Quarterly Report (10-q)

As filed with the Securities and Exchange Commission on November 8, 2017

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017


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

For the transition period from ____________ to ____________.

Commission File Number: 001-35768



WASHINGTONFIRST BANKSHARES, INC.
(Exact name of registrant as specified in its charter)

VIRGINIA		26-4480276
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

11921 Freedom Drive, Suite 250, Reston, Virginia		20190
(Address of principal executive offices)		(Zip Code)

(703) 840-2410
(Registrant’s telephone number, including area code)

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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

Large accelerated filer ¨ Accelerated filer x

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Emerging growth company x

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 Exchange Act).

Yes ¨ No x

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As of November 1, 2017 , the registrant had outstanding 12,531,336 shares of voting common stock and 572,835 shares of non-voting common stock.

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	Glossary of Acronyms	3
PART I		4
Item 1.	Consolidated Financial Statements	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Income	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to the Consolidated Financial Statements	9
	1. Organization & Significant Accounting Policies	9
	2. Acquisition Activities	15
	3. Cash and Cash Equivalents	15
	4. Investment Securities	15
	5. Loans Held For Investment	17
	6. Allowance For Loan Losses	24
	7. Other Real Estate Owned	27
	8. Goodwill and Identifiable Intangible Assets	28
	9. Deposits	28
	10. Other Borrowings	29
	11. Federal Home Loan Bank Advances	29
	12. Long-Term Borrowings	30
	13. Shareholder’s Equity	31
	14. Commitments and Contingencies	31
	15. Related Party Transactions	33
	16. Capital Requirements	34
	17. Share Based Compensation	35
	18. Earnings Per Share	37
	19. Fair Value Disclosures	37
	20. Segment Reporting	42
	21. Subsequent Events	44
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44
	Cautionary Note Regarding Forward-Looking Statements	45
	Critical Accounting Policies and Estimates	45
	Overview	47
	Results of Operations	48
	Financial Condition	53
	Capital Resources	61
	Liquidity	63
	Concentrations	64
	Off-Balance Sheet Arrangements	64
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	65
PART II		67
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits, Financial Statement Schedules	67
	Signatures	69

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Glossary of Acronyms



ACBB	-	Atlantic Central Bankers Bank
ACH	-	Automated Clearing House
ALCO	-	Asset/Liability Committee
AOCI	-	Additional Other Comprehensive Income
ASC	-	FASB Accounting Standards Codification
ASU	-	Accounting Standards Update
Bank	-	WashingtonFirst Bank
BHC Act	-	Bank Holding Company Act of 1956
BOLI	-	Bank Owned Life Insurance
Bureau	-	Virginia Bureau of Financial Institutions
CBB	-	Community Bankers Bank
CDARS	-	Certificate of Deposit Account Registry Service
CET1	-	Common Equity Tier 1
CFPB	-	Consumer Financial Protection Bureau
CMO	-	Collateralized Mortgage Obligations
Company	-	WashingtonFirst Bankshares, Inc.
CRA	-	Community Reinvestment Act of 1977
DIF	-	Deposit Insurance Fund
Dodd-Frank Act	-	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
ELC	-	Executive Loan Committee of the Board of Directors
EVE	-	Economic Value of Equity
Exchange Act	-	Securities Exchange Act of 1934, as amended
Fannie Mae	-	Federal National Mortgage Association
FASB	-	Financial Accounting Standards Board
FDIA	-	Federal Deposit Insurance Act of 1950
FDIC	-	Federal Deposit Insurance Corporation
FDICIA	-	Federal Deposit Insurance Corporation Improvement Act of 1991
Federal Reserve	-	Board of Governors of the Federal Reserve System
FHFA	-	Federal Housing Finance Agency
FHLB	-	Federal Home Loan Bank of Atlanta
FRA	-	Federal Reserve Act of 1913
FRB	-	Federal Reserve Bank of Richmond
Freddie Mac	-	Federal Home Loan Mortgage Corporation
GAAP	-	Generally Accepted Accounting Principles in the U.S.
GLB Act	-	Graham Leach Bliley Act of 1999
GSE	-	Government Sponsored Enterprises
HUD	-	The Department of Housing and Urban Development
HVCRE	-	High-volatility commercial real estate
IRLOC	-	Interest Rate Lock Commitment
IRS	-	Internal Revenue Service
JOBS Act	-	Jumpstart Our Business Startups Act of 2012
LHFI	-	Loans Held for Investment
LHFS	-	Loans Held for Sale
LTV	-	Loan-to-value Ratio
MBS	-	Mortgage Backed Securities
Mortgage Company	-	WashingtonFirst Mortgage Corporation, a wholly owned subsidiary of WashingtonFirst Bank
NASDAQ	-	NASDAQ Capital Market
NII	-	Net Interest Income
OFAC	-	U.S. Treasury Department Office of Foreign Assets Control
OLC	-	Bank Officers' Loan Committee
OREO	-	Other Real Estate Owned
RESPA	-	Real Estate Settlement Procedures Act of 1974
SOX	-	Sarbanes-Oxley Act of 2002
SBLF	-	Small Business Loan Fund
SEC	-	Securities and Exchange Commission
Securities Act	-	Securities Act of 1933, as amended
TDR	-	Troubled Debt Restructuring
TILA	-	Truth-in-Lending Act of 1968
USA Patriot Act	-	Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
VA	-	Veterans Administration
VCDC	-	Virginia Community Development Corporation
VSCA	-	Virginia Stock Corporation Act
Wealth Advisors	-	1 ^st Portfolio, Inc., a wholly owned subsidiary of WashingtonFirst Bankshares, Inc.

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PART I

Item 1. Consolidated Financial Statements

WashingtonFirst Bankshares, Inc.

Consolidated Balance Sheets

(unaudited)



	September 30, 2017			December 31, 2016
	($ in thousands)
Assets:
Cash and cash equivalents:
Cash and due from bank balances	$	3,426		$	3,614
Federal funds sold	34,523			93,659
Interest bearing deposits	100			100
Cash and cash equivalents	38,049			97,373
Investment securities, available-for-sale, at fair value	296,827			280,204
Restricted stock, at cost	11,239			11,726
Loans held for sale, at lower of cost or fair value	27,890			32,109
Loans held for investment:
Loans held for investment, at amortized cost	1,635,645			1,534,543
Allowance for loan losses	(14,137		)	(13,582		)
Total loans held for investment, net of allowance	1,621,508			1,520,961
Premises and equipment, net	6,012			6,955
Goodwill	11,420			11,420
Identifiable intangibles	1,417			1,619
Deferred tax asset, net	8,097			8,944
Accrued interest receivable	6,224			5,243
Other real estate owned	636			1,428
Bank-owned life insurance	16,676			13,880
Other assets	9,481			11,049
Total Assets	$	2,055,476		$	2,002,911
Liabilities and Shareholders' Equity:
Liabilities:
Non-interest bearing deposits	$	463,810		$	381,887
Interest bearing deposits	1,229,480			1,140,854
Total deposits	1,693,290			1,522,741
Other borrowings	6,439			5,852
FHLB advances	97,856			232,097
Long-term borrowings	32,817			32,638
Accrued interest payable	1,832			947
Other liabilities	14,492			15,976
Total Liabilities	1,846,726			1,810,251
Commitments and contingent liabilities	—			—
Shareholders' Equity:
Common stock:
Common Stock Voting, $0.01 par value, 50,000,000 shares authorized, 12,519,656 and 10,987,652 shares issued and outstanding, respectively	124			109
Common Stock Non-Voting, $0.01 par value, 10,000,000 shares authorized; 572,835 and 1,908,733 shares issued and outstanding, respectively	6			19
Additional paid-in capital	180,257			177,924
Accumulated earnings	29,791			17,187
Accumulated other comprehensive loss	(1,428		)	(2,579		)
Total Shareholders' Equity	208,750			192,660
Total Liabilities and Shareholders' Equity	$	2,055,476		$	2,002,911

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Income

(unaudited)



	For the Three Months Ended				For the Nine Months Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
	($ in thousands)
Interest and dividend income:
Interest and fees on loans	$	20,279	$	17,703	$	58,930	$	50,930
Interest and dividends on investments:
Taxable	1,373		1,102		3,992		3,272
Tax-exempt	61		25		187		66
Dividends on other equity securities	173		56		530		208
Interest on Federal funds sold and other short-term investments	82		50		237		186
Total interest and dividend income	21,968		18,936		63,876		54,662
Interest expense:
Interest on deposits	3,078		2,232		8,397		6,427
Interest on borrowings	1,159		861		3,436		2,838
Total interest expense	4,237		3,093		11,833		9,265
Net interest income	17,731		15,843		52,043		45,397
Provision for loan losses	375		1,035		2,315		2,640
Net interest income after provision for loan losses	17,356		14,808		49,728		42,757
Non-interest income:
Service charges on deposit accounts	51		54		139		214
Earnings on bank-owned life insurance	105		90		297		270
Gain on sale of other real estate owned, net	—		11		—		11
Gain on sale of loans, net	3,772		6,327		11,022		14,356
Mortgage banking activities	825		1,215		2,694		3,772
Wealth management income	526		467		1,545		1,338
Gain on sale of available-for-sale investment securities, net	—		135		—		1,287
Gain on debt extinguishment	—		—		301		—
Other operating income	386		367		1,064		689
Total non-interest income	5,665		8,666		17,062		21,937
Non-interest expense:
Compensation and employee benefits	7,169		7,395		21,737		21,344
Mortgage commission	1,682		2,657		5,092		5,865
Premises and equipment	1,827		1,802		5,390		5,482
Data processing	1,084		1,058		3,254		3,183
Professional fees	337		377		802		1,046
Merger expenses	133		30		665		30
Mortgage loan processing expenses	265		444		782		994
Debt extinguishment	—		155		—		1,199
Other operating expenses	1,795		1,693		5,334		4,504
Total non-interest expense	14,292		15,611		43,056		43,647
Income before provision for income taxes	8,729		7,863		23,734		21,047
Provision for income taxes	3,162		2,922		8,394		7,784
Net income	$	5,567	$	4,941	$	15,340	$	13,263

Earnings per common share: ⁽¹⁾
Basic earnings per common share	$	0.43	$	0.38	$	1.18	$	1.03
Diluted earnings per common share	$	0.41	$	0.37	$	1.15	$	1.01
⁽¹⁾ Prior periods adjusted for 5% stock dividend issued in December 2016

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Comprehensive Income

(unaudited)



	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Net income	$	5,567		$	4,941		$	15,340		$	13,263
Other comprehensive income:
Unrealized gain (loss) on hedge:
Unrealized holding gain (loss)	—			—			—			—
Reclassification adjustment for realized gains	—			—			—			(66		)
Tax effect	—			—			—			—
Unrealized gain on hedge, net of tax	—			—			—			(66		)
Unrealized gain (loss) on securities available for sale:
Unrealized holding gain (loss) arising during the period	283			(1,073		)	1,826			3,391
Reclassification adjustment for realized gains	—			(135		)	—			(1,287		)
Tax effect	(103		)	443			(675		)	(771		)
Unrealized gain (loss) on securities available for sale, net of tax	180			(765		)	1,151			1,333
Total other comprehensive income (loss)	180			(765		)	1,151			1,267
Comprehensive income	$	5,747		$	4,176		$	16,491		$	14,530

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Changes in Shareholders' Equity

(unaudited)



	For the Nine Months Ended
	September 30, 2017					September 30, 2016
	Shares		Amount			Shares		Amount
	($ in thousands, except share data)
Common stock:
Balance, beginning of period	12,896,385		$	128		12,195,823		$	121
Exercise of stock options	158,599		2			61,722		1
Forfeiture of restricted stock award	(3,204	)	—			(1,586	)	—
Exercise of warrants	40,711		—			—		—
Issuance of common stock related to 1 ^st Portfolio acquisition	—		—			(28	)	—
Balance, end of period	13,092,491		130			12,255,931		122
Additional paid-in capital - common:
Balance, beginning of period			177,924					160,861
Exercise of stock options			1,836					644
Stock compensation expense			497					413
Balance, end of period			180,257					161,918
Accumulated earnings:
Balance, beginning of period			17,187					17,740
Net income			15,340					13,263
Cash dividends declared			(2,736		)			(2,203		)
Balance, end of period			29,791					28,800
Accumulated other comprehensive income/(loss):
Balance, beginning of period			(2,579		)			(127		)
Other comprehensive income			1,151					1,267
Balance, end of period			(1,428		)			1,140
Total shareholders' equity			$	208,750				$	191,980

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Cash Flows

(unaudited)



	For the Nine Months Ended
	September 30, 2017			September 30, 2016
	($ in thousands)
Cash flows from operating activities:
Net income	$	15,340		$	13,263
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	1,367			1,478
Amortization of deferred loan origination fees and costs	(483		)	(495		)
Net amortization of purchase accounting marks	(257		)	(2,934		)
Write-down of other real estate owned	254			97
Gain on sale of investment securities available-for-sale	—			(1,287		)
Gain on sale of other real estate owned	—			(11		)
Loss on disposal of fixed assets	(12		)	(40		)
Provision for loan losses	2,315			2,640
Earnings on bank-owned life insurance	(297		)	(270		)
Deferred income taxes	(270		)	—
Tax effect on stock options	441			—
Net amortization on investment securities available-for-sale	1,429			1,115
Stock based compensation	497			413
Gain on debt extinguishment	(301		)	—
Gain on sale of loans	(11,022		)	(14,356		)
Originations of loans held-for-sale	(480,683		)	(603,174		)
Proceeds from sales of loans held-for-sale	498,455			589,953
Net change in:
Accrued interest receivable	(981		)	96
Other assets	1,612			(5,127		)
Accrued interest payable	885			478
Other liabilities	(1,539		)	2,705
Net cash used in operating activities	26,750			(15,456		)
Cash flows from investing activities:
Purchase of investment securities available-for-sale	(44,493		)	(124,316		)
Proceeds from repayment of investment securities available-for-sale	28,268			36,866
Proceeds from sale of investment securities available-for-sale	—			71,818
Net increase in loans held-for-investment	(104,347		)	(125,061		)
Proceeds from sale of real estate owned	538			201
Purchase of bank-owned life insurance	(2,500		)	—
Net decrease in restricted stock	487			(891		)
Purchases of premises and equipment, net	(325		)	(1,299		)
Net cash used in investing activities	(122,372		)	(142,682		)
Cash flows from financing activities:
Net increase in deposits	170,494			198,965
Proceeds from FHLB advances	62,500			93,000
Repayments of FHLB advances	(196,440		)	(79,236		)
Net increase/(decrease) in other borrowings	587			15,537
Proceeds from exercise of stock options	1,838			645
Cash dividends paid	(2,681		)	(2,199		)
Net cash provided by financing activities	36,298			226,712
Net (decrease) increase in cash and cash equivalents	(59,324		)	68,574
Cash and cash equivalents at beginning of period	97,373			62,753
Cash and cash equivalents at end of period	$	38,049		$	131,327

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Notes to the Consolidated Financial Statements

In this report, WashingtonFirst Bankshares Inc. is sometimes referred to as “WashingtonFirst,” the “Company,” “we,” “our,” or “us” and these references include the Company’s subsidiaries, WashingtonFirst Bank, 1 ^st Portfolio, Inc. and WashingtonFirst Mortgage (a wholly-owned subsidiary of WashingtonFirst Bank), unless the context requires otherwise.

1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Company is organized under the laws of the Commonwealth of Virginia as a bank holding company. Headquartered in Reston, Virginia, the Company is the parent company of the Bank which operates 19 full-service banking offices throughout the Washington, D.C. metropolitan area. In addition, the Company provides wealth management services through its subsidiary, 1 ^st Portfolio, Inc., located in Fairfax, Virginia, and mortgage banking services through the Bank’s wholly owned subsidiary, WashingtonFirst Mortgage which operates in two locations: Fairfax, Virginia, and Rockville, Maryland.

Basis of Presentation

The accounting and reporting policies of the Company conform to U.S. GAAP and follow general practices within the banking industry. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

Principles of Consolidation

All significant intercompany accounts and transactions have been eliminated in consolidation.

Assets Under Management

Assets held for others under fiduciary and agency relationships are not assets of the Company or its subsidiaries and are not included in the accompanying balance sheets. Investment management fees are presented on an accrual basis.

Use of Estimates

Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the fair values and impairments of financial instruments, the status of contingencies and the valuation of deferred tax assets and goodwill.

Cash and Cash Equivalents and Statements of Cash Flows

For purposes of the statements of cash flows, cash and cash equivalents consists of cash and due from banks, interest bearing balances and federal funds sold.



Table 1: Certain Cash and Non-Cash Transactions
	For the Nine Months Ended
	September 30, 2017		September 30, 2016
	($ in thousands)
Cash paid during the period for:
Interest paid	$	10,948	$	8,787
Income taxes paid	5,043		5,728
Non-cash activity:
Loans converted into other real estate owned	—		2,256
Reclassifications from goodwill to other liabilities	—		(11		)
Reclassifications from LHFS to LHFI	315		(1,224		)

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Investment Securities

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Securities are monitored to determine whether a decline in their value is other-than-temporary. Management evaluates the investment portfolio on a quarterly basis to determine the collectibility of amounts due per the contractual terms of the investment security.

A security is generally defined to be impaired if the carrying value of such security exceeds its estimated fair value. Based on the provisions of ASC 320, a security is considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected is less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security’s amortized cost basis and the investor intends, or more-likely-than-not will be required to sell the security before recovery of the security’s amortized cost basis. The charge to earnings is limited to the amount of credit loss if the investor does not intend, and more-likely-than-not will not be required, to sell the security before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. In certain instances, as a result of the other-than-temporary impairment analysis, the recognition or accrual of interest will be discontinued and the security will be placed on non-accrual status.

