaccrual loans and other real estate owned and repossessed assets as nonperforming assets. Total nonperforming assets were $25.8 million and $37.7 million at September 30, 2017 and December 31, 2016, respectively. Our nonperforming assets ratio, defined as the ratio of nonperforming assets to total assets, was 0.79% and 1.15% at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, there were no loans, other than our GSLs, categorized as 90 days or more past due and still accruing interest. GSLs are substantially fully guaranteed by the federal government as to principal and accrued interest.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Loans in nonaccrual status totaled $21.0 million and $32.4 million at September 30, 2017 and December 31, 2016, respectively. Other real estate owned and repossessed assets decreased to $4.8 million at September 30, 2017 from $5.3 million at December 31, 2016.

The following table summarizes our nonperforming assets as of the dates stated:



	September 30, 2017		December 31, 2016
Loans 90 days past due and still accruing interest (1)	$	—	$	—
Nonaccrual loans	21,002		32,370
Other real estate owned and repossessed assets, net	4,817		5,345
Total nonperforming assets	$	25,819	$	37,715

(1) Excludes GSLs.

Deposits

The following table presents the average balances and annualized costs paid by deposit category for the periods stated:



	September 30, 2017				December 31, 2016
	Amount		Rate		Amount		Rate
Noninterest-bearing demand deposits	$	511,533	—	%	$	382,613	—	%
Interest-bearing deposits:
Demand and money market	1,156,000		0.59	%	873,046		0.53	%
Savings accounts	91,858		0.26	%	73,033		0.17	%
Time deposits $100 or greater	410,923		1.15	%	340,259		1.17	%
Time deposits less than $100	414,177		1.08	%	396,982		1.04	%
Total interest-bearing deposits	2,072,958		0.78	%	1,683,320		0.76	%
Total average deposits	$	2,584,491	0.62	%	$	2,065,933	0.62	%

Maturities of large denomination time deposits (equal to or greater than $100 thousand) as of September 30, 2017 were as follows:



											Percent of
	Within 3 Months		3-6 Months		6-12 Months		Over 12 Months		Total		Total Deposits
Time deposits	$	130,391	$	100,452	$	83,262	$	113,950	$	428,055	16.43	%

Deposits increased $33.4 million, or 1.30%, from December 31, 2016 to September 30, 2017, primarily due to an increase in demand and money market account balances, partially offset by a decline in time deposit account balances. As of September 30, 2017, $115.2 million of our deposits were in Certificate of Deposit Account Registry Service ("CDARS"), Insured Cash Sweep ("ICS"), Anova Financial Corporation and Brokered CDs (collectively, "brokered deposits"), which is a decline of $18.5 million from December 31, 2016.

Borrowings

We use short-term and long-term borrowings from various sources, including the FRB discount window, the FHLB, subordinated debt and junior subordinated debentures. We manage the level of our borrowings to minimize our borrowing cost, to maintain sufficient liquidity to meet the daily needs of our customers, and to meet our regulatory reserve requirements. We decreased borrowings with the FHLB by $67.0 million to $105.0 million at September 30, 2017 from December 31, 2016, primarily due to deposit growth.

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

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION



	September 30, 2017								December 31, 2016
	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate		Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
FHLB borrowings	$	105,000	$	105,000	$	86,040	0.92	%	$	172,000	$	197,500	$	99,125	0.43	%

In the Legacy Xenith Merger, we assumed $8.5 million in aggregate principal amount of Legacy Xenith's outstanding 6.75% subordinated notes due 2025 (the "Subordinated Notes"). The Subordinated Notes bear interest at an annual rate of 6.75%, which is payable quarterly in arrears on March 31, June 30, September 30 and December 31 and qualify as Tier 2 capital for us. As of September 30, 2017, the carrying amount of the Subordinated Notes, including the remaining fair value adjustment recorded at the Legacy Xenith Merger, was $8.6 million. For the three and nine months ended September 30, 2017, the effective interest rate, including the amortization of purchase accounting adjustments, on the Subordinated Notes was 6.40%. As of September 30, 2017, Xenith Bankshares and the Bank, as applicable, were in compliance with all covenants of the Subordinated Notes.

