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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
 
September 30, 2017 and December 31, 2016
 
 
 
 
 
Consolidated Statements of Income
 
Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
 
Consolidated Statements of Comprehensive Income
 
Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
 
Consolidated Statement of Changes in Shareholders' Equity
 
Nine Months Ended September 30, 2017
 
 
 
 
 
Consolidated Statements of Cash Flows
 
Nine Months Ended September 30, 2017 and 2016
 
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 
AND RESULTS OF OPERATIONS
 
 
 
 
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
 
ITEM 4
CONTROLS AND PROCEDURES
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 1
LEGAL PROCEEDINGS
 
 
 
ITEM 1A
RISK FACTORS
 
 
 
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 6
EXHIBITS
 
 
 
 
SIGNATURES

2

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.

3

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.

4

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

 


5

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.

6

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:
 

 
 


7

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.

8

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.


9

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

10

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.

11

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

NOTE 2 - Business Combination
 
The Company has accounted for the 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.

12

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

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

  Securities
 
139,025

  Loans
 
827,987

  Premises and equipment
 
6,180

  Other real estate owned
 
738

  Core deposit intangible
 
4,006

  Accrued interest receivable
 
4,464

  Deferred tax asset
 
5,156

  Bank owned life insurance
 
19,917

  Other assets
 
17,879

    Total assets
 
$
1,094,593

Fair value of liabilities assumed:
  Deposits
 
$
956,078

  Accrued interest payable
 
285

  Supplemental executive retirement plan
 
2,162

Borrowings
 
36,533

  Other liabilities
 
8,112

    Total liabilities
 
$
1,003,170

    Net identifiable assets acquired
 
$
91,423

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

  Purchase price per share (2)
 
$
1.97

  Value of common stock issued
 
$
116,063

  Estimated fair value of stock options
 
2,290

  Cash in lieu of fractional shares
 
1

  Total consideration paid
 
118,354

    Goodwill
 
$
26,931

_______________________
 
 
(1) The issuance of shares of common stock in the 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





13

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
 

14

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:

15

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.

16

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.


17

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

18

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.


19

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



20

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