Loans Held for Sale

The Mortgage Company regularly engages in the generation and sale of residential mortgage loans. These loans are generally loans held for sale to outside investors, are made on a pre-sold basis with servicing rights released, and carried at lower of cost or market, determined in the aggregate. Fair value considers commitment agreements with investors and prevailing market prices. Gains and losses on these loans are recognized based on the difference between the selling price and the carrying value of the related loan sold.

Loans Held for Investment

Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. The ability of the Company’s debtors to honor their loan contracts is dependent upon the real estate and general economic conditions in the Company’s market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans and other loans typically are charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) ASC 450-10, which requires that losses be accrued when they are probable of occurring and estimable; and (ii) ASC 310-10, which requires that losses be accrued based on the differences between the net realizable value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

An allowance is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance represents an amount that, in management’s judgment will be adequate to absorb any losses on existing loans that may become uncollectible. Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions which may affect a borrower’s ability to repay, overall portfolio quality, and review of specific potential losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is

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maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

For loans that are classified as impaired, an allowance is established when the net realizable value (or collateral value, observable market price, or discounted cash flows) of the impaired loan is lower than the carrying value of that loan. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer loans for impairment disclosures.

Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Premises and equipment are depreciated over their estimated useful lives; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement, whichever is less. Depreciation is computed using the straight-line method over the lesser of the estimated useful life or the remaining term of the lease for leasehold improvements; and 3 to 7 years for furniture, fixtures, and equipment. Costs of maintenance and repairs are expensed as incurred; improvements and betterments are capitalized. When items are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from the accounts and any resulting gains or losses are included in the determination of net income.

Other Real Estate Owned

Real estate properties acquired through loan foreclosures are recorded initially at fair value, less expected sales costs, determined by management. Subsequent valuations are performed by management, and the carrying amount of a property is adjusted by a charge to expense to reflect any subsequent declines in estimated fair value. Fair value estimates are based on recent appraisals and current market conditions. Gains or losses on sales of real estate owned are recognized upon disposition.

Leases

The Bank and Mortgage Company lease certain properties under operating leases with terms greater than one year and with minimum lease payments associated with these agreements. Rent expense is recognized on a straight-line basis over the expected lease term in accordance with ASC 840. Within the provisions of certain leases, there are predetermined fixed escalations of the minimum rental payments over the base lease term. The effects of the escalations have been reflected in rent expense on a straight-line basis over the lease term, and the difference between the recognized rental expense and the amounts payable under the lease is recorded as deferred lease payments. The amortization period for leasehold improvements is the term used in calculating straight-line rent expense or their estimated economic life, whichever is shorter.

Marketing & Advertising

Marketing and advertising costs are generally expensed as incurred.

Income Taxes

The Company employs the liability method of accounting for income taxes as required by ASC Topic 740, "Income Taxes ." Under the liability method, deferred-tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e. temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse.

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The provision for income taxes is based on the results of operations, adjusted primarily for: (1) decreases from tax-exempt income; and (2) the tax-exempt earnings from BOLI offset by stock-based compensation which are in excess of the tax-exempt income amounts and income taxes paid to applicable state taxing authorities. Certain items of income and expense are reported in different

periods for financial reporting and tax return purposes. Deferred tax assets and liabilities are determined based on the difference between the consolidated financial statement and income tax basis of assets and liabilities measured by using the enacted tax rates and laws expected to be in effect when the timing differences are expected to reverse. Deferred tax expense or benefit is based on the difference between deferred tax asset or liability from period to period. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, the projected future taxable income and tax planning strategies in making this assessment. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” (i.e., more than 50% likely) that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is more likely than not to be realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company and its subsidiaries are subject to U.S. federal income tax and state income tax in those jurisdictions where they operate. The Bank is not subject to state income tax in its primary place of business (Virginia), rather it is subject to Virgina franchise tax. The Company is generally no longer subject to examination by Federal or State taxing authorities for the years before 2013. As of September 30, 2017 and December 31, 2016 the Company did not have any unrecognized tax benefits. The Company does not expect the amount of any unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other non-interest expense. As of September 30, 2017 and December 31, 2016 , the Company does not have any amounts accrued for interest and/or penalties.

Valuation of Long-Lived Assets

The Company accounts for the valuation of long-lived assets under ASC 205-20, which requires that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reportable at the lower of the carrying amount or the fair value, less costs to sell.

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company; (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Derivative Financial Instruments

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. interest rate lock commitments). Such interest rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. To protect against the price risk inherent in residential mortgage loan commitments, the Company utilizes both "best efforts" and "mandatory delivery" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Under a "best efforts" contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to a price that it will purchase the loan from the Company if the loan to the underlying borrower closes. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the investor commits to purchase a loan at a price representing a premium on the day the borrower commits to an interest rate with the intent that the buyer/investor has assumed the interest rate risk on the loan. As a result, the Company is not generally exposed to losses on loans sold utilizing best efforts, nor will it realize gains related to rate lock commitments due to changes in interest rates. The market values of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss should occur on the interest rate lock commitments. Under a "mandatory delivery" contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay the investor a "pair-off" fee, based on then-current market prices, to compensate the investor for the shortfall. The Company manages the interest rate risk on interest rate lock commitments by entering into forward sale contracts of mortgage backed

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securities, whereby the Company obtains the right to deliver securities to investors in the future at a specified price. Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, carried on the Consolidated Balance Sheet within other assets or other liabilities with changes in fair value recorded in other income within the Consolidated Statement of Income. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions. The gross gains on loan sales are recognized based on new loan commitments with adjustment for price and pair-off activity. Commission expenses on loans held for sale are recognized based on loans closed.

The Company has determined these derivative financial instruments do not meet the hedging criteria required by ASC 815 and has not designated these derivative financial instruments as hedges. Accordingly, changes in fair value are recognized currently in earnings.

Purchased Credit Impaired Loans

Related to its acquisition activity, the Bank has acquired loans, some of which have shown evidence of credit impairment since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually. For each such loan the Bank estimates the amount and timing of expected cash flows, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Recent Accounting Pronouncements

ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities . This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. This ASU is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company currently adheres to this ASU.

ASU No. 2017-04, Simplifying the Test for Goodwill . This amends FASB ASC Topic 250 to simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has goodwill from a prior business combination and performs an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company’s most recent annual impairment assessment determined that the Company’s goodwill was not impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment management does not anticipate a material impact from this ASU to the Company’s Consolidated Financial Statements.

ASU No. 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This amends ASC 230 to add or clarify guidance on the classification of eight specific cash receipts and payments in the statement of cash flows. The amendments are effective for public companies for fiscal periods beginning after December 15, 2017, and interim periods within those fiscal years and should be be applied using a retrospective transition method to each period where practicable. The adoption of this pronouncement is not expected to have a material impact on the Company’s Consolidated Financial Statements.

ASU No. 2016-13, Current Expected Credit Losses (CECL). This provided new accounting guidance that will require the earlier recognition of credit losses on loans and other financial instruments based on an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The expected loss model will apply to loans and leases, unfunded lending commitments, held-to-maturity (HTM) debt securities and other debt instruments measured at amortized cost. The impairment model for available-for-sale (AFS) debt securities will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. The new guidance is effective on January 1, 2020, with early adoption permitted on January 1, 2019. While early adoption is permitted, the Company does not expect to elect that option. The Company has begun its evaluation of this pronouncement including the potential impact on its Consolidated Financial Statements. As a result of the required change in approach toward determining estimated credit losses from the current “incurred loss” model to one based on estimated cash flows over a loan’s contractual life, adjusted for prepayments (a “life of loan” model), the Company expects the new guidance will

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result in an increase in the allowance for loan losses, particularly for longer duration portfolios. The Company also expects the new pronouncement may result in an allowance for debt securities. In both cases, the extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Further, to date, no guidance has been issued by either the Company’s or the Bank’s primary regulators with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.

ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting . The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company assessed the impact this pronouncement will have on its Consolidated Financial Statements and has concluded there is potential for a positive benefit to net income in future periods as a result of tax benefits flowing through tax expense arising from the change in the application of tax accounting for share-based payment award transactions. The aforementioned positive benefit to net income is dependent upon the company’s stock price gradually rising over time so that the fair value assigned to share-based payment awards is less than the future value of the awards upon vesting or exercise date for restricted stock awards and option awards, respectively.

ASU No. 2016-02, Leases. From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessees. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company continues to evaluate the impact of this pronouncement, including determining whether additional contracts exist that are deemed to be in scope. Further, to date, no guidance has been issued by either the Company’s or the Bank’s primary regulator with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.

ASU No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fai r values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public businesses entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The pronouncement is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of this pronouncement to have a significant impact on its Consolidated Financial Statements.

FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update creates a new topic in ASC Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers , to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, financing arrangements, financial instruments, guarantees other than product or service warranties, and non-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company does not expect the adoption of this pronouncement to have a significant impact on its Consolidated Financial Statements.

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2. ACQUISITION ACTIVITIES

On May 15, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sandy Spring Bancorp, Inc. (“Sandy Spring”) and Touchdown Acquisition, Inc., a wholly owned subsidiary of Sandy Spring. Pursuant to the terms and subject to the conditions of the Merger Agreement, the Company will merge with and into Sandy Spring, with Sandy Spring as the surviving entity (the “Merger”). The closing of the Merger is subject to customary closing conditions, including receipt of all required regulatory approvals, which receipt is pending as of November 8, 2017 .

On October 18, 2017, both the Company and Sandy Spring held a special meeting of shareholders, at which meetings both the Company’s and Sandy Spring’s shareholders approved the Merger.

The Merger is expected to close in the fourth quarter of 2017.

3. CASH AND CASH EQUIVALENTS

Federal Reserve regulations require banks to maintain reserve balances with the FRB based principally on the type and amount of their deposits. In addition to vault cash, the Bank maintains balances at the FRB to meet the reserve requirements as well as balances to partially compensate for services provided by the FRB. The Bank has an interest bearing account with the FHLB and maintains seven non-interest bearing accounts with domestic correspondent banks. In addition, the Bank has short term investments in the form of certificates of deposit with FDIC insured banks, classified as interest bearing balances. All balances are fully insured up to the applicable limits by the FDIC. Management regularly evaluates the credit risk associated with these balances and believes that the Company is not exposed to any significant credit risks on cash and cash equivalents. Those balances include usable vault cash and amounts on deposit with the FRB. The Bank had no compensating balance requirements or required cash reserves with correspondent banks as of September 30, 2017 and December 31, 2016 . The Ban k maintains interest bearing balances at other banks to help ensure sufficient liquidity and provide additional return compared to overnight Federal Funds.

4. INVESTMENT SECURITIES

The Bank maintains an investment securities portfolio to help ensure sufficient liquidity and provide additional return versus overnight Federal Funds and interest bearing balances. Securities that management has both the positive intent and ability to hold to maturity are classified as “held to maturity” and are recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of income taxes. As of September 30, 2017 , and December 31, 2016 , all investments were classified as available-for-sale. As of September 30, 2017 , and December 31, 2016 , the only material component of the balance in accumulated other comprehensive loss on the consolidated balance sheets is related to the unrealized gains/losses on available-for-sale investment securities.



Table 4.1: Available-for-Sale Investment Securities Summary
	As of September 30, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
	($ in thousands)
U.S. Treasuries	$	8,068	$	10	$	(7	)	$	8,071
U.S. Government agencies	101,083		76		(525		)	100,634
Mortgage-backed securities	91,296		357		(564		)	91,089
Collateralized mortgage obligations	73,637		35		(1,166		)	72,506
Taxable state and municipal securities	10,380		47		(278		)	10,149
Tax-exempt state and municipal securities	14,605		41		(268		)	14,378
Total available-for-sale investment securities	$	299,069	$	566	$	(2,808	)	$	296,827

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	As of December 31, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
	($ in thousands)
U.S. Treasuries	$	8,082	$	17	$	(21	)	$	8,078
U.S. Government agencies	99,153		135		(812		)	98,476
Mortgage-backed securities	69,835		49		(933		)	68,951
Collateralized mortgage obligations	80,306		29		(1,517		)	78,818
Taxable state and municipal securities	11,690		18		(416		)	11,292
Tax-exempt state and municipal securities	15,206		4		(621		)	14,589
Total available-for-sale investment securities	$	284,272	$	252	$	(4,320	)	$	280,204

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase included in Other Borrowings, and for other purposes amounted to $173.8 million and $132.9 million as of September 30, 2017 , and December 31, 2016 , respectively.

The Bank did not recognize in earnings any other-than-temporary impairment losses on available-for-sale investment securities during the three and nine months ended September 30, 2017 and September 30, 2016 . During the three and nine months ended September 30, 2017 , the Bank received no proceeds from the sale of securities from its available-for-sale investment portfolio resulting in no gross realized gains and no gross realized losses, compared to proceeds of $23.4 million resulting in gross realized gains of $0.2 million and no gross realized losses during the three months ended September 30, 2016 . During the nine months ended September 30, 2016 , the Bank received proceeds of $71.8 million resulting in gross realized gains of $1.3 million and gross realized losses of $44.0 thousand .



Table 4.2: Continuous Gross Unrealized Losses by Length of Time
	As of September 30, 2017
	For less than 12 months					For more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	($ in thousands)
U.S. Treasuries	$	3,545	$	(7	)	$	—	$	—
U.S. Government agencies	68,087		(431		)	2,906		(94		)
Mortgage-backed securities	48,342		(534		)	1,194		(30		)
Collateralized mortgage obligations	41,958		(667		)	25,321		(499		)
Taxable state and municipal securities	710		(29		)	5,988		(249		)
Tax-exempt state and municipal securities	6,213		(123		)	4,567		(145		)
Total	$	168,855	$	(1,791	)	$	39,976	$	(1,017	)



	As of December 31, 2016
	For less than 12 months					For more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	($ in thousands)
U.S. Treasuries	$	5,061	$	(21	)	$	—	$	—
U.S. Government agencies	60,279		(812		)	—		—
Mortgage-backed securities	54,981		(871		)	1,356		(62		)
Collateralized mortgage obligations	69,497		(1,395		)	3,754		(122		)
Taxable state and municipal securities	7,995		(416		)	—		—
Tax-exempt state and municipal securities	13,661		(621		)	—		—
Total	$	211,474	$	(4,136	)	$	5,110	$	(184	)

As of September 30, 2017 , there were $40.0 million , or thirty-one positions, of individual securities that had been in a continuous loss position for more than 12 months with a total unrealized loss of $1.0 million . As of December 31, 2016 , there were $5.1 million , or four positions, of individual securities that had been in a continuous loss position for more than 12 months with a total unrealized loss

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of $184.0 thousand . Management has determined these securities are temporarily impaired at September 30, 2017 for the following reasons:

U.S. Treasuries and Government Agencies. The unrealized losses in this category were caused by interest rate fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has been met for the Company to be required to sell any of these investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider these investments to be other than temporarily impaired.

Mortgage backed securities and collateralized mortgage obligations. The unrealized losses in this category were primarily the result of interest rate fluctuation. Since the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider these investments to be other than temporarily impaired.

Tax-exempt state and municipal securities. The unrealized losses in the category were generally the result of changes in market interest rates and interest spread relationships since original purchases. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. The Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be at maturity, therefore the Company does not consider these investments to be other than temporarily impaired.



Table 4.3: Contractual Maturity of Available-For-Sale Securities
	As of September 30, 2017				As of December 31, 2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	($ in thousands)
Due within one year	$	8,723	$	8,736	$	6,856	$	6,876
Due after one year through five years	104,398		104,167		100,102		99,693
Due after five years through ten years	51,999		51,035		45,828		44,419
Due after ten years	133,949		132,889		131,486		129,216
Total	$	299,069	$	296,827	$	284,272	$	280,204

In the table above, mortgage-backed securities and collateralized mortgage obligations are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.

5. LOANS HELD FOR INVESTMENT

The Bank and Mortgage Company make several types of loans to its customers including real estate loans (which vary in type between construction and development, commercial, and residential), commercial and industrial loans, and consumer loans. A significant portion of the Bank’s loan portfolio is secured by commercial real estate collateral in the greater Washington, D.C. metropolitan area. Real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. Under guidance adopted by the federal banking regulators, banks with concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital.

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Table 5.1: Composition of Loans Held for Investment
	September 30, 2017		December 31, 2016
	($ in thousands)
Construction and development	$	269,981	$	288,193
Commercial real estate - owner occupied	259,963		231,414
Commercial real estate - non-owner occupied	603,147		557,846
Residential real estate	315,423		287,250
Real estate loans	1,448,514		1,364,703
Commercial and industrial	182,830		165,172
Consumer	4,301		4,668
Total loans held for investment	1,635,645		1,534,543
Less: allowance for loan losses	14,137		13,582
Total loans held for investment, net of allowance	$	1,621,508	$	1,520,961

Loans that are 90+ days past due and still accruing are only loans that are well secured and in the process of collection.