We have four placements of trust preferred securities. In all four trusts, the trust issuer has invested the total proceeds from the sale of the trust preferred securities in junior subordinated deferrable interest debentures issued by us. The trust preferred securities pay cumulative cash distributions quarterly at an annual rate, reset quarterly. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. We have fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. Our obligation under the guarantee is unsecured and subordinate to our senior and subordinated indebtedness. The trust preferred securities are redeemable only at our discretion, subject to regulatory approval. We are current on interest payments due to the holders of the trust preferred securities. The aggregate carrying value of these debentures as of September 30, 2017 was $30.6 million. The difference between the par amounts and the carrying amounts of the debentures, due to purchase accounting adjustments from the acquisition of Gateway Financial Holdings, Inc. in 2008, is amortized using the interest method as an adjustment to interest expense each period. Effective interest rates for the debentures for the nine-month period ended September 30, 2017 were between 7.33% and 8.01%.

Liquidity

Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate deposit withdrawals, payments of debt and operating expenses, to fund loan demand, and to achieve stated objectives. These events may occur daily or in other short-term intervals in the normal operation of our business. Historical trends may help management predict the amount of cash required. In assessing liquidity, we give consideration to various factors, including stability and maturity of deposits, quality, volume and maturity of assets, sources and costs of borrowing, concentrations of loans and deposits with certain businesses and industries, competition for loans and deposits, and our overall financial condition and cash flows. Our primary sources of liquidity are cash, due from banks, federal fund sold and securities in our available-for-sale portfolio.

At September 30, 2017, cash and cash equivalents were $165.2 million compared to $127.0 million at December 31, 2016. Net cash provided by operating activities in 2017 was $31.0 million, primarily from operating earnings. Net cash provided by investing activities in 2017 was $32.1 million, primarily due to proceeds from investment securities, restricted securities and loan sales, partially offset by purchases of investment securities. Net cash used in financing activities in 2017 was $34.7 million, primarily due to the repayment of short-term FHLB borrowings of 67.0 million, partially offset by an increase in deposits of $33.4 million.

We have secured borrowing facilities with the FHLB and the FRB. As of September 30, 2017, total credit availability under the FHLB facility was $794.7 million, limited to a pledged, lendable collateral value of $303.0 million. Under this facility, as of September 30, 2017, there was $105.0 million outstanding. Credit availability under the FRB facility as of September 30, 2017 was $112.8 million, which is also based on pledged collateral value. At September 30, 2017, the Bank also had no borrowings outstanding under the FRB facility.

We have uncommitted lines of credit with eight banks to borrow federal funds up to $153.0 million on an unsecured basis. Two of the lines expire within one year; the remaining lines have to stated expiration. However, all of the lines are uncommitted and can be canceled by the lender at any time. As of September 30, 2017, there were no amounts outstanding under these lines of credit. Borrowings under these arrangements bear interest at the prevailing Federal Funds Rate.

Capital Resources

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Total shareholders' equity increased $20.7 million to $484.3 million at September 30, 2017 from $463.6 million at December 31, 2016. The increase was primarily due to net income of $19.1 million for the nine months ended September 30, 2017.

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

We are subject to various regulatory capital requirements administered by federal and other bank regulators. Failure to meet minimum capital requirements can trigger certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on us. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

In July 2013, the Federal Reserve approved a final rule establishing a regulatory capital framework for smaller, less complex financial institutions, implementing in the United States the Basel III regulatory capital reforms for the Basel Committee and certain changes required by the Dodd-Frank Act. Information regarding capital requirements to which we are subject can be found in Part I, Item 1 - Business under the caption "Supervision and Regulation - Capital Adequacy and Guidelines" in our 2016 Form 10-K.

The following table presents capital for the various capital ratios and risk weighted assets for the Bank and Xenith Bankshares as of the dates stated:



	September 30, 2017				December 31, 2016
	Xenith Bank		Xenith Bankshares		Xenith Bank		Xenith Bankshares
Common equity Tier 1 capital	$	343,256	$	363,579	$	314,768	$	343,519
Tier 1 capital	343,256		366,784		314,768		343,518
Total risk-based capital	359,521		391,643		336,712		374,082
Risk-weighted assets	2,822,708		2,843,595		2,821,029		2,849,714

The following table presents our capital ratios, minimum capital ratios required by our regulators, and capital ratios defined as "well capitalized" by regulators for the Bank and for Xenith Bankshares as of the dates stated. Since September 30, 2017, there are no conditions or events that management believes has changed our status as "well capitalized."