Table 5.2: Loans Held for Investment Aging Analysis
	As of September 30, 2017
	Current Loans ⁽¹⁾		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due (and accruing)		Non- Accrual		Total Past Due		Total Loans
	($ in thousands)
Construction and development	$	269,981	$	—	$	—	$	—	$	—	$	—	$	269,981
Commercial real estate - owner occupied	257,556		—		—		—		2,407		2,407		259,963
Commercial real estate - non-owner occupied	588,042		—		—		12,611		2,494		15,105		603,147
Residential real estate	312,633		1,352		18		—		1,420		2,790		315,423
Commercial and industrial	179,180		28		—		65		3,557		3,650		182,830
Consumer	4,301		—		—		—		—		—		4,301
Balance at end of period	$	1,611,693	$	1,380	$	18	$	12,676	$	9,878	$	23,952	$	1,635,645



	As of December 31, 2016
	Current Loans ⁽¹⁾		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due (and accruing)		Non- Accrual		Total Past Due		Total Loans
	($ in thousands)
Construction and development	$	288,035	$	158	$	—	$	—	$	—	$	158	$	288,193
Commercial real estate - owner occupied	226,735		1,837		277		—		2,565		4,679		231,414
Commercial real estate - non-owner occupied	555,657		2,189		—		—		—		2,189		557,846
Residential real estate	285,035		630		—		—		1,585		2,215		287,250
Commercial and industrial	162,904		685		—		—		1,583		2,268		165,172
Consumer	4,653		—		—		2		13		15		4,668
Balance at end of period	$	1,523,019	$	5,499	$	277	$	2	$	5,746	$	11,524	$	1,534,543
(1) Loans 1-29 days past due are included in the balance of current loans.

As of September 30, 2017 , $895.9 million of loans were pledged as collateral for FHLB advances, compared to $732.7 million as of December 31, 2016 . Loans pledged include qualifying home equity lines of credit, commercial real estate loans, multifamily real estate loans, and residential real estate secured loans. As of September 30, 2017 , and December 31, 2016 , there were $1.3 million and $1.5 million of net unamortized deferred fees, respectively.

The Company divides its loans held for investment into the following categories based on credit quality.

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The characteristics of these ratings are as follows:

•

Pass and pass watch rated loans (risk ratings 1 to 6) are to borrowers with an acceptable financial condition, specified collateral margins, specified cash flow to service the existing loans, and a specified leverage ratio. The borrower has paid all obligations as agreed and it is expected that the borrower will maintain this type of payment history. Acceptable personal guarantors routinely support these loans.

•

Special mention loans (risk rating 7) have a specifically defined weakness in the borrower’s operations and/or the borrower’s ability to generate positive cash flow on a sustained basis. For example, the borrower’s recent payment history may be characterized by late payments. The Company’s risk exposure to special mention loans is partially mitigated by collateral supporting the loan; however, loans in this category have collateral that is considered to be degraded.

•

Substandard loans (risk rating 8) are considered to have specific and well-defined weaknesses that jeopardize the repayment terms as originally structured in the Company’s initial credit extension. The payment history for the loan may have been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan, or the estimated net liquidation value of the collateral pledged and/or ability of the personal guarantors to pay the loan may not adequately protect the Company. For loans in this category, there is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet the Company’s definition of an impaired loan unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable the Company will be unable to collect all amounts due. Substandard non-accrual loans have the same characteristics as substandard loans. However these loans have a non-accrual classification generally because the borrower’s principal or interest payments are 90 days or more past due.


•	Doubtful rated loans (risk rating 9) have all the weakness inherent in a loan that is classified as substandard but with the added characteristic that the weakness makes collection or liquidation in full highly questionable and improbable based upon current existing facts, conditions, and values. The possibility of loss related to doubtful rated loans is extremely high.


•	Loss (risk rating 10) rated loans are not considered collectible under normal circumstances and there is no realistic expectation for any future payment on the loan. Loss rated loans are fully charged off.

Internal risk ratings of pass (rating numbers 1 to 5), pass watch (rating number 6), and special mention (rating number 7) are deemed to be unclassified assets. Internal risk ratings of substandard (rating number 8), doubtful (rating number 9) and loss (rating number 10) are deemed to be classified assets.



Table 5.3: Risk Categories of Loans Held for Investment
	As of September 30, 2017
Internal risk rating grades	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
Risk rating number	1 to 5		6		7		8		9
	($ in thousands)
Construction and development	$	268,799	$	1,182	$	—	$	—	$	—	$	269,981
Commercial real estate - owner occupied	243,637		13,847		—		2,479		—		259,963
Commercial real estate - non-owner occupied	584,785		3,257		2,098		13,007		—		603,147
Residential real estate	307,656		5,728		364		1,669		6		315,423
Commercial and industrial	173,595		4,643		942		3,650		—		182,830
Consumer	4,301		—		—		—		—		4,301
Balance at end of period	$	1,582,773	$	28,657	$	3,404	$	20,805	$	6	$	1,635,645

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	As of December 31, 2016
Internal risk rating grades	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
Risk rating number	1 to 5		6		7		8		9
	($ in thousands)
Construction and development	$	286,959	$	1,234	$	—	$	—	$	—	$	288,193
Commercial real estate - owner occupied	222,683		5,401		—		3,330		—		231,414
Commercial real estate - non-owner occupied	551,996		3,331		2,519		—		—		557,846
Residential real estate	279,953		4,737		849		1,660		51		287,250
Commercial and industrial	157,076		5,547		743		1,640		166		165,172
Consumer	4,653		2		—		13		—		4,668
Balance at end of period	$	1,503,320	$	20,252	$	4,111	$	6,643	$	217	$	1,534,543

A loan may be placed on non-accrual status when the loan is specifically determined to be impaired or when principal or interest is delinquent 90 days or more. The Company closely monitors individual loans, and relationship officers are charged with working with customers to resolve potential credit issues in a timely manner with minimum exposure to the Company. The Company maintains a policy of adding an appropriate amount to the allowance for loan losses to ensure an adequate reserve based on the portfolio composition, specific credit extended by it, general economic conditions and other factors and external circumstances identified during the process of estimating probable losses in its loan portfolio.



Table 5.4: Non-Accrual Loans
	September 30, 2017		December 31, 2016
	($ in thousands)
Construction and development	$	—	$	—
Commercial real estate - owner occupied	2,407		2,565
Commercial real estate - non-owner occupied	2,494		—
Residential real estate	1,420		1,585
Commercial and industrial	3,557		1,583
Consumer	—		13
Total non-accrual loans	$	9,878	$	5,746

A modification to the contractual terms of a loan that results in granting a concession to a borrower experiencing financial difficulties is considered a TDR. When the Company has granted a concession, as a result of the restructuring, it does not expect to collect all amounts due in a timely manner, including interest accrued at the original contract rate. In making its determination of whether a borrower is experiencing financial difficulties, the Company considers several factors, including whether: (1) the borrower has declared or is in the process of declaring bankruptcy; (2) there is substantial doubt as to whether the borrower will continue to be a going concern; and (3) the borrower can obtain funds from other sources at an effective interest rate at or near a current market interest rate for debt with similar risk characteristics. The Company evaluates TDRs similarly to other impaired loans for purposes of the allowance for loan losses. In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession. These modifications are not considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs.

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Table 5.5: Changes in Troubled Debt Restructurings
	Construction and Development		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Residential Real Estate			Commercial and Industrial			Consumer		Total
	September 30, 2017
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	—	$	—	$	—	$	1,040		$	287		$	—	$	1,327
New TDRs	—		—		—		—			—			—		—
Increases to existing TDRs	—		—		—		13			—			—		13
Charge-offs post modification	—		—		—		—			—			—		—
Sales, principal payments, or other decreases	—		—		—		(18		)	(2		)	—		(20		)
Ending Balance	$	—	$	—	$	—	$	1,035		$	285		$	—	$	1,320

For the Nine Months Ended:
Beginning Balance	$	—	$	—	$	—	$	1,073		$	456		$	—	$	1,529
New TDRs	—		—		—		70			—			—		70
Increases to existing TDRs	—		—		—		14			—			—		14
Charge-offs post modification	—		—		—		—			(165		)	—		(165		)
Sales, principal payments, or other decreases	—		—		—		(122		)	(6		)	—		(128		)
Ending Balance	$	—	$	—	$	—	$	1,035		$	285		$	—	$	1,320



	Construction and Development			Commercial real estate - owner occupied		Commercial real estate - non-owner occupied			Residential Real Estate			Commercial and Industrial			Consumer			Total
	September 30, 2016
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	—		$	—	$	—		$	2,866		$	397		$	353		$	3,616
New TDRs	—			—		742			—			—			—			742
Increases to existing TDRs	—			—		—			2			—			—			2
Charge-offs post modification	—			—		—			—			—			—			—
Sales, principal payments, or other decreases	—			—		(742		)	(14		)	(66		)	(4		)	(826		)
Ending Balance	$	—		$	—	$	—		$	2,854		$	331		$	349		$	3,534

For the Nine Months Ended:
Beginning Balance	29			—		2,029			1,967			1,949			353			6,327
New TDRs	—			—		742			1,788			28			—			2,558
Increases to existing TDRs	—			—		—			6			—			—			6
Charge-offs post modification	(29		)	—		(544		)	(11		)	(576		)	—			(1,160		)
Sales, principal payments, or other decreases	—			—		(2,227		)	(896		)	(1,070		)	(4		)	(4,197		)
Ending Balance	$	—		$	—	$	—		$	2,854		$	331		$	349		$	3,534

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Table 5.6: New Troubled Debt Restructurings Details
	For the Nine Months Ended
	September 30, 2017					September 30, 2016
	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
	($ in thousands)
Construction and development	—	$	—	$	—	—	$	—	$	—
Commercial real estate - owner occupied	—	—		—		—	—		—
Commercial real estate - non-owner occupied	—	—		—		1	742		742
Residential real estate	1	84		70		1	1,788		1,788
Commercial and industrial	—	—		—		1	28		28
Consumer	—	—		—		—	—		—
Total loans	1	$	84	$	70	3	$	2,558	$	2,558

TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if the borrower satisfies a minimum six-month performance requirement; however, it will remain classified as impaired.



Table 5.7: Troubled Debt Restructurings with Modification and Default Date within 12 Months of Restructure
	As of September 30,
	2017					2016
	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
	($ in thousands)
Construction and development	—	$	—	$	—	1	$	184	$	29
Commercial real estate - owner occupied	—	—		—		—	—		—
Commercial real estate - non-owner occupied	—	—		—		2	2,071		2,029
Residential real estate	1	98		83		1	168		144
Commercial and industrial	—	—		—		1	931		931
Consumer	—	—		—		1	352		349
Total loans	1	$	98	$	83	6	$	3,706	$	3,482

The following is an analysis of new loans modified in a troubled debt restructuring by type of concession for the three and nine months ended September 30, 2017 , and 2016 . There were no modifications that involved forgiveness of debt.



Table 5.8: Troubled Debt Restructuring by Type of Concession
	TDRs Entered into During the Three Months Ended September 30,
	2017			2016
	Number of Loans	Post-Modification Outstanding Recorded Balance		Number of Loans	Post-Modification Outstanding Recorded Balance
	($ in thousands)
Extended under forbearance	—	$	—	1	$	742
Interest rate modification	—	—		—	—
Maturity or payment extension	—	—		—	—
Total loans	—	$	—	1	$	742

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	TDRs Entered into During the Nine Months Ended September 30,
	2017			2016
	Number of Loans	Post-Modification Outstanding Recorded Balance		Number of Loans	Post-Modification Outstanding Recorded Balance
	($ in thousands)
Extended under forbearance	—	$	—	3	$	2,558
Interest rate modification	1	70		—	—
Maturity or payment extension	—	—		—	—
Total loans	1	$	70	3	$	2,558

The outstanding balances in Table 5.1 include acquired impaired loans with a recorded investment of $2.4 million or 0.1% of total loans as of September 30, 2017 , compared to $2.7 million or 0.2% of total loans as of December 31, 2016 . The contractual principal of these acquired loans was $2.6 million as of September 30, 2017 compared to $2.9 million as of December 31, 2016 . For these loans, the allowance for loan losses decreased by $5.7 thousand and $45.6 thousand during the three and nine months ended September 30, 2017 and $1.0 thousand and $199.5 thousand during the three and nine months ended September 30, 2016 , respectively. The balances do not include future accretable net interest on the acquired impaired loans.



Table 5.9: Accretable Yield of Purchased Credit Impaired Loans
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Accretable yield at beginning of period	$	700		$	1,168		$	844		$	1,208
Accretion (including cash recoveries)	(47		)	(43		)	(156		)	(175		)
Net reclassifications to accretable from non-accretable	(12		)	(235		)	(27		)	10
Disposals (including maturities, foreclosures, and charge-offs)	—			—			(20		)	(153		)
Accretable yield at end of period	$	641		$	890		$	641		$	890



Table 5.10: Non-Performing Assets
	September 30, 2017		December 31, 2016
	($ in thousands)
Non-accrual loans	$	9,878	$	5,746
90+ days still accruing	12,676		2
Troubled debt restructurings still accruing	1,231		1,361
Other real estate owned	636		1,428
Total non-performing assets	$	24,421	$	8,537

If interest had been earned on the non-accrual loans, interest income on these loans would have been approximately $115.8 thousand and $281.5 thousand for the three and nine months ended September 30, 2017 , and $109.3 thousand and $407.4 thousand for the same periods 2016 . The Company has no remaining commitment to fund non-performing loans. As of September 30, 2017 , the Company had approximately $249.0 thousand residential real estate loans in the process of foreclosure.

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6. ALLOWANCE FOR LOAN LOSSES



Table 6.1: Changes in Allowance for Loan Losses
	September 30, 2017
	Construction and Development			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Residential Real Estate			Commercial and Industrial			Consumer			Total
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	2,974		$	2,483		$	5,543		$	1,773		$	1,284		$	17		$	14,074
Provision for loan losses	(167		)	(28		)	(4		)	66			513			(5		)	375
Charge-offs	—			—			—			(79		)	(246		)	—			(325		)
Recoveries	—			—			—			9			—			4			13
Ending Balance	$	2,807		$	2,455		$	5,539		$	1,769		$	1,551		$	16		$	14,137

For the Nine Months Ended:
Beginning Balance	$	2,954		$	2,129		$	4,834		$	1,768		$	1,869		$	28		$	13,582
Provision for loan losses	(140		)	313			705			154			1,312			(29		)	2,315
Charge-offs	(13		)	—			—			(249		)	(1,711		)	(15		)	(1,988		)
Recoveries	6			13			—			96			81			32			228
Ending Balance	$	2,807		$	2,455		$	5,539		$	1,769		$	1,551		$	16		$	14,137



	September 30, 2016
	Construction and Development			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Residential Real Estate			Commercial and Industrial			Consumer			Total
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	2,573		$	2,533		$	3,858		$	1,552		$	1,818		$	261		$	12,595
Provision for loan losses	94			(4		)	385			117			328			115			1,035
Charge-offs	—			—			(90		)	—			(612		)	—			(702		)
Recoveries	—			10			—			16			5			1			32
Ending Balance	$	2,667		$	2,539		$	4,153		$	1,685		$	1,539		$	377		$	12,960

For the Nine Months Ended:
Beginning Balance	$	2,321		$	2,576		$	3,549		$	1,532		$	2,172		$	139		$	12,289
Provision for loan losses	375			(13		)	1,240			152			650			236			2,640
Charge-offs	(31		)	(34		)	(636		)	(48		)	(1,302		)	(1		)	(2,052		)
Recoveries	2			10			—			49			19			3			83
Ending Balance	$	2,667		$	2,539		$	4,153		$	1,685		$	1,539		$	377		$	12,960

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Table 6.2: Loans Held for Investment and Related Allowance for Loan Losses by Impairment Method and Loan Class
	As of September 30, 2017
	Construction and Development		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate		Commercial and Industrial		Consumer		Total
	($ in thousands)
Ending Balance:
Evaluated collectively for impairment	$	269,981	$	256,846	$	588,042	$	311,515	$	178,923	$	4,301	$	1,609,608
Evaluated individually for impairment	—		3,117		15,105		3,908		3,907		—		26,037
	$	269,981	$	259,963	$	603,147	$	315,423	$	182,830	$	4,301	$	1,635,645

Allowance for Losses:
Evaluated collectively for impairment	$	2,807	$	2,452	$	5,539	$	1,609	$	1,054	$	16	$	13,477
Evaluated individually for impairment	—		3		—		160		497		—		660
	$	2,807	$	2,455	$	5,539	$	1,769	$	1,551	$	16	$	14,137



	December 31, 2016
	Construction and Development		Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate		Commercial and Industrial		Consumer		Total
	($ in thousands)
Ending Balance:
Evaluated collectively for impairment	$	288,193	$	228,131	$	557,846	$	283,013	$	163,157	$	4,653	$	1,524,993
Evaluated individually for impairment	—		3,283		—		4,237		2,015		15		9,550
	$	288,193	$	231,414	$	557,846	$	287,250	$	165,172	$	4,668	$	1,534,543

Allowance for Losses:
Evaluated collectively for impairment	$	2,954	$	2,000	$	4,834	$	1,533	$	952	$	15	$	12,288
Evaluated individually for impairment	—		129		—		235		917		13		1,294
	$	2,954	$	2,129	$	4,834	$	1,768	$	1,869	$	28	$	13,582

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Table 6.3: Specific Allocation for Impaired Loans
	September 30, 2017						December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Related Allowance		Unpaid Principal Balance		Recorded Investment		Related Allowance
	($ in thousands)
With no related allowance:
Construction and development	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate - owner occupied	2,522		2,407		—		3,239		3,154		—
Commercial real estate - non-owner occupied	17,456		15,105		—		—		—		—
Residential real estate	1,822		1,609		—		1,972		1,845		—
Commercial and industrial	2,888		2,857		—		213		204		—
Consumer	—		—		—		—		—		—
Total with no related allowance	24,688		21,978		—		5,424		5,203		—
With an allowance recorded:
Construction and development	—		—		—		—		—		—
Commercial real estate - owner occupied	710		710		3		130		129		129
Commercial real estate - non-owner occupied	—		—		—		—		—		—
Residential real estate	2,324		2,299		160		2,409		2,392		235
Commercial and industrial	2,335		1,050		497		2,140		1,811		917
Consumer	—		—		—		16		15		13
Total with an allowance recorded	5,369		4,059		660		4,695		4,347		1,294
Total impaired loans	$	30,057	$	26,037	$	660	$	10,119	$	9,550	$	1,294