	September 30, 2017				December 31, 2016
	Xenith	Xenith	Regulatory	Well	Xenith	Xenith	Regulatory	Well
	Bank	Bankshares	Minimum	Capitalized	Bank	Bankshares	Minimum	Capitalized
Common equity Tier 1 capital ratio	12.16%	12.79%	4.50%	> 6.50%	11.16%	12.05%	4.50%	> 6.50%
Tier 1 leverage ratio	11.24%	11.93%	4.00%	> 5.00%	9.94%	10.74%	4.40%	> 5.00%
Tier 1 risk-based capital ratio	12.16%	12.90%	6.00%	> 8.00%	11.16%	12.05%	6.00%	> 8.00%
Total risk-based capital ratio	12.74%	13.77%	8.00%	> 10.00%	11.94%	13.13%	8.00%	> 10.00%

Contractual Obligations

In the normal course of business, we have contractual obligations to make future payments on debt and lease agreements. We also enter into contractual arrangements whereby we commit to future purchases of products or services from unaffiliated parties. Our primary contractual obligations consist of time deposits, borrowings and operating lease obligations for facilities.

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

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

These commitments represent outstanding off-balance sheet commitments and are further discussed in Part 1, Item 1 - Notes to Consolidated Financial Statements under the caption "Note 13 - Commitments and Contingencies" in this Form 10-Q.

Interest Rate Sensitivity

Market risk is the potential of loss arising from adverse changes in interest rates and prices. We are exposed to market risk as a consequence of the normal course of conducting our business activities. Management considers interest rate risk to be a significant market risk for us. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of our interest-earning assets and interest-bearing liabilities.

The primary goal of our asset-liability management strategy is to optimize net interest income while limiting exposure to fluctuations caused by changes in the interest rate environment. Our ability to manage our interest rate risk depends generally on our ability to match the maturities and re-pricing characteristics of our assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income.

Management, guided by the Asset-Liability Committee of our board of directors, determines the overall magnitude of interest sensitivity risk and then formulates policies governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management's expectations regarding future interest rate movements, the state of the national and regional economy, and other financial and business risk factors.

The primary method that we use to quantify and manage interest rate risk is simulation analysis, which is used to model net interest income from assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures. This analysis measures the sensitivity of net interest income over a relatively short time horizon. Key assumptions in the simulation analysis relate to the behavior of interest rates and spreads, the changes in product balances, and the behavior of loan and deposit customers in different rate environments.

The following table illustrates the expected effect on net interest income for the 12 months following September 30, 2017 due to an immediate change ("instantaneous rate shock" scenario) and a gradual change ("ramped rate shock" scenario) in interest rates. Estimated changes set forth below are dependent on material assumptions, such as those previously discussed. It should be noted that rates are unlikely to change instantly in the severity of an instantaneous rate shock, and management believes the ramped rate shock simulation more likely demonstrates the effect of changes in interest rates on us. In the ramped rate shock simulation, interest rates change pro rata over the simulation period.



	September 30, 2017
	Change in Net Interest Income
	Instantaneous Rate Shock Scenario					Ramped Rate Shock Scenario
	$			%		$			%
Change in Interest Rates:
+200 basis points	$	3,934		3.90	%	$	1,389		1.38	%
+100 basis points	$	2,559		2.54	%	$	726		0.72	%
–100 basis points	$	(5,709	)	(5.66	)%	$	(958	)	(0.95	)%
–200 basis points	$	(7,342	)	(7.28	)%	$	(1,227	)	(1.22	)%

As of September 30, 2017, we project an increase in net interest income in an increasing rate environment and a decrease in net interest income in a decreasing interest rate environment, and we are considered "asset-sensitive".

It should be noted that the simulation analyses are based upon equivalent changes in interest rates for all categories of assets and liabilities. In normal operating conditions, interest rates may not change in a uniform matter. Many factors affect the timing and magnitude of interest rate changes on financial instruments. In addition, we may deploy strategies that offset some of the impact of changes in interest rates. Depending upon the timing and shifts in the interest rate yield curve, certain rising rate scenarios could be less favorable due to loan and deposit re-pricing characteristics. Consequently, actual outcomes would be expected to vary from the projections due to the controlled conditions of the simulation analysis.

Economic value of equity ("EVE") is defined as the present value of all future asset cash flows less the present value of all future liability cash flows or an estimate of the enterprise value. Although EVE takes into account all anticipated future cash flow based

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

on the existing balance sheet at a point in time, it does not distinguish either the timing of those cash flows or changes in behavior or balance sheet structure that might occur in different rate environments. It also assumes that a change in interest rates occurs immediately and that the same interest rate environment last perpetually into the future. The following table illustrates the expected effect on EVE as of September 30, 2017 due to an immediate change in interest rates. Estimated changes set forth below are dependent on material assumptions such as those previously discussed.



	September 30, 2017
	Change in the Economic Value of Equity
	$			%
Change in Interest Rates:
+200 basis points	$	76,500		16.8	%
+100 basis points	$	45,900		10.1	%
–100 basis points	$	(70,400	)	(15.5	)%
–200 basis points	$	(181,800	)	(39.9	)%

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

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XENITH BANKSHARES, INC.

PART I. FINANCIAL INFORMATION

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as amended (the "Exchange Act"), as of September 30, 2017. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of September 30, 2017 were effective in providing reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified by the SEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the three months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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XENITH BANKSHARES, INC.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

On September 7, 2017, Paul Parshall, a purported shareholder of Xenith Bankshares, filed a putative class action lawsuit (the "Parshall Lawsuit") in the United States District Court for the Eastern District of Virginia against us, the current members of our board of directors, and Union on behalf of all of our public shareholders. The plaintiff in the Parshall Lawsuit alleges that Union's registration statement on Form S-4, as amended, filed with the SEC relating to the Union Merger omitted certain material information in violation of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and further that the individual defendants are liable for those omissions under Section 20(a) of the Exchange Act. The relief sought in the Parshall Lawsuit includes preliminary and permanent injunction to prevent the completion of the Union Merger, rescission or rescissory damages if the Union Merger is completed, costs and attorneys' fees. On November 6, 2017, the plaintiff in the Parshall Lawsuit filed a notice of voluntary dismissal, terminating the Parshall Lawsuit without prejudice.

On September 19, 2017, Shannon Rowe, a purported shareholder of Xenith Bankshares, also filed a putative class action lawsuit (the "Rowe Lawsuit") in the United States District Court for the Eastern District of Virginia against us and the current members of our board of directors. The allegations in the Rowe Lawsuit are similar to the allegations in the Parshall Lawsuit, described above.

At this time, it is not possible to predict the outcome of the Rowe Lawsuit or its impact on us or the Union Merger. We believe the claims in the Rowe Lawsuit are without merit, and we and our board of directors intend to defend vigorously against them.

In addition to the Rowe Lawsuit, in the ordinary course of operations, we may become a party to legal proceedings. Based upon information currently available, management believes that any such legal proceedings, in the aggregate, will not have a material adverse effect on our business, financial condition, cash flows, or results of operations.

ITEM 1A – RISK FACTORS

For information regarding factors that could affect our results of operations, financial condition, or liquidity, see the risk factors discussed in Part I, Item 1A - Risk Factors in our 2016 Form 10-K. We do not believe there have been any material changes to the risk factors as previously disclosed in our 2016 Form 10-K.

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

We announced an open ended program on August 13, 2003, by which management was authorized to repurchase an unlimited number of shares of our common stock in the open market and through privately negotiated transactions. There were no share repurchase transactions conducted during the nine months ended September 30, 2017.

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XENITH BANKSHARES, INC.

PART II - OTHER INFORMATION

ITEM 6 - EXHIBITS



Exhibit Number			Description
31.1			Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS			XBRL Instance Document.
101.SCH			XBRL Taxonomy Extension Schema Document.
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.

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XENITH BANKSHARES, INC.

SIGNATURES

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

XENITH BANKSHARES, INC.

(Registrant)



DATE:	November 9, 2017	/s/ T. Gaylon Layfield, III
		T. Gaylon Layfield, III
		Chief Executive Officer

		/s/ Thomas W. Osgood
		Thomas W. Osgood
		Chief Financial Officer

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