Table 6.4: Average Impaired Loan Balance
	For the Three Months Ended
	September 30, 2017				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	($ in thousands)
With no related allowance:
Construction and development	$	—	$	—	$	—	$	—
Commercial real estate- owner occupied	2,425		—		87		—
Commercial real estate- non-owner occupied	11,712		112		1,018		—
Residential real estate	1,427		2		2,833		28
Commercial and industrial	3,044		2		1,484		1
Consumer	—		—		—		—
Total with no related allowance	18,608		116		5,422		29
With an allowance recorded:
Construction and development	—		—		92		—
Commercial real estate- owner occupied	712		20		2,462		—
Commercial real estate- non-owner occupied	1,048		21		—		—
Residential real estate	2,312		29		1,629		10
Commercial and industrial	688		1		1,925		1
Consumer	—		—		364		—
Total with an allowance recorded	4,760		71		6,472		11
Total average impaired loans	$	23,368	$	187	$	11,894	$	40

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	For the Nine Months Ended
	September 30, 2017				September 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	($ in thousands)
With no related allowance:
Construction and development	$	4	$	—	$	30	$	—
Commercial real estate - owner occupied	2,445		—		931		—
Commercial real estate - non-owner occupied	5,729		186		3,047		—
Residential real estate	1,572		7		3,817		87
Commercial and industrial	1,520		5		4,107		11
Consumer	7		—		—		—
Total with no related allowance	11,277		198		11,932		98
With an allowance recorded:
Construction and development	$	—	$	—	$	92	$	—
Commercial real estate - owner occupied	713		59		2,476		—
Commercial real estate - non-owner occupied	633		31		—		—
Residential real estate	2,345		88		2,094		42
Commercial and industrial	1,178		4		2,024		4
Consumer	—		—		365		—
Total with an allowance recorded	4,869		182		7,051		46
Total average impaired loans	$	16,146	$	380	$	18,983	$	144

7. OTHER REAL ESTATE OWNED



Table 7.1: OREO Activity
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Balance at beginning of period	$	725		$	2,159		$	1,428		$	—
Properties acquired at foreclosure	—			—			—			2,256
Sales of foreclosed properties	—			(190		)	(538		)	(190		)
Write-downs	(89		)	—			(254		)	(97		)
Balance at end of period	$	636		$	1,969		$	636		$	1,969



Table 7.2: OREO Expense
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Write-downs	$	89		$	—		$	254		$	97
Operating expenses	26			48			183			67
Rental income	(12		)	(29		)	(22		)	(31		)
Net OREO expense	$	103		$	19		$	415		$	133

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8. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

As of September 30, 2017 , the Company has $11.4 million in goodwill and $1.4 million in net identifiable intangible assets. The Company recognized $5.2 million of goodwill as part of the 1 ^st Portfolio Acquisition in 2015. The remaining $6.2 million of goodwill on the consolidated balance sheets as of September 30, 2017 and December 31, 2016 , arose from multiple community bank acquisition activities in prior years.

Identifiable intangible assets include core deposit intangibles and client list intangibles. Core deposit intangibles arise when an acquired bank or branch has a stable deposit base comprised of funds associated with long-term customer relationships. The intangible asset value derives from customer relationships that provide a low-cost source of funding. In connection with the Alliance Transaction in 2012, the Company recorded a $400.0 thousand core deposit intangible. In connection with the Millennium Transaction in 2014, the Company recorded a $470.0 thousand core deposit intangible. Core deposit intangibles are being amortized straight-line over a five year or eight year period, depending on the nature of the deposits underlying the intangible. In connection with the 1 ^st Portfolio Acquisition in 2015, the Company recognized a $1.4 million client list intangible asset which is being amortized straight line over a 15 year term. See Note 3 Acquisition Activities of the 2016 10-K for further details on the 1 ^st Portfolio Acquisition.

There was no impairment of goodwill or identifiable intangible assets during the periods ended September 30, 2017 , or September 30, 2016 .



Table 8: Goodwill and Identifiable Intangibles
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Goodwill:
Balance, beginning of period	$	11,420		$	11,420		$	11,420		$	11,431
Goodwill additions/(reductions)	—			—			—			(11		)
Balance, end of period	11,420			11,420			11,420			11,420

Identifiable intangibles:
Core deposit intangible balance, beginning of period	222			395			309			481
Addition of core deposit intangibles	—			—			—			—
Amortization of core deposit intangibles	(43		)	(43		)	(130		)	(129		)
Core deposit intangible balance, net, end of period	179			352			179			352

Client list intangible balance, beginning of period	1,262			1,358			1,310			1,407
Addition of client list intangibles	—			—			—			—
Amortization of client list intangibles	(24		)	(24		)	(72		)	(73		)
Client list intangible balance, net, end of period	1,238			1,334			1,238			1,334
Total intangibles, net	$	12,837		$	13,106		$	12,837		$	13,106

9. DEPOSITS



Table 9.1: Composition of Deposits
	September 30, 2017		December 31, 2016
	($ in thousands)
Demand deposit accounts	$	463,810	$	381,887
NOW accounts	153,592		134,938
Money market accounts	284,787		270,794
Savings accounts	201,387		209,961
Time deposits under $100,000	133,575		77,279
Time deposits $100,000 through $250,000	273,625		308,816
Time deposits over $250,000	182,514		139,066
Total deposits	$	1,693,290	$	1,522,741

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Time deposits include CDARS balances. CDARS deposits are customer deposits that are placed in the CDARS network to maximize the FDIC insurance coverage for clients. CDARS balances were $34.3 million and $57.8 million as of September 30, 2017 and December 31, 2016 , respectively. The Bank had $55.0 million in brokered deposits as of September 30, 2017 , and no brokered deposits December 31, 2016 . As of September 30, 2017 and December 31, 2016 , approximately $590.3 million and $515.5 million , respectively, in deposits were in excess of FDIC insurance limits.



Table 9.2: Scheduled Maturities of Time Deposits
	September 30, 2017		December 31, 2016
	($ in thousands)
Within 1 Year	$	419,695	$	350,854
1 - 2 years	88,829		111,315
2 - 3 years	26,558		36,187
3 - 4 years	14,527		19,570
4 - 5 years	24,856		6,981
5+ years	15,249		254
Total	$	589,714	$	525,161

10. OTHER BORROWINGS

O ther borrowings consist of $6.2 million and $5.9 million of customer repurchase agreements as of September 30, 2017 and December 31, 2016 , respectively. Customer repurchase agreements are overnight and continuous standard commercial banking transactions that involve a Bank customer instead of a wholesale bank or broker. The average rate of these repurchase agreements was 0.05% as of both September 30, 2017 , and December 31, 2016 . As of September 30, 2017 , these repurchase agreements were secured by $3.1 million of collateralized mortgage obligations and $3.1 million of mortgage-backed securities, compared to $3.7 million and $2.1 million , respectively, as of December 31, 2016 . In addition, the Bank maintains $127.0 million in unsecured lines of credit with a variety of correspondent banks. As of September 30, 2017 , there were $0.3 million outstanding balances on these lines of credit. The parent company also maintains a $5.0 million unsecured line of credit with a correspondent bank.

11. FEDERAL HOME LOAN BANK ADVANCES

As a member of the FHLB, the Bank has access to numerous borrowing programs with total credit availability established at 25% of total quarter-end assets. FHLB advances are fully collateralized by pledges of certain qualifying real estate secured loans (see Note 3 - Cash and Cash Equivalents). The Bank also maintains a secured line of credit with the FHLB up to 25% of total assets or $513.9 million as of September 30, 2017 based on available collateral. As of September 30, 2017 , the Bank’s borrowing capacity was $519.6 million of which $97.9 million was outstanding.



Table 11.1: Composition of FHLB Advances
	September 30, 2017			December 31, 2016
	($ in thousands)
FHLB advances	$	97,856		$	232,097
Weighted average outstanding effective interest rate	1.79		%	1.12		%

On March 30, 2017, the Bank prepaid two long-term FHLB advances. The $10.0 million and $15.0 million advances had coupon rates of 2.12% and 2.28% with final maturity dates of November 16, 2022 , and December 9, 2022 , respectively. The gains recognized from prepaying these debt instruments were $151.6 thousand and $150.5 thousand , respectively.

In August 2016, the Bank prepaid a long-term FHLB advance that was entered into during late 2015. This $10.0 million advance had a coupon rate of 1.67% and a final maturity of August 15, 2019 . The cost to terminate the debt instrument was $155.0 thousand .

In late June 2016, the Bank prepaid a long-term FHLB advance that was assumed during the Alliance acquisition which was completed in December of 2012. For more information on the Alliance acquisition, please refer to Note 3 Mergers and Acquisitions of the 2014 10-K. This $25.0 million advance had a coupon rate of 3.99% but an effective cost of 2.04% after considering the purchase accounting mark on the instrument. The instrument had a final maturity of February 26, 2021 . The effective cost (prepayment penalty less release of the purchase accounting mark) to terminate the debt instrument was $1.04 million .

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Table 11.2: FHLB Advances Average Balances
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Average FHLB advances during the period	$	145,639		$	85,407		$	164,870		$	103,783
Average effective interest rate paid during the period	1.62		%	1.46		%	1.43		%	1.54		%
Maximum month-end balance outstanding	$	97,938		$	121,343		$	229,515		$	131,098



Table 11.3: Contractual Maturities of FHLB Advances
	September 30, 2017		December 31, 2016
	($ in thousands)
Within one year	$	47,500	$	156,000
1 - 2 years	7,873		7,500
2 - 3 years	16,684		9,906
3 - 4 years	6,278		15,000
4 - 5 years	4,521		6,556
5+ years	15,000		37,135
Total FHLB advances	$	97,856	$	232,097

12. LONG-TERM BORROWINGS



Table 12: Long-term Borrowings Detail
	September 30, 2017			December 31, 2016
	($ in thousands)
Subordinated debt	$	25,000		$	25,000
Less: debt issuance costs	(310		)	(385		)
Trust preferred capital notes	10,310			10,310
Trust preferred capital notes purchase accounting mark	(2,183		)	(2,287		)
Long-term borrowings	$	32,817		$	32,638

Under current regulatory guidelines, the Subordinated Debt may constitute no more than 25% of total Tier 1 Capital. Any amount not eligible to be counted as Tier 1 Capital is considered to be Tier 2 Capital. As of September 30, 2017 and December 31, 2016 , the entire amount of Subordinated Debt was considered Tier 2 Capital.

On June 30, 2003, Alliance invested $310.0 thousand as common equity into a wholly-owned Delaware statutory business trust (the “Trust”). Simultaneously, the Trust privately issued $10.0 million face amount of thirty -year floating rate trust preferred capital securities (the “Trust Preferred Capital Notes”) in a pooled trust preferred capital securities offering. The Trust used the offering proceeds, plus the equity, to purchase $10.3 million principal amount of Alliance’s floating rate junior subordinated debentures due 2033 (the “Subordinated Debentures”). Both the Trust Preferred Capital Notes and the Subordinated Debentures are callable at any time, without penalty. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. The interest rates as of September 30, 2017 and December 31, 2016 were 4.47% and 4.11% , respectively. The Trust Preferred Capital Notes are guaranteed by the Company on a subordinated basis, and were recorded on the Company’s consolidated balance sheet at the time of the Alliance acquisition at a discounted amount of $7.5 million , which was the fair value of the instruments at the time of the acquisition. The $2.5 million discount is being expensed monthly over the life of the obligation. Under the indenture governing the Trust Preferred Capital Notes, the Company has the right to defer payments of interest for up to twenty consecutive quarterly periods. As of September 30, 2017 , the Company was current on all interest payments.

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13. SHAREHOLDERS’ EQUITY

On May 3, 2017, 63,690 warrants for shares of common stock with an exercise price equal to $9.81 were exercised in a net transaction in which shares were surrendered to pay for the exercise cost. The transaction resulted in 40,711 shares being issued to the holder of the warrants. As of September 30, 2017 , there were no warrants outstanding.

The Company commenced paying cash dividends in 2014. In the fourth quarter 2016, the Company increased the quarterly cash dividend to seven cents ( $0.07 ) per share. Although the Company expects to dec lare and pay quarterly cash dividends in the future, any such dividend would be at the discretion of the Board of Directors of the Company and would be subject to various federal and state regulatory limit ations.

On November 22, 2016, the Company declared a five percent ( 5% ) stock dividend on the Company’s outstanding shares of voting and non-voting common stock. The dividend shares were issued on December 28, 2016, to stockholders of record at the close of business on December 13, 2016. The Company paid cash in lieu of fractional shares.

On February 22, 2017, the Company, entered into an Exchange Agreement with Castle Creek Capital Partners IV, LP (“Castle Creek”) providing for the exchange of 591,898 shares of the Company’s Non-Voting Common Stock, Series A, par value $.01 per share (“Non-Voting Common Stock”), for 591,898 shares of the Company’s voting common stock, par value $.01 per share (“Voting Common Stock”). The Company also entered into an Exchange Agreement with Endicott Opportunity Partners III, L.P. (“Endicott”) providing for the exchange of 500,000 shares of the Company’s Non-Voting Common Stock for 500,000 shares of the Company’s Voting Common Stock. The Non-Voting Common Stock was originally issued to Castle Creek and Endicott (referred to herein together as the “Investors”) in a private placement transaction that was completed on December 21, 2012, and was issued to enable the equity ownership of Castle Creek and Endicott to comply with applicable banking laws and regulations. Pursuant to the terms of the Company’s Amended and Restated Articles of Incorporation (the “Articles of Incorporation”) the Non-Voting Common Stock was convertible into Voting Common Stock, subject to certain limitations. The number of shares that the Investors received pursuant to the Exchange Agreements is equal to the number of shares of Voting Common Stock that the Investors would have received upon conversion of the Non-Voting Common Stock. The exchange transactions were effected because the Non-Voting Common Stock could only be converted at the time of a transfer or sale of the Non-Voting Common Stock that satisfied certain conditions set forth in the Articles of Incorporation. The Voting Common Stock issued upon exchange of the Non-Voting Common Stock was offered and exchanged in reliance on exemptions from registration provided by the Securities Act of 1933, as amended (the “Securities Act”). Upon completion of the exchange transactions, Castle Creek had 591,898 shares of Voting Common Stock issued and outstanding, including unvested stock awards, and Endicott had 1,199,032 shares of Voting Common Stock issued and outstanding, including unvested stock awards. Copies of the Exchange Agreements are attached as Exhibits 10.21 and 10.22 to Form 8-K filed with the SEC on February 28, 2017. The foregoing description of the Exchange Agreements is a summary and is qualified in its entirety by reference to the complete text of the Exchange Agreements.

In four separate transactions in June 2017, Castle Creek Capital Partners IV, LP (“Castle Creek”) sold a total of 74,557 shares of the Company’s Non-Voting Common Stock, Series A, par value $.01 per share (“Non-Voting Common Stock”), to an unaffiliated transferee. Pursuant to and in accordance with the Articles of Incorporation, as amended, of the Company (the “Articles”), contemporaneously with each transaction the transferee irrevocably elected to convert all of such shares from Non-Voting Common Stock to voting common stock, par value $.01 per share (the “Voting Common Stock”) of the Company.

In nine separate transactions in July 2017, Castle Creek sold a total of 169,443 shares of the Company’s Non-Voting Common Stock to an unaffiliated transferee. Pursuant to and in accordance with the Articles, contemporaneously with each transaction the transferee irrevocably elected to convert all of such shares from Non-Voting Common Stock to Voting Common Stock of the Company.

14. COMMITMENTS AND CONTINGENCIES

Credit Extension Commitments

Various commitments to extend credit are made in the normal course of banking business. Letters of credit are also issued for the benefit of customers. These commitments are subject to loan underwriting standards and geographic boundaries consistent with the Company's loans outstanding. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

As of September 30, 2017 , the Bank has $10.2 million in fixed rate commitments and $310.4 million in variable rate commitments.

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Table 14: Outstanding Commitments to Extend Credit
	September 30, 2017		December 31, 2016
	($ in thousands)
Unused lines of credit as of period ended:
Loans held for sale	$	4,826	$	2,746
Commercial	75,443		197,750
Commercial real estate	187,660		158,972
Residential real estate	1,087		727
Home equity	49,848		45,782
Personal lines of credit	1,803		1,940
Total outstanding commitments to extend credit	$	320,667	$	407,917

Litigation

In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. In each pending matter, the Company contests liability or the amount of claimed damages. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages, or where investigation or discovery have yet to be completed, the Company is unable to reasonably estimate a range of possible losses on its remaining outstanding legal proceedings; however, in the opinion of management and after consultation with legal counsel, the Company believes that the ultimate disposition of these matters is not expected to have a material adverse effect on the financial condition of the Company.

Investment in Affordable Housing Project

The Bank ha s committed $1.0 million to VCDC, a non-profit organization that seeks to gather capital from investors to build and operate low income housing programs. The Bank’s commitment is split evenly between two funds: the Housing Equity Fund of Virginia XVII, LLC (“Fund XVII”) and the Housing Equity Fund of Virginia XVIII, LLC (“Fund XVIII”). The expected return on these two funds is in the form of tax credits and tax deductions from operating losses. The principal risk associated with such an investment results from potential noncompliance with the conditions in the tax law to qualify for the tax benefits, which could result in recapture of the tax benefits. As of September 30, 2017 , the Bank had disbursed $490.5 thousand and $453.0 thousand to Fund XVII and Fund XVIII, respectively, as a result of investor capital calls. The Bank expects to make additional capital investments of $9.5 thousand by the end of 2017 for Fund XVII and additional capital investments of $47.0 thousand by the end of 2018 for Fund XVIII. The Bank accounts for the capital already disbursed in Other Assets on the consolidated balance sheet, and records related income using the effective interest method.

Representations and Warranties for Mortgage Loans Sold

The Mortgage Company maintains a reserve for the potential repurchase of residential mortgage loans, which amounted to $332.9 thousand as of September 30, 2017 , and $308.8 thousand as of December 31, 2016 . These amounts are included in other liabilities in the accompanying Consolidated Balance Sheets. Changes in the balance of the reserve are a component of other expenses in the accompanying Consolidated Statements of Operations. The reserve is available to absorb losses on the repurchase of loans sold related to document and other fraud, early payment default and early payoff. Through September 30, 2017 , no reserve charges have occurred related to fraud.

Other Contractual Arrangements

The Bank is party to a contract dated October 7, 2010, with Fiserv, for core data processing and item processing services integral to the operations of the Bank. Under the terms of the agreement, the Bank may cancel the agreement subject to a substantial cancellation penalty based on the current monthly billing and remaining term of the contract. The initial term of services provided shall end seven years following the date services are first used. Services were first provided beginning May 16, 2011 and will expire on May 15, 2018 . The Bank expects to pay Fiserv approximately $0.5 million over the remaining life of the contract.

Mortgage Banking Interest Rate Locks

During the normal course of business, the Mortgage Company enters into commitments to originate mortgage loans with end customers whereby the interest rate on the loan is determined prior to funding or closing such a loan in a transaction referred to as an IRLOC. The IRLOC are considered derivatives. The Mortgage Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments. The Mortgage Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer of the loan has assumed the interest rate risk on the loan. The correlation between the

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IRLOC and the best efforts contracts is very high due to their similarity and timing of entering into an IRLOC with the customer and the best efforts delivery commitment entered into with the buyer of the loan.

The market values of the IRLOC are not readily ascertainable with precision because the IRLOC is not an actively traded instrument in a stand-alone market. The Mortgage Company determines the fair value of the IRLOC by considering the difference between the wholesale and retail mortgage values and the expected premium for service and release fees offset by direct production costs of the underlying loans. In addition, we apply an estimated pull through rate to the valuation which recognizes the likelihood that some loans that have an IRLOC will not ultimately result in a funded mortgage loan.

The Mortgage Company also originates mortgage loans which are sold to investors on mandatory basis. These loans are hedged via forward sales contracts of MBS. The forward sales contracts of the MBS securities provide a natural hedge against changes in interest rates when mortgage loans are locked with customers. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contract may fail to meet their contractual obligations. The Mortgage Company does not expect the counterparties to fail to meet their respective obligations. If the Mortgage Company fails to close loans required under mandatory delivery requirements, the Mortgage Company could incur additional costs to acquire additional loans to meet the commitment and/or MBS securities to comply with its contractual obligations. These costs could adversely impact the financial performance of the Mortgage Company. The forward sales contracts of MBS securities are recorded at fair value with the changes in fair value recorded in non-interest income.

Since the deriv ative instruments are not designated as hedging instruments, the fair value of the derivatives are recorded by the Mortgage Company as a freestanding asset or liability with the change in value being recognized in current net income during the period of change. As of September 30, 2017 and December 31, 2016 , the Mortgage Company had open forward contracts with a notional value of $36.0 million and $36.5 million , respectively. The open forward delivery contracts are composed of forward sales of MBS. The fair value of these open forward contracts was an asset of $58.9 thousand and an asset of $17.1 thousand as of September 30, 2017 and December 31, 2016 , respectively. Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Mortgage Company does not expect any counterparty to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that if the Mortgage Company does not close the loans subject to interest rate risk lock commitments, they will be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Mortgage Company could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations in future periods.

IRLCs totaled $43.0 million and $29.6 million (notional amount) as of September 30, 2017 and December 31, 2016 , respectively. Fair values of these best efforts commitments were $0.2 million and $0.2 million as of September 30, 2017 and December 31, 2016 , respectively.

Loans Held for Sale Loss Contingencies

The Mortgage Company makes representations and warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers is accurate and complete. In the event of a default on a loan sold, the investor may make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations. The Mortgage Company maintains a reserve in other liabilities for potential losses on mortgage loans sold. Management performs a quarterly analysis to determine the adequacy of the reserve. As of September 30, 2017 , and December 31, 2016 , the balance in this reserve totaled $0.3 million and $0.3 million , respectively.

15. RELATED PARTY TRANSACTIONS

The aggregate amount of loans outstanding to employees, officers, directors, and to companies in which the Company’s directors were principal owners, amounted to $23.0 million , or 1.4% of total loans, and $23.5 million , or 1.5% of total loans, as of September 30, 2017 and December 31, 2016 , respectively. For the three and nine months ended September 30, 2017 , principal advances to related parties totaled $0.8 million and $3.2 million , respectively and principal repayments and other reductions totaled $1.6 million and $3.7 million for the same periods.

Total deposit accounts with related parties totaled $29.0 million and $29.9 million as of September 30, 2017 and December 31, 2016 , respectively.

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16. CAPITAL REQUIREMENTS

The Company and Bank are subject to regulatory capital requirements of federal banking agencies. Failure to meet minimum capital requirements can result in mandatory—and possibly additional discretionary—actions by regulators that could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital requirements that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Common Equity Tier 1 and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, in each case as those terms are defined in the regulations. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios, as set forth in the table below. Additionally, under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement began being phased in over three years beginning in 2016. We have included the 1.25% increase for 2017 in our minimum capital adequacy ratios in the table below. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis on January 1, 2019.

As of September 30, 2017 , management believes the Company and Bank satisfied all capital adequacy requirements to which it was subject to and that the Company and Bank were “well capitalized” under the regulatory framework for prompt corrective action. The capital buffer provisions as of September 30, 2017 , are presented in the tabl e below as well.

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Table 16: Capital Amounts, Ratios and Regulatory Requirements Summary
	Actual				To Be Well Capitalized Under Prompt Corrective Action Provisions			For Minimum Capital Adequacy Purposes			For Minimum Capital Adequacy Purposes with Capital Buffer
	Amount		Ratio		Amount		Ratio	Amount		Ratio	Amount		Ratio
	($ in thousands)
As of September 30, 2017:
Total risk-based capital ratio
Consolidated	$	244,927	14.20	%	n/a		n/a	$	137,941	>8.0%	$	159,494	>9.250%
Bank	238,635		13.86	%	$	172,163	>10.0%	137,730		>8.0%	159,250		>9.250%
Tier 1 risk-based capital ratio
Consolidated	205,457		11.92	%	n/a		n/a	103,456		>6.0%	125,009		>7.250%
Bank	224,165		13.02	%	137,730		>8.0%	103,298		>6.0%	124,818		>7.250%
Common Equity Tier 1 risk-based capital ratio
Consolidated	197,662		11.46	%	n/a		n/a	77,592		>4.5%	99,145		>5.750%
Bank	224,165		13.02	%	111,906		>6.5%	77,473		>4.5%	98,994		>5.750%
Tier 1 leverage ratio
Consolidated	205,457		10.04	%	n/a		n/a	81,847		>4.0%	n/a		n/a
Bank	224,165		10.96	%	102,224		>5.0%	81,779		>4.0%	n/a		n/a

As of December 31, 2016:
Total risk-based capital ratio
Consolidated	$	228,383	13.99	%	n/a		n/a	$	130,612	>8.0%	$	140,816	>8.625%
Bank	214,512		13.15	%	$	163,182	>10.0%	130,545		>8.0%	140,744		>8.625%
Tier 1 risk-based capital ratio
Consolidated	189,492		11.61	%	n/a		n/a	97,959		>6.0%	108,163		>6.625%
Bank	200,261		12.29	%	130,545		>8.0%	97,909		>6.0%	108,108		>6.625%
Common Equity Tier 1 risk-based capital ratio
Consolidated	182,021		11.15	%	n/a		n/a	73,469		>4.5%	83,673		>5.125%
Bank	200,621		12.29	%	106,068		>6.5%	73,432		>4.5%	83,631		>5.125%
Tier 1 leverage ratio
Consolidated	189,492		10.14	%	n/a		n/a	74,718		>4.0%	n/a		n/a
Bank	200,621		10.74	%	93,373		>5.0%	74,699		>4.0%	n/a		n/a

17. SHARE BASED COMPENSATION

The Company maintains the 2010 Equity Compensation Plan (the “2010 Equity Plan”). Pursuant to the terms of the 2010 Equity Plan, all shares of common stock of the Company remaining unissued under the prior plans were canceled, and an identical number of shares of the Company’s common stock were reserved for issuance under the 2010 Equity Plan. The 2010 Equity Plan gives the Personnel/Compensation Committee of the Company the ability to grant Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, and Stock Awards to employees and non-employee directors.

Under ASC 718, the Company recognizes compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides services in exchange for the award. Compensation cost is measured based on the fair value of the equity instrument issued at the date of grant. Option awards are granted with an exercise price equal to the market price at the date of grant. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The Company expects that all options granted will vest and become exercisable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

For the nine months ended September 30, 2017 , and September 30, 2016 , the Company recognized $497.0 thousand and $413.1

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thousand in expenses, respectively, related to these awards. The total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the plan as of both September 30, 2017 and September 30, 2016 was $1.7 million and $1.4 million , respectively. As of September 30, 2017 , the cost is expected to be recognized over a weighted average period of 5.80 years.



Table 17.1: Stock Options
	For the Nine Months Ended September 30
	2017				2016 ⁽¹⁾
	Stock Options		Weighted-Average Exercise Price		Stock Options		Weighted-Average Exercise Price
Outstanding, beginning of period	636,210		$	12.71	663,648		$	11.56
Options granted or exchanged	73,278		28.22		87,442		20.04
Exercised	(158,599	)	11.85		(64,808	)	10.87
Canceled or forfeited	(17,305	)	18.36		(15,205	)	14.47
Outstanding, end of period	533,584		$	14.94	671,077		$	12.66
Exercisable at end of period	327,775		$	11.17	291,734		$	11.62
⁽¹⁾ Adjusted for 5% stock dividend issued in December 2016



Table 17.2: Fair Value Assumptions for Stock Option Awards
	For the Nine Months Ended September 30
	2017			2016
Weighted-average risk-free interest rate	2.19		%	1.46		%
Expected dividend yield	0.99		%	1.14		%
Weighted-average expected volatility	46.81		%	52.45		%
Weighted-average expected life (in years)	7.3 years			7.0 years
Weighted-average fair value of each option granted	$	13.04		$	10.03



Table 17.3: Stock Options Outstanding
	As of September 30, 2017
	Outstanding		Exercisable
Range of Exercise Prices	Stock Options	Weighted-Average Remaining Contractual Life	Stock Options	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price
$8.00 - $9.99	189,611	4.6	189,611	4.6	$	9.89
$10.00 - $10.99	56,294	5.1	40,042	4.9	10.07
$11.00 - $11.99	47,328	0.3	47,328	0.3	11.51
$13.00 - $13.99	6,084	2.0	4,563	1.9	13.80
$14.00 - $14.99	2,536	1.3	2,536	1.3	14.89
$15.00 - $15.99	70,759	6.9	28,581	6.3	15.20
$18.00 - $28.99	160,972	8.8	15,114	8.4	19.94
	533,584	5.8	327,775	4.3	$	11.17

As of September 30, 2017 , and September 30, 2016 , the intrinsic value of stock options outstanding was $11.0 million and $7.2 million , respectively.

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Table 17.4: Non-Vested Restricted Stock
	For the Nine Months Ended September 30
	2017				2016
	Non-vested Restricted Stock		Weighted-Average Grant Date Fair Value		Non-vested Restricted Stock		Weighted-Average Grant Date Fair Value
Outstanding, beginning of year	28,207		$	13.42	44,496		$	12.93
Granted	—		—		—		—
Canceled	(57	)	11.00		(1,203	)	13.47
Vested and issued	(11,487	)	12.59		(15,086	)	11.98
Outstanding, end of period	16,663		$	14.00	28,207		$	13.42

18. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of voting and non-voting restricted common shares outstanding during the period. Diluted earnings per common share is computed by dividing applicable net income by the weighted average number of common shares outstanding plus any dilutive potential common shares and dilutive stock options. It is assumed that all dilutive stock options were exercised at the beginning of each period and that the proceeds were used to purchase shares of the Company’s common stock at the average market price during the period.

The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential dilutive common stock has no effect on income available to common shareholders.



Table 18: Basic and Dilutive Earnings Per Share
	For the Three Months Ended,				For the Nine Months Ended,
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
	($ in thousands, except for per share amounts)
Net income available to common shareholders	$	5,567	$	4,941	$	15,340	$	13,263

Weighted average number of shares outstanding ⁽²⁾	13,082,620		12,865,698		13,037,880		12,846,167
Effect of dilutive shares ⁽¹⁾ ⁽²⁾	242,542		243,555		294,265		232,597
Diluted weighted average number of shares outstanding ⁽²⁾	13,325,162		13,109,253		13,332,145		13,078,764

Basic earnings per share ⁽²⁾	$	0.43	$	0.38	$	1.18	$	1.03
Diluted earnings per share ⁽²⁾	$	0.41	$	0.37	$	1.15	$	1.01
⁽¹⁾ All restricted stock, stock options and warrants were dilutive for the periods presented
⁽²⁾ Prior periods adjusted for stock dividend

19. FAIR VALUE DISCLOSURES

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on-and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments.

Fair value is defined in FASB ASC 820-10 as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Transfers between levels of the fair value hierarchy are recognized on the actual dates of the event or circumstances that caused the transfer, which generally coincides with the Corporation’s monthly and or quarterly valuation process. The standard describes three levels of inputs that may be used to measure

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fair values:



	Level 1		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

	Level 2		Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

	Level 3		Prices or valuations that require unobservable inputs that are significant to the fair value measurement.

The following is a description of the fair value techniques used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy described above. Fair value measurements related to financial instruments that are reported at fair value in the consolidated financial statements each period are referred to as recurring fair value measurements. Fair value measurements related to financial instruments that are not reported at fair value each period but are subject to fair value adjustments in certain circumstances are referred to as non-recurring fair value measurements.

Recurring Fair Value Measurements and Classification

Investment Securities Available for Sale

The fair value of investments in U.S. Treasuries is based on unadjusted quoted prices in active markets. The Company classifies these fair value measurements as Level 1.

For a significant portion of the Company’s investment portfolio, including most asset-backed securities, corporate debt securities, senior agency debt securities, and Government/GSE guaranteed mortgage-backed securities, fair value is determined using a reputable and nationally recognized third party pricing service. The prices obtained are non-binding and generally representative of recent market trades. The Company corroborates its primary valuation source by obtaining a secondary price from another independent third party pricing service. The Company classifies these fair value measurements as Level 2.

For certain investment securities that are thinly traded or not quoted, the Company estimates fair value using internally-developed models that employ a discounted cash flow approach. The Company maximizes the use of observable market data, including prices of financial instruments with similar maturities and characteristics, interest rate yield curves, measures of volatility and prepayment rates. The Company generally considers a market to be thinly traded or not quoted if the following conditions exist: (1) there are few transactions for the financial instruments; (2) the prices in the market are not current; (3) the price quotes vary significantly either over time or among independent pricing services or dealers; or (4) there is a limited availability of public market information. The Company classifies these fair value measurements as Level 3.

Net transfers in and/or out of the different levels within the fair value hierarchy are based on the fair values of the assets and liabilities as of the beginning of the reporting period. There were no transfers within the fair value hierarchy for fair value measurements of the Company's investment securities during the nine months ended September 30, 2017 or 2016 .

Financial Derivatives

The Company relies on a third-party pricing service to value its mortgage banking derivative financial assets and liabilities, which the Company classifies as a Level 3 valuation. The external valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated pull-through rate based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment groups.

Nonrecurring Fair Value Measurements and Classification

Loans Held for Investment

Certain loans in the Company's loan portfolio are measured at fair value when they are determined to be impaired. Impaired loans are reported at fair value less estimated cost to sell. The fair value of the loan generally is based on the fair value of the underlying property, which is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties. The Company classifies these fair values as Level 3 measurements.

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Other Real Estate Owned

The Company initially records OREO properties at fair value less estimated costs to sell and subsequently records them at the lower of carrying value or fair value less estimated costs to sell. The fair value of OREO is determined by third-party appraisals when available. When third-party appraisals are not available, fair value is estimated based on factors such as prices for comparable properties in similar geographical areas and/or assessment through observation of such properties.

Fair Value Classification and Transfers

Fair values estimated by management in the absence of readily determinable fair values are classified as Level 3. As of September 30, 2017 , the Company's Level 3 assets and liabilities recorded were $4.3 million or approximately 0.2% of total assets and 1.4% of financial instruments measured at fair value. As of December 31, 2016 , Level 3 assets and liabilities were at $4.9 million or approximately 0.2% of total assets and 1.7% of financial instruments measured at fair value.

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring and nonrecurring basis as of September 30, 2017 and December 31, 2016 , respectively, and indicate the fair value hierarchy of the valuation techniques used by the Company to determine such fair value:



Table 19.1: Summary of Assets and Liabilities Measured at Fair Value
	As of September 30, 2017
	Level 1		Level 2		Level 3		Total
	($ in thousands)
Recurring:
Assets:
U.S. Treasuries	$	8,071	$	—	$	—	$	8,071
U.S. Government agencies	—		100,634		—		100,634
Mortgage-backed securities	—		91,089		—		91,089
Collateralized mortgage obligations	—		72,506		—		72,506
Taxable state and municipal securities	—		10,149		—		10,149
Tax-exempt state and municipal securities	—		14,378		—		14,378
Financial derivatives	—		—		299		299
Total recurring assets at fair value	$	8,071	$	288,756	$	299	$	297,126
Liabilities:
Financial derivatives	$	—	$	—	$	7	$	7
Total recurring liabilities at fair value	$	—	$	—	$	7	$	7
Nonrecurring:
Assets:
Loans held for investment ⁽¹⁾	$	—	$	—	$	3,399	$	3,399
Other real estate owned	—		—		636		636
Total nonrecurring assets at fair value	$	—	$	—	$	4,035	$	4,035

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	As of December 31, 2016
	Level 1		Level 2		Level 3		Total
	($ in thousands)
Recurring:
Assets:
U.S. Treasuries	$	8,078	$	—	$	—	$	8,078
U.S. Government agencies	—		98,476		—		98,476
Mortgage-backed securities	—		68,951		—		68,951
Collateralized mortgage obligations	—		78,818		—		78,818
Taxable state and municipal securities	—		11,292		—		11,292
Tax-exempt state and municipal securities	—		14,589		—		14,589
Financial derivatives	—		—		318		318
Total recurring assets at fair value	$	8,078	$	272,126	$	318	$	280,522
Liabilities:
Financial derivatives	—		—		105		105
Total recurring liabilities at fair value	$	—	$	—	$	105	$	105
Nonrecurring:
Assets:
Loans held for investment ⁽¹⁾	$	—	$	—	$	3,053	$	3,053
Other real estate owned	—		—		1,428		1,428
Total nonrecurring assets at fair value	$	—	$	—	$	4,481	$	4,481
⁽¹⁾ Represents the impaired loans, net of allowance, that have been individually evaluated and reserved for.



Table 19.2: Fair Value Inputs, Assets, Quantitative Information
	As of September 30, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	($ in thousands)
Loans held for investment ⁽¹⁾	$	3,399	Appraisal	Appraisal Adjustments	0%-10% (7%)
				Cost to Sell	0%-10% (7%)
				Time to Liquidate (Mo.)	0-12 mo. (7 mo.)
				Probability of Default	5%-100% (31%)

Other real estate owned	$	636	Appraisal	Appraisal Adjustment	10%-18% (15%)

	As of December 31, 2016
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	($ in thousands)
Loans held for investment ⁽¹⁾	$	3,053	Appraisal	Appraisal Adjustments	0%-43% (6%)
				Cost to Sell	0%-10% (6%)
				Probability of Default	5%-100% (51%)
				Time to Liquidate (Mo.)	0-12 mo (9 mo.)
Other real estate owned	$	1,428	Appraisal	Appraisal Adjustment	0%-10% (10%)
				Cost to Sell	0-5% (5%)
⁽¹⁾ Represents the impaired loans, net of allowance, that have been individually evaluated and reserved for.

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The recurring Level 3 assets and liabilities are related to the fair value of the interest rate locks recorded by the Mortgage Company (acquired in July 2015). These derivatives represent the fair value of the interest rate locks and forward sales contracts of mortgage backed securities. The fair value utilizes market pricing for the valuation with the unobservable inputs being the estimated pull-through percentages which ranges from 70% to 90% . For more information on these derivatives, see Note 14 - Commitments and Contingencies. There were no significant transfers in or out of level 3 for the nine months ended September 30, 2017 and 2016 , respectively.



Table 19.3: Estimated Fair Values and Carrying Values for Financial Assets, Liabilities and Commitments
	September 30, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	($ in thousands)
Assets:
Cash and cash equivalents	$	38,049	$	38,049	$	97,373	$	97,373
Investment securities	296,827		296,827		280,204		280,204
Restricted Stock	11,239		11,239		11,726		11,726
Loans held for sale	27,890		28,809		32,109		32,985
Loans held for investment, net	1,621,508		1,641,193		1,520,961		1,546,652
Derivatives	299		299		318		318
Liabilities:
Time deposits	589,714		589,305		525,161		525,149
Other borrowings	6,439		6,439		5,852		5,852
FHLB advances	97,856		98,326		232,097		232,264
Long-term borrowings	32,817		43,799		32,638		44,188
Derivatives	7		7		105		105
Off-balance sheet instruments	—		—		—		—

The following methods and assumptions not previously presented were used in estimating the fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

Cash and cash equivalents. The carrying amount of cash and cash equivalents approximates fair value.

Restricted Stock. It is not practical to determine the fair value of restricted stock due to the restrictions placed on transferability therefore the carrying amount is assumed to be the fair value.

Loans Held for Sale. Loans held for sale are carried at the lower of cost or fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of non-interest income in the consolidated statements of operations. As such, the Company classifies loans subjected to fair value adjustments as Level 2 valuation.

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

Accounting pronouncements require disclosure of the estimated fair value of financial instruments. Fair value is defined in accordance with ASC 820-10 as disclosed above. Given market conditions, a portion of our loan portfolio is not readily marketable and market prices do not exist. We have not attempted to market our loans to potential buyers, if any exist, to determine the fair value of those instruments in accordance with the definition of ASC 820-10. Since negotiated prices in illiquid markets depends upon the then present motivations of the buyer and seller, it is reasonable to assume that actual sales prices could vary widely from any estimate of fair value made without the benefit of negotiations. Additionally, changes in market interest rates can dramatically impact the value of financial instruments in a short period of time. Accordingly, the fair value measurements for loans included in the table above are unlikely to represent the instruments’ liquidation values.

Deposits. The fair value of deposits with no stated maturity, such as demand, interest checking and money market, and savings accounts, is equal to the amount payable on demand at year-end, resulting in a Level 2 classification. The fair value of time deposits is based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities thereby resulting in a Level 2 classification.

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Other borrowings. The carrying value of other borrowings, which consists of customer repurchase agreements and federal funds purchased, approximates the fair value as of the reporting date, therefore resulting in a Level 2 classification.

FHLB advances. The fair value of FHLB advances is based on the discounted value of future cash flows using interest rates currently being offered for FHLB advances with similar terms and characteristics thereby resulting in a Level 2 classification.

Long-term borrowings. The fair value of long-term borrowing, which consists of subordinated debt and trust preferred securities are based on the discounted value of future cash flows using interest rates currently being offered for FHLB advances with similar terms and characteristics thereby resulting in a Level 2 classification.

Off-balance sheet instruments. The fair value of off-balance-sheet lending commitments is equal to the amount of commitments outstanding. This is based on the fact that the Company generally does not offer lending commitments or standby letters of credit to its customers for long periods, and therefore, the underlying rates of the commitments approximate market rates, resulting in a Level 2 classification.

20. SEGMENT REPORTING

The Company has three reportable segments: commercial banking, mortgage banking, and wealth management. The basis of segmentation is driven by the respective lines of business within the Company. Revenues from commercial banking operations consist primarily of interest earned on loans and investment securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary market, and loan origination fee income. Wealth management operating revenues consist of fees for portfolio asset management and transactional fees charged to clients. The commercial banking segment provides the mortgage banking segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on a premium over their cost to borrow funds. These transactions are eliminated in the consolidation process. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process. A management fee for operations and administrative support services is charged amongst subsidiaries and eliminated in the consolidated totals.



Table 20.1: Segment Reporting - 2017 (QTD)
	As of and for the Three Months Ended September 30, 2017
	Commercial Bank		Mortgage Bank		Wealth Management		Other ⁽¹⁾			Consolidated Totals
	($ in thousands)
Interest and dividend income	$	21,606	$	362	$	—	$	—		$	21,968
Interest expense	3,686		—		—		551			4,237
Net interest income	17,920		362		—		(551		)	17,731
Provision for loan losses	375		—		—		—			375
Net interest income after provision for loan losses	17,545		362		—		(551		)	17,356

Non-interest income	535		4,598		533		(1		)	5,665
Compensation and employee benefits	5,043		1,599		260		267			7,169
Mortgage commission	—		1,682		—		—			1,682
Premises and equipment	1,586		167		32		42			1,827
Data processing	1,014		56		14		—			1,084
Professional fees	231		13		3		90			337
Merger expenses	—		—		—		133			133
Mortgage loan processing expenses	—		265		—		—			265
Other operating expenses	1,424		275		60		36			1,795
Income/(loss) before provision for income taxes	$	8,782	$	903	$	164	$	(1,120	)	$	8,729

Total assets	$	2,008,137	$	41,844	$	3,880	$	1,615		$	2,055,476
⁽¹⁾ Includes parent company and intercompany eliminations

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Table 20.2: Segment Reporting - 2017 (YTD)
	As of and for the Nine Months Ended September 30, 2017
	Commercial Bank		Mortgage Bank		Wealth Management		Other ⁽¹⁾			Consolidated Totals
	($ in thousands)
Interest and dividend income	$	62,941	$	935	$	—	$	—		$	63,876
Interest expense	10,197		—		—		1,636			11,833
Net interest income	52,744		935		—		(1,636		)	52,043
Provision for loan losses	2,315		—		—		—			2,315
Net interest income after provision for loan losses	50,429		935		—		(1,636		)	49,728

Non-interest income	1,757		13,716		1,552		37			17,062
Compensation and employee benefits	15,202		4,968		806		761			21,737
Mortgage commission	—		5,092		—		—			5,092
Premises and equipment	4,669		500		97		124			5,390
Data processing	3,040		177		37		—			3,254
Professional fees	501		31		6		264			802
Merger expenses	14		—		—		651			665
Mortgage loan processing expenses	—		782		—		—			782
Other operating expenses	4,185		797		201		151			5,334
Income/(loss) before provision for income taxes	$	24,575	$	2,304	$	405	$	(3,550	)	$	23,734

Total assets	$	2,008,137	$	41,844	$	3,880	$	1,615		$	2,055,476
⁽¹⁾ Includes parent company and intercompany eliminations



Table 20.3: Segment Reporting - 2016 (QTD)
	As of and for the Three Months Ended September 30, 2016
	Commercial Bank		Mortgage Bank		Wealth Management		Other ⁽¹⁾			Consolidated Totals
	($ in thousands)
Interest and dividend income	$	18,301	$	635	$	—	$	—		$	18,936
Interest expense	2,560		—		—		533			3,093
Net interest income	15,741		635		—		(533		)	15,843
Provision for loan losses	1,035		—		—		—			1,035
Net interest income after provision for loan losses	14,706		635		—		(533		)	14,808

Non-interest income	601		7,535		467		63			8,666
Compensation and employee benefits	4,839		2,090		241		225			7,395
Mortgage commission	—		2,657		—		—			2,657
Premises and equipment	1,561		169		32		40			1,802
Data processing	981		74		3		—			1,058
Professional fees	266		29		2		80			377
Merger expenses	30		—		—		—			30
Mortgage loan processing expenses	—		444		—		—			444
Debt extinguishment	155		—		—		—			155
Other operating expenses	1,259		300		65		69			1,693
Income/(loss) before provision for income taxes	$	6,216	$	2,407	$	124	$	(884	)	$	7,863

Total assets	$	1,828,543	$	83,644	$	3,604	$	1,147		$	1,916,938
⁽¹⁾ Includes parent company and intercompany eliminations

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Table 20.4: Segment Reporting - 2016 (YTD)
	As of and for the Nine Months Ended September 30, 2016
	Commercial Bank		Mortgage Bank		Wealth Management			Other ⁽¹⁾			Consolidated Totals
	($ in thousands)
Interest and dividend income	$	53,299	$	1,363	$	—		$	—		$	54,662
Interest expense	7,672		—		2			1,591			9,265
Net interest income	45,627		1,363		(2		)	(1,591		)	45,397
Provision for loan losses	2,640		—		—			—			2,640
Net interest income after provision for loan losses	42,987		1,363		(2		)	(1,591		)	42,757

Non-interest income	2,403		18,128		1,339			67			21,937
Compensation and employee benefits	14,386		5,556		728			674			21,344
Mortgage commission	—		5,865		—			—			5,865
Premises and equipment	4,718		544		100			120			5,482
Data processing	2,919		238		26			—			3,183
Professional fees	736		57		6			247			1,046
Merger expenses	30		—		—			—			30
Mortgage loan processing expenses	—		994		—			—			994
Debt extinguishment	1,199		—		—			—			1,199
Other operating expenses	3,448		662		184			210			4,504
Income/(loss) before provision for income taxes	$	17,954	$	5,575	$	293		$	(2,775	)	$	21,047

Total assets	$	1,828,543	$	83,644	$	3,604		$	1,147		$	1,916,938
⁽¹⁾ Includes parent company and intercompany eliminations

During the three and nine months ended September 30, 2017 , the mortgage subsidiary originated $166.3 million and $480.7 million , respectively, of total loan volume compared to $263.6 million and $603.2 million for the three and nine months ended September 30, 2016 , respectively. Wealth Advisors’ assets under management grew to $327.0 million as of September 30, 2017 , from $280.8 million as of September 30, 2016 .

21. SUBSEQUENT EVENTS

On October 18, 2017 , the Company held a special meeting of shareholders, at which meeting the Company’s shareholders approved the Merger of the Company into Sandy Spring, with Sandy Spring as the surviving entity.

On August 21, 2017 , the Company announced that its Board of Directors declared a cash dividend of seven cents ( $0.07 ) per share payable on October 2, 2017 , to stockholders of record as of September 11, 2017 . The dividend payout was $916 thousand on 13.1 million shares of voting and non-voting common stock.

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

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and it’s operating subsidiaries. This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report.

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Cautionary Note Regarding Forward-Looking Statements

The following discussion and other sections to which the Company has referred you contains management’s comments on the Company’s business strategy and outlook, and such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying management’s judgment concerning the matters discussed, and accordingly, involve estimates, assumptions, judgments and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements and the discussion below is not necessarily indicative of future results. Factors that could cause or contribute to any differences include, but are not limited to, those discussed in Part II, Item 1A - “Risk Factors.”

This report, as well as other periodic reports filed with the SEC, and written or oral communications made from time to time by or on behalf of the Company, may contain statements relating to future events or future results and their effects that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend,” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may” or the negative of those terms or other variations of them or comparable terminology. Forward-looking statements include statements of the Company’s goals, intentions and expectations; statements regarding its business plans, prospects, growth and operating strategies; statements regarding the quality of its loan and investment portfolios; and estimates of its risks and future costs and benefits.

Forward-looking statements included herein speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP and follow general practices in the U.S. banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely to a greater extent on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Management believes the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results:


•	allowance for loan losses;


•	business combinations


•	goodwill and identifiable intangible asset impairment; and,


•	accounting for income taxes.

Allowance for Loan Losses

The allowance for loan and lease losses is an estimate of the probable losses that are inherent in the loan and lease portfolio at the balance sheet date. The allowance is based on the basic principle that a loss be accrued when it is probable that the loss has occurred at

the date of the financial statements and the amount of the loss can be reasonably estimated.

Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of probable losses in the lending portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions or reductions to the allowance may be necessary based on changes in the loans and comprising the portfolio and changes in the financial condition of borrowers, resulting from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Company periodically review the loan and lease portfolio and the allowance. Such reviews may result in additional provisions based on their judgments of information available at the time of each examination.

Impaired Loans . A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows

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discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

The Company’s allowance for loan and lease losses has three basic components: a general allowance (ASC 450 reserves) reflecting historical losses by loan category, as adjusted by several factors whose effects are not reflected in historical loss ratios; specific allowances (ASC 310 reserves) for individually identified loans; and an unallocated component. Each of these components, and the allowance methodology used to establish them, are described in detail in Note 1 of the Notes to the Consolidated Financial Statements included in this report. The amount of the allowance is reviewed monthly by management, and periodically by independent consultants.

General reserve component consists of two parts. The first part covers non-impaired loans and is quantitatively derived from an estimate of credit losses averaged during the preceding twelve quarters, adjusted for various qualitative factors applicable to loan portfolio segments. The estimate of credit losses is the product of the adjusted net charge-off historical loss experience multiplied by the balance of the loan segment. The qualitative environmental factors consist of national, local, and portfolio characteristics and are applied to the loan segments. The following are types of environmental factors management considers:


•	trends in delinquencies and other non-performing loans;


•	changes in the risk profile related to large loans in the portfolio;


•	changes in the categories of loans comprising the loan portfolio;


•	concentrations of loans to specific industry segments;


•	changes in economic conditions on both a local and national level;


•	changes in the Company’s credit administration and loan portfolio management processes; and


•	quality of the Company’s credit risk identification processes.

Specific reserve component is established for individually impaired loans. As a practical expedient, for collateral dependent loans, the Company measures impairment based on fair value of the collateral less costs to sell the underlying collateral. For loans on which the Company has not elected to use a practical expedient to measure impairment, the Company will measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate. In determining the cash flows to be included in the discount calculation the Company considers the several factors when estimating the probability and severity of potential losses, including borrower’s overall financial condition, resources and payment record, demonstrated or documented support available from guarantors, and adequacy of realizable collateral value in a liquidation scenario.

Unallocated component may be used to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

Business Combinations

Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date measured at their fair value as of that date. To determine fair value, the Company utilizes third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principals and conditions. If they are necessary, to implement its plan to exit an activity of an acquiree, the costs that the Company expects, but is not obligated, to incur in the future are not liabilities at the acquisition date, nor are costs to terminate the employment of or relocate an acquiree’s employee(s). The Company does not recognize these costs as part of applying the acquisition method. Instead, the Company recognizes these costs as expenses in its post-combination financial statements in accordance with other applicable U.S. GAAP.

Acquisition-related costs are costs the Company incurs to effect a business combination. These costs include advisory, legal, accounting, valuation and other professional services. Some other examples of acquisition-related costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company will account for acquisition-related costs as expenses in periods in which the costs are incurred and the services received.

Loans acquired in a business combination are recorded at fair value on the date of acquisition. Loans acquired with deteriorating credit quality are accounted for in accordance with ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorating Credit Quality, and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are not considered to be impaired unless they deteriorate further subsequent to the acquisition. Certain acquired loans, including performing loans and revolving lines of credit, are accounted for in accordance with ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Goodwill and Identifiable Intangible Assets

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The Company follows ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company performs its annual impairment testing in the 4th quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Examples of such events include, but are not limited to, a significant deterioration in future operating results, adverse action by a regulator, or a loss of key personnel. If the fair value is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Intangible assets with definite useful lives such as core deposits and customer relationships are amortized over their estimated useful lives to their estimated residual values. These are initially measured at fair value and then are amortized over their useful lives. Determining the fair value requires the Company to use a degree of subjectivity. Intangible assets with definite useful lives are amortized over their estimated useful lives, to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s Consolidated Balance Sheets. Core deposit intangible assets arise when a bank has a stable deposit base comprised of funds associated with long-term customer relationships. The intangible asset value derives from customer relationships that provide a low-cost source of funding. Client list intangible assets arise when a client list is acquired through a business combination and that client list is deemed to be an asset that will provide value over a finite period of time.

Accounting for Income Taxes

The Company accounts for income taxes by recording deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company’s accoun ting policy follows the prescribed authoritative guidance that a minimal probability threshold of a tax position must be met before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in other non-interest expenses in its consolidated statements of income. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the applicable reporting and accounting requirements.

Management expects that the Company’s adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates due to the requirement that any change in judgment or measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

Executive Overview

The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and its subsidiary. This discussion and analysis should be read in conjunction with Item 8 - “Consolidated Financial Statements and Notes”.

Consolidated net income available to common shareholders was $5.6 million (or $0.41 per diluted common share) for the three months ended September 30, 2017 . Net income available to common shareholders during 2017 increased $0.6 million , up 12.7% over the $4.9 million (or $0.37 per diluted common share) earned during the three months ended September 30, 2016 . These results reflect the following:


•	The increase in earnings is primarily attributable to the growth in earning assets, particularly loans held for investment, of the Bank.


•	Return on average assets for the three months ended September 30, 2017 was 1.07% compared to 1.09% for the same period last year. Return on average assets for the nine months ended September 30, 2017 was 1.01% compared to 1.01% for the same period last year.


•	Return on average shareholders’ equity for the three months ended September 30, 2017 was 10.57% compared to 10.21% for the three months ended September 30, 2016 . For the nine months ended September 30, 2017 , return on average shareholder’s equity was 10.11% compared to 9.43% for the same period last year.

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•

Net i nterest income after provision for loan losses for the three months ended September 30, 2017 increased $2.5 million or 17.2% to $17.4 million compared to $14.8 million for the three months ended September 30, 2016 . Net interest income increased $7.0 million or 16.3% from $42.8 million for the nine months ended September 30, 2016 to $49.7 million for the nine months ended September 30, 2017 . This increase is primarily attributable to organic growth in earning assets of the Bank.

•

During the three and nine months ended September 30, 2017 , the Mortgage Company generated $5.0 million and $14.7 million in gross revenue on $166.3 million and $480.7 million of mortgage production compared to $8.2 million and $19.5 million in revenue on $263.6 million and $603.2 million of mortgage production over the same period last year. In 2017, the mortgage segment contributed net income of $1.5 million or $0.11 cents per share fully diluted.

•

As of September 30, 2017 , and December 31, 2016 , total assets were $2.1 billion and $2.0 billion , respectively. Total net loans held for investment increased by $100.5 million , or 6.6% , from $1.5 billion as of December 31, 2016 , to $1.6 billion as of September 30, 2017 . This increase is attributable to organic growth from our existing lending team. During the same period, total deposits increased $170.5 million , or 11.2% , to $1.7 billion . This increase is attributable to deposit growth in our retail network.

•

As of September 30, 2017 , WashingtonFirst had $24.4 million in non-performing assets, 1.19% of total assets; an increase of $15.9 million from $8.5 million at December 31, 2016 . Allowance for loan losses increased to $14.1 million during the nine months ended September 30, 2017 increasing $0.6 million compared to December 31, 2016 . The increase in the allowance was driven by provisions of $2.3 million partially offset by net charge-offs of $1.8 million .


•	The Company paid its 15 ^th consecutive quarterly dividend of $0.07 on July 3, 2017 .

The Company's primary market, the Washington, D.C. metropolitan area (which includes the District of Columbia proper, Northern Virginia and suburban Maryland), has been relatively less impacted by recessionary forces than other parts of the country. The region’s economic strength is due not only to the region’s significant federal presence, but also to strong growth in the business and professional services sector. Private sector growth was attributable in part to a diverse economy including a large health care component, substantial business services, and a highly educated work force. The unemployment rate in the region has remained consistently below the national average for the last several years. Much of this success is due to the region’s highly trained and educated workforce. According to the U.S. Census Bureau, the region is home to six of the top ten most highly educated counties in the nation and six of the top ten most affluent counties, as measured by household income. Collectively, the Company’s market area is more diverse and resilient than many other regions. During the third quarter of 2017 , the Mid-Atlantic region in which the Company operates continued to show consistent economic improvement. Although recent increases in market interest rates have had some impact on mortgage production in the Mortgage segment, market interest rates and general economic conditions remained favorable for the Bank segment. The Bank continues to maintain strong levels of liquidity, capital and credit quality.

Results of Operations



Table M1: Selected Performance Ratios
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands, except earnings per share)
Average total assets	$	2,058,354		$	1,801,142		$	2,021,901		$	1,762,452
Average shareholders' equity	208,945			192,449			202,917			187,928
Net income	5,567			4,941			15,340			13,263
Basic earnings per common share ⁽¹⁾	$	0.43		$	0.38		$	1.18		$	1.03
Fully diluted earnings per common share ⁽¹⁾	$	0.41		$	0.37		$	1.15		$	1.01
Return on average assets ⁽²⁾	1.07		%	1.09		%	1.01		%	1.01		%
Return on average shareholders' equity ⁽²⁾	10.57		%	10.21		%	10.11		%	9.43		%
Average shareholders' equity to average total assets	10.15		%	10.68		%	10.04		%	10.66		%
Efficiency ratio ⁽³⁾	61.09		%	63.41		%	62.58		%	64.27		%
Dividend payout ratio	16.28		%	15.00		%	17.84		%	16.67		%
⁽¹⁾ Adjusted for stock dividends
⁽²⁾ Annualized
⁽³⁾ The efficiency ratio is calculated as total non-interest expense (less debt extinguishment costs) divided by the sum of net interest income and total non-interest income (less gain on sale of AFS securities and gain on debt extinguishment). This non-GAAP financial measure is presented to facilitate an understanding of the Company's performance.

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T he following tables provide information regarding interest-earning assets and funding for the three and nine months ended September 30, 2017 and September 30, 2016 , respectively. The balance of non-accruing loans is included in the average balance of loans presented, though the related income is accounted for on a cash basis. Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate a ccordingly. The increase i n average rate on interest-bearing deposit accounts is consistent with general trends in average short-term rates during the periods presented. The upward trend in the average rate on time deposits reflects the maturity of older time deposits and the issuance of new time deposits at higher market rate s.



Table M2: Average Balances, Interest Income and Expense and Average Yield and Rates
	For the Three Months Ended
	September 30, 2017							September 30, 2016
	Average Balance			Income/ Expense		Yield/ Rate ⁽⁶⁾		Average Balance			Income/ Expense		Yield/ Rate ⁽⁶⁾
	($ in thousands)
Assets
Interest-earning assets:
Loans held for sale	$	34,881		$	362	4.06	%	$	66,337		$	635	3.74	%
Loans held for investment ⁽¹⁾	1,620,363			19,917		4.81	%	1,402,087			17,068		4.76	%
Investment securities - taxable	291,207			1,373		1.84	%	239,119			1,102		1.80	%
Investment securities - tax-exempt ⁽²⁾	14,475			90		2.45	%	6,006			30		1.98	%
Other equity securities	13,268			174		5.20	%	5,494			56		4.07	%
Interest-bearing balances	100			—		0.98	%	100			—		0.60	%
Federal funds sold	35,863			82		0.90	%	34,806			50		0.57	%
Total interest earning assets	2,010,157			21,998		4.28	%	1,753,949			18,941		4.23	%
Non-interest earning assets:
Cash and due from banks	3,529							2,849
Premises and equipment	6,268							7,477
Other real estate owned	695							2,121
Other assets ⁽³⁾	51,806							47,373
Less: allowance for loan losses	(14,101		)					(12,627		)
Total non-interest earning assets	48,197							47,193
Total Assets	$	2,058,354						$	1,801,142

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	143,475		$	96	0.27	%	$	127,801		$	93	0.29	%
Money market deposit accounts	294,026			705		0.95	%	262,080			395		0.60	%
Savings accounts	198,440			351		0.70	%	228,047			409		0.71	%
Time deposits	587,995			1,926		1.30	%	477,763			1,335		1.11	%
Total interest-bearing deposits	1,223,936			3,078		1.00	%	1,095,691			2,232		0.81	%
FHLB advances	145,639			604		1.62	%	85,407			318		1.46	%
Other borrowings and long-term borrowings	39,401			555		5.57	%	39,840			543		5.40	%
Total interest-bearing liabilities	1,408,976			4,237		1.19	%	1,220,938			3,093		1.01	%
Non-interest-bearing liabilities:
Demand deposits	428,254							375,629
Other liabilities	12,179							12,126
Total non-interest-bearing liabilities	440,433							387,755
Total Liabilities	1,849,409							1,608,693
Shareholders’ Equity	208,945							192,449
Total Liabilities and Shareholders’ Equity	$	2,058,354						$	1,801,142

Interest Spread ⁽⁴⁾				$	17,761	3.09	%				$	15,848	3.22	%
Net Interest Margin ⁽²⁾⁽⁵⁾						3.45	%						3.53	%


⁽¹⁾	Includes loans placed on non-accrual status.


⁽²⁾	Yield and income presented on a fully taxable equivalent (FTE) basis using a federal statutory rate of 35 percent and includes $30 thousand and $5 thousand of FTE income for the three months ended September 30, 2017 , and September 30, 2016 , respectively.


⁽³⁾	Includes intangibles, deferred tax asset, accrued interest receivable, bank-owned life insurance and other assets.


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


⁽⁵⁾	Net interest margin is net interest income, expressed as a percentage of average earning assets.


⁽⁶⁾	Rates and yields are annualized and calculated from actual, not rounded amount in thousands which appear in this table. Additionally, yields are calculated based on a 360 or 365 day convention as appropriate. For leap years, a 366 annaulization approach is taken instead of 365 days.

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Table M2.1: Average Balances, Interest Income and Expense and Average Yield and Rates
	For the Nine Months Ended
	September 30, 2017							September 30, 2016
	Average Balance			Income/ Expense		Yield/ Rate ⁽⁶⁾		Average Balance			Income/ Expense		Yield/ Rate ⁽⁶⁾
	($ in thousands)
Assets
Interest-earning assets:
Loans held for sale	$	30,198		$	935	4.08	%	$	47,067		$	1,363	3.80	%
Loans held for investment ⁽¹⁾	1,593,745			57,995		4.80	%	1,367,222			49,567		4.76	%
Investment securities - taxable	283,258			3,992		1.86	%	246,686			3,272		1.74	%
Investment securities - tax-exempt ⁽²⁾	14,482			278		2.53	%	4,644			81		2.27	%
Other equity securities	13,799			530		5.14	%	6,115			208		4.55	%
Interest-bearing balances	100			1		0.85	%	81			1		1.98	%
Federal funds sold	38,072			236		0.83	%	44,005			185		0.56	%
Total interest earning assets	1,973,654			63,967		4.27	%	1,715,820			54,677		4.19	%
Non-interest earning assets:
Cash and due from banks	3,366							2,515
Premises and equipment	6,620							7,607
Other real estate owned	856							1,534
Other assets ⁽³⁾	51,611							47,375
Less: allowance for loan losses	(14,206		)					(12,399		)
Total non-interest earning assets	48,247							46,632
Total Assets	$	2,021,901						$	1,762,452

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	139,133		$	319	0.31	%	$	122,218		$	269	0.29	%
Money market deposit accounts	276,393			1,793		0.87	%	275,039			1,226		0.60	%
Savings accounts	202,843			1,072		0.71	%	205,095			1,090		0.71	%
Time deposits	565,703			5,213		1.23	%	467,384			3,842		1.10	%
Total interest-bearing deposits	1,184,072			8,397		0.95	%	1,069,736			6,427		0.80	%
FHLB advances	164,870			1,789		1.43	%	103,783			1,216		1.54	%
Other borrowings and long-term borrowings	39,412			1,647		5.57	%	39,284			1,622		5.49	%
Total interest-bearing liabilities	1,388,354			11,833		1.14	%	1,212,803			9,265		1.02	%
Non-interest-bearing liabilities:
Demand deposits	418,201							348,836
Other liabilities	12,429							12,885
Total non-interest-bearing liabilities	430,630							361,721
Total Liabilities	1,818,984							1,574,524
Shareholders’ Equity	202,917							187,928
Total Liabilities and Shareholders’ Equity	$	2,021,901						$	1,762,452

Interest Spread ⁽⁴⁾				$	52,134	3.13	%				$	45,412	3.17	%
Net Interest Margin ⁽²⁾⁽⁵⁾						3.48	%						3.47	%


⁽¹⁾	Includes loans placed on non-accrual status.


⁽²⁾	Yield and income presented on a fully taxable equivalent (FTE) basis using a federal statutory rate of 35 percent and includes $91 thousand and $32 thousand of FTE income for the nine months ended September 30, 2017 , and September 30, 2016 , respectively.


⁽³⁾	Includes intangibles, deferred tax asset, accrued interest receivable, bank-owned life insurance and other assets.


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


⁽⁵⁾	Net interest margin is net interest income, expressed as a percentage of average earning assets.


⁽⁶⁾	Rates and yields are annualized and calculated from actual, not rounded amount in thousands which appear in this table. Additionally, yields are calculated based on a 360 or 365 day convention as appropriate. For leap years, a 366 annaulization approach is taken instead of 365 days.

The following tables set forth information regarding the changes in the components of the Company’s net interest income for the periods indicated. For each category, information is provided for changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of variable rate investments, variable rate deposit accounts and adjustable rate mortgages to lower rates and the acquisition of new lower yielding investments and loan s, as described above. The decrease in expense reflects the decreased cost of funding due to lower

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interest rates available in the debt markets. The increases due to changes in volume reflect the increase in on-balance sheet assets during the three and nine months September 30, 2017 , and September 30, 2016 .



Table M3: Changes in Rate and Volume Analysis
	For the Three Months Ended September 30, 2017, Compared to Same Period 2016									For the Nine Months Ended September 30, 2017, Compared to Same Period 2016
	(Decrease)/Increase Due to									(Decrease)/Increase Due to
	Rate			Volume			Total			Rate			Volume			Total
	($ in thousands)
Income from interest-earning assets:
Loans held for sale	$	318		$	(591	)	$	(273	)	$	146		$	(574	)	$	(428	)
Loans held for investment	180			2,669			2,849			407			8,021			8,428
Investment securities - taxable	25			246			271			229			491			720
Investment securities - tax exempt	9			51			60			10			187			197
Other equity securities	19			99			118			30			292			322
Interest bearing balances	—			—			—			(1		)	1			—
Federal funds sold	30			2			32			92			(41		)	51
Total income from interest-earning assets	581			2,476			3,057			913			8,377			9,290
Expense from interest-bearing liabilities:
Interest-bearing deposits	564			282			846			1,255			715			1,970
FHLB Advances	38			248			286			(142		)	715			573
Borrowed funds	45			(32		)	13			20			5			25
Total expense from interest-bearing liabilities	647			498			1,145			1,133			1,435			2,568
Increase (Decrease) in net interest income	$	(66	)	$	1,978		$	1,912		$	(220	)	$	6,942		$	6,722

Interest Earning Assets

Average loan balances were $1.6 billion for the nine months ended September 30, 2017 , compared to $1.4 billion for the nine months ended September 30, 2016 . This 17% increase over the prior year is attributable primarily to organic growth. The related interest income from loans was $58.0 million for the nine months ended September 30, 2017 resulting in an average yield of 4.80% , compared to $49.6 million and for the nine months ended September 30, 2016 , resulting in average yield of 4.76% . The increase in average yield on loans reflects increases on the prime rate as reported by The Wall Street Journal offset by competitive pressure on loan pricing during the period (including the repricing of adjustable rate loans). Interest rates are established for classes of loans that include variable rates based on the prime rate or other identifiable bases while others carry fixed rates with terms as long as 30 years. Most variable rate originations include minimum initial rates and/or floors.

Taxable investment securities balances averaged $283.3 million for the nine months ended September 30, 2017 , compared to $246.7 million for the nine months ended September 30, 2016 . Interest income generated on these investment securities for the nine months ended September 30, 2017 totaled $4.0 million , or a 1.86% yield, compared to $3.3 million or a 1.74% yield for the nine months ended September 30, 2016 .

Tax-exempt investment securities balances averaged $14.5 million for the nine months ended September 30, 2017 , compared to $4.6 million nine months ended September 30, 2016 . Interest income generated on these investment securities for the nine months ended September 30, 2017 totaled $278.0 thousand , or a 2.53% yield, compared to $81.0 thousand or a 2.27% yield for the nine months ended September 30, 2016 . The yield for tax-exempt securities has been presented on a fully taxable equivalent basis.

Other equity securities balances averaged $13.8 million for the nine months September 30, 2017 , compared to $6.1 million for the nine months ended September 30, 2016 . Interest income generated on these investment securities for the nine months ended September 30, 2017 totaled $530.0 thousand , or a 5.14% yield, compared to $208.0 thousand or a 4.55% yield for the nine months ended September 30, 2016 .

Interest-bearing balances averaged $100.0 thousand for the nine months ended September 30, 2017 , compared to $81.0 thousand for the nine months ended September 30, 2016 . Interest income generated on these balances for the nine months ended September 30, 2017 was $1.0 thousand or a 0.85% yield, compared to $1.0 thousand or a 1.98% yield for the nine months ended September 30, 2016 .

Short-term investments in federal funds sold averaged $38.1 million for the nine months ended September 30, 2017 , compared to $44.0 million for the nine months ended September 30, 2016 . The decrease in average short-term investments in 2017 is attributable to loan growth out pacing deposit growth. Interest income generated on these assets for the nine months ended September 30, 2017

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totaled $236.0 thousand , or a 0.83% yield, compared to $185.0 thousand or a 0.56% yield, for the nine months ended September 30, 2016 .

Interest Bearing Liabilities

Average interest-bearing deposits were $1.2 billion for the nine months September 30, 2017 compared to $1.1 billion for September 30, 2016 . This 11% increase in the average interest-bearing deposits in 2017 is the result of organic growth. The related interest expense from interest-bearing deposits was $8.4 million for the nine months ended September 30, 2017 , compared to $6.4 million for the nine months ended September 30, 2016 . The average rate on these deposits was 0.95% for the nine months ended September 30, 2017 , compared to 0.80% for September 30, 2016 . This increase in the cost of interest-bearing deposits is attributable to increased competition in the Company’s market, and changes in the mix of interest-bearing deposits. The increase in interest expense is primarily attributable to an increase in the average balance of interest bearing liabilities as well as changes in the mix of deposit funding.

FHLB advances averaged $164.9 million for the nine months ended September 30, 2017 , compared to $103.8 million for the nine months ended September 30, 2016 . Interest expense incurred on these borrowings for the nine months ended September 30, 2017 , totaled $1.8 million , or a 1.43% rate, compared to $1.2 million or a 1.54% rate for the nine months ended September 30, 2016 .

Other borrowings and long-term liabilities averaged $39.4 million for the nine months ended September 30, 2017 , compared to $39.3 million for the nine months ended September 30, 2016 . Interest expense incurred on these borrowings for the nine months ended September 30, 2017 , totaled $1.6 million , or a 5.57% rate, compared to $1.6 million or a 5.49% rate for the nine months ended September 30, 2016 .

The Company’s net interest margin includes the benefit of acquisition accounting fair value adjustments (purchase marks). Net accretion related to acquisition accounting totaled $86.0 thousand for the nine months ended September 30, 2017 . Actual accretion results presented are augmented by prepayments of loans, whereas future projections of accretion are based solely on the contractual maturity of loans and do not include estimated accretion related to prepayment of loans. The actual 2017 and remaining estimated net accretion impact are reflected in the following table.



Table M4: Purchase Accounting Accretion Analysis
	Loan Accretion	Borrowings Accretion (Amortization)		Net Accretion impact to net interest income
	($ in thousands)
For the years ending:
For the quarter ended September 30, 2017	121	(35	)	86
For the remaining three months of 2017	205	(35	)	170
2018	271	(139	)	132
2019	259	(139	)	120
2020	248	(139	)	109
2021	166	(139	)	27
Thereafter	2,234	(1,594	)	640

Non-Interest Income

For the three and nine months ended September 30, 2017 , non-interest income was $5.7 million and $17.1 million , compared to $8.7 million and $21.9 million for the three and nine months ended September 30, 2016 , respectively. The $3.0 million and $4.9 million decrease over the same periods ended September 30, 2016 is primarily attributable to no gains on sales of available for sale investment securities and lower gains on sale of mortgage loans. There were no gains on the sale of available-for-sale investment securities for the three and nine months ended September 30, 2017 , compared to $0.1 million and $1.3 million for the three and nine months ended September 30, 2016 . The decrease of $0.1 million and $1.3 million over the three and nine months ended September 30, 2016 , is the result of not having any sales of investment securities in 2017.

The mortgage segment realized gains on the sale of loans of $3.8 million and $11.0 million for the three and nine months ended September 30, 2017 , compared to $6.3 million and $14.4 million for the three and nine months ended September 30, 2016 , respectively. During the nine months ended September 30, 2017 , 78.1% of the mortgage loan volume was for purchase money mortgage loans, whereas only 62.6% of the mortgage volume for September 30, 2016 , respectively, was for purchase money loans. Additional fee income of $0.8 million and $2.7 million was generated by the mortgage subsidiary for the three and nine months ended September 30, 2017 . Mortgage origination volume for the three and nine months ended September 30, 2017 , was $166.3 million and

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$480.7 million , compared to $263.6 million and $603.2 million for the same period last year. Mortgage operations tend to be subject to seasonality with higher levels of volume seen during the second and third quarters annually.

The Wealth Management segment generated $0.5 million and $1.5 million in revenue for the three and nine months ended September 30, 2017 , compared to $0.5 million and $1.3 million for the three and nine months ended September 30, 2016 . Assets under management grew to $327.0 million as of September 30, 2017 , at the wealth management subsidiary, compared to $280.8 million as of September 30, 2016 .

Non-Interest Expense

For the three and nine months ended September 30, 2017 , non-interest expense was $14.3 million and $43.1 million , compared to $15.6 million and $43.6 million for the three and nine months ended September 30, 2016 . The decrease of $1.3 million over the three months ended September 30, 2017 compared to the same period last year is primarily attributable to lower mortgage commissions and mortgage loan processing expenses which is lower due to lower mortgage production.

Gain on sale of loans is highly correlated with salaries and employee benefits at the mortgage subsidiary due to commissions paid to loan officers. Mortgage company salaries and employee benefits totaled $1.6 million and $5.0 million for the three and nine months ended September 30, 2017 , compared to $2.1 million and $5.6 million for the three and nine months ended September 30, 2016 , at the mortg age segment. In addition to mortgage company salaries and employee benefits, $1.7 million and $5.1 million relating to variable commission and bonus costs were incurred for the three and nine months ended September 30, 2017 , and $2.7 million and $5.9 million for the same periods in 2016 , respectively. Total non-interest expense, which is inclusive of salaries and employee benefits, at the mortgage segment totaled $4.1 million and $12.3 million for the three and nine months September 30, 2017 , compared to $5.8 million and $13.9 million for the three and nine months ended September 30, 2016 . The mortgage variable production costs are primarily made up of appraisal, verification and credit reporting costs incurred upfront; as well as closing expenses, investor fees, and quality control costs incurred during and after loan closing.

Changes in other operating expenses are outlined in the following table.



Table M5: Consolidated Statement of Operations - Other Operating Expenses Detail
	For the Three Months Ended				For the Nine Months Ended
	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
	($ in thousands)
Other real estate owned expenses	$	115	$	48	$	437	$	164
Business and franchise tax	450		408		1,273		958
Advertising and promotional expenses	277		299		902		832
FDIC premiums	298		273		875		758
Postage, printing and supplies	35		56		155		164
Directors' fees	109		104		329		311
Insurance	56		59		189		168
Amortization of intangibles	68		68		202		202
Other	387		378		972		947
Other expenses	$	1,795	$	1,693	$	5,334	$	4,504

Provision for Income Taxes

Pro vision for inco me taxes was $3.2 million and $8.4 million for the three and nine months ended September 30, 2017 , compared to $2.9 million and $7.8 million for the same periods in 2016 , resulting in effective tax rates of 36.2% and 35.4% , respectively.

Financial Condition

Total assets were $2.1 billion as of September 30, 2017 , compared to $2.0 billion as of December 31, 2016 . This 2.6% increase is primarily attributable to the Bank’s organic growth. As of September 30, 2017 , the Company had $38.0 million of cash and cash equivalents, compared to $97.4 million as of December 31, 2016 . As of September 30, 2017 , the Company had $296.8 million of investment securities, compared to $280.2 million as of December 31, 2016 .

Total loans held for investment, net, increased $100.5 million ( 6.6% ) from $1.5 billion as of December 31, 2016 , to $1.6 billion as of September 30, 2017 . This increase is attributable to organic loan growth in our core market.

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Total deposits increased $170.5 million ( 11.2% ) from $1.5 billion as of December 31, 2016 to $1.7 billion as of September 30, 2017 . This increase is attributable to a $81.9 million growth in non-interest demand deposit account balances, a $24.1 million increase in transactional accounts, and a $64.6 million increase in time deposits.

Investment Securities - Available-for-sale

The Company actively manages its portfolio duration and composition in response to changing market conditions and changes in balance sheet risk management needs. Additionally, the securities are pledged as collateral for certain borrowing transactions, public funds and repurchase agreements. The total fair value of the amount of the investment securities accounted for under available-for-sale acco unting was $296.8 million as of September 30, 2017 , compared to $280.2 million as of December 31, 2016 . The increase is primarily attributable to additional purchases of investment securities. For reporting purposes, management includes Small Business Administration debentures within the mortgage backed securities subtotal due to similar cash flow characteristics.



Table M6: Available-for-Sale Investment Securities Summary
	September 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
	($ in thousands)
U.S. Treasuries	$	8,071	2.7	%	$	8,078	2.9	%
U.S. Government agencies	100,634		33.9	%	98,476		35.2	%
Mortgage-backed securities	91,089		30.7	%	68,951		24.6	%
Collateralized mortgage obligations	72,506		24.5	%	78,818		28.1	%
Taxable state and municipal securities	10,149		3.4	%	11,292		4.0	%
Tax-exempt state and municipal securities	14,378		4.8	%	14,589		5.2	%
Total available-for-sale investment securities	$	296,827	100.0	%	$	280,204	100.0	%

The amortized cost, fair value and yield of investments by remaining contractual maturity for available-for-sale investment securities are set forth below. Asset-backed and mortgage-backed securities are included based on their final maturities, although the actual maturities may differ due to prepayments of the underlying assets or mortgages.



Table M7: Available-for-Sale Investment Securities Contractual Maturity
	As of September 30, 2017
	Amortized Cost		Fair Value		Weighted-Average Yield
	($ in thousands)
Due within one year	$	8,723	$	8,736	1.62%
Due after one year through five years	104,398		104,167		1.79%
Due after five years through ten years	51,999		51,035		1.83%
Due after ten years	133,949		132,889		2.02%
Total available-for-sale investment securities	$	299,069	$	296,827	1.91%



	As of December 31, 2016
	Amortized Cost		Fair Value		Weighted-Average Yield
	($ in thousands)
Due within one year	$	6,856	$	6,876	1.49%
Due after one year through five years	100,102		99,693		1.78%
Due after five years through ten years	45,828		44,419		1.92%
Due after ten years	131,486		129,216		1.88%
Total available-for-sale investment securities	$	284,272	$	280,204	1.88%

Loans Held for Sale

Loan s in this category are originated by the Mortgage Company and comprised of residential mortgage loans extended to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loans. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans and servicing are sold concurrently. LHFS are

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closed in the name of the Mortgage Company and carried on our books until the loan is delivered to and purchased by an investor, generally within fifteen to forty-five days. The Mortgage Company releases all servicing rights to the investors.

The Mortgage Company was acquired in July 2015. See Note 2 - Acquisition Activities for further details. As of September 30, 2017 , loans held for sale totaled $27.9 million . The amount of loans held for sale outstanding at the end of any given month fluctuates with the volume of loans closed during the month and the timing of loans purchased by investors. During the three months ended September 30, 2017 , the mortgage subsidiary originated $166.3 million of total loan volume compared to $263.6 million for the three months ended September 30, 2016

Loans Held for Investment

In its lending activities, the Company seeks to develop relationships with clients whose business and individual banking needs will grow with the Company. The Company has made significant efforts to be responsive to the lending needs in the markets served, while maintaining sound asset quality and credit practices. The Company extends credit to construction and development, residential real estate, commercial real estate, commercial and industrial and consumer borrowers in the normal course of business. The gross loans held for investment portfolio totaled $1.6 billion as of September 30, 2017 , an increase of $101.1 million , or 6.6% , from the December 31, 2016 , balance of $1.5 billion .



Table M8: Loans Held for Investment Portfolio
	September 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
	($ in thousands)
Construction and development	$	269,981	16.5	%	$	288,193	18.8	%
Commercial real estate - owner occupied	259,963		15.9	%	231,414		15.1	%
Commercial real estate - non-owner occupied	603,147		36.9	%	557,846		36.3	%
Residential real estate	315,423		19.3	%	287,250		18.7	%
Real estate loans	1,448,514		88.6	%	1,364,703		88.9	%
Commercial and industrial	182,830		11.1	%	165,172		10.8	%
Consumer	4,301		0.3	%	4,668		0.3	%
Total loans held for investment	$	1,635,645	100.0	%	$	1,534,543	100.0	%

Substantially all loans are initially underwritten based on identifiable cash flows and supported by appropriate advance rates on collateral, which is independently valued. Commercial and industrial loans are generally secured by accounts receivable, equipment and business assets. Commercial real estate loans are secured by owner-occupied or non-owner occupied commercial properties of all types. Construction and development loans are supported by projects which generally require an appropriate level of pre-sales or pre-leasing. Generally, all commercial and industrial loans and commercial real estate loans have full recourse to the owners and/or sponsors. Residential real estate loans are secured by first or second liens on both owner-occupied and investor-owned residential properties.

Loans secured by various types of real estate, which include constructi on and development loans, commercial real estate loans, and residential real estate loans, constitute the largest portion of total loans. Of that portion, commercial real estate loans represent the largest dollar expos ure. Substantially all of these loans are secured by properties in the greater Washington, D.C. metropolitan area with the heaviest concentration in Northern Virginia. Risk is managed through diversification by sub-market, property type, and loan size, and by seeking loans with multiple sources of repayment. The average outstanding loan balance in this portfolio is $0.7 million as of September 30, 2017 .

Construction and development loans represented 16.5% and 18.8% of the total loan portfolio as of September 30, 2017 and December 31, 2016 , respectively. New originations in this category are being underwritten in the context of current market conditions and are particularly focused in sub-markets which the Company believes to be relatively strong as compared to other markets in the region. Legacy loans, particularly in the land and speculative construction portion of this portfolio, have been largely converted to amortizing loans with regular principal and interest payments. The Company expects any future reductions in its land and speculative construction exposure to be partially offset by increases in residential construction activities as market conditions improve.

Secured residential real estate loans represented 19.3% and 18.7% of total loans as of September 30, 2017 and December 31, 2016 , respectively. In general, loans in these categories represent loans underwritten to customers who had or established a deposit relationship with the respective bank at the time the loan was originated. Management believes that its underwriting criteria reflect current market conditions.

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The contractual maturity ranges or repricing schedules, as appropriate, of the loans in the Bank’s loan portfolio and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of September 30, 2017 , are summarized in the following table:



Table M9: Loan Portfolio Maturity Schedule
	As of September 30, 2017
	One Year or Less		One to Five Years		Over Five Years		Total
	($ in thousands)
Construction and development	$	167,406	$	78,329	$	24,246	$	269,981
Commercial real estate - owner occupied	21,562		50,330		188,071		259,963
Commercial real estate - non-owner occupied	70,878		202,310		329,959		603,147
Residential real estate	48,257		62,974		204,192		315,423
Commercial and industrial	101,788		59,723		21,319		182,830
Consumer	2,045		1,224		1,032		4,301
Total loans	$	411,936	$	454,890	$	768,819	$	1,635,645

Loans with a predetermined interest rate	$	93,476	$	262,784	$	123,024	$	479,284
Loans with a floating or adjustable interest rate	318,460		192,106		645,795		1,156,361
Total loans	$	411,936	$	454,890	$	768,819	$	1,635,645

Asset Quality

The Bank separates its loans into the following categories, based on credit quality: pass; pass watch; special mention; substandard; doubtful; and loss. The Bank reviews the characteristics of each rating at least annually, generally during the first quarter of each year. For a discussion of the characteristics of these ratings, see Note 5 - Loans Held for Investment.

As part of the Bank’s credit risk management practices, management regularly monitors the payment performance of its borrowers. A high percentage of all loans require some form of payment on a monthly basis, with a high percentage requiring regular amortization of principal. However, certain home equity lines of credit, commercial and industrial lines of credit, and construction loans generally require only monthly interest payments.

When payments are 90 days or more in arrears, or when it is no longer prudent to recognize current interest income on a loan, management classifies the loan as non-accrual. From time to time, a loan may be past due 90 days or more but is well secured and in the process of collection and thus warrants remaining on accrual status. Non-accrual loans increased from $5.7 million as of December 31, 2016 to $9.9 million as of September 30, 2017 . There were $12.7 million loans past due more than 90 days that were still accruing as of September 30, 2017 compared to $2.0 thousand in loans past due more than 90 days that were still accruing as of December 31, 2016 .

Allowance for Loan Losses

The methodology used by the Company to determine the level of its allowance for loan losses is described in Item 2 - “Management’s Discussio n and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates - Allowance for Loan Losses.”

The allo wance for loan losses was $14.1 million as of September 30, 2017 , or approximately 0.86% of outstanding loans held for investment, compared to $13.6 million or approximately 0.89% of outstanding loans held for investment as of December 31, 2016 .

As of September 30, 2017 , the Company has allocated $0.7 million for specific loans evaluated individually for impairment. For the three and nine months ended September 30, 2017 , the Company recorded $0.4 million and $2.3 million in provisions for loan losses, $0.3 million and $2.0 million in charge-offs, and $13.0 thousand and $228.0 thousand in recoveries, compared to $1.0 million and $2.6 million in provision for loans losses, $0.7 million and $2.1 million in charge-offs and $32.0 thousand and $83.0 thousand in recoveries for the three and nine months ended September 30, 2016 .

As part of its routine credit administration process, the Company periodically engages an outside consulting firm to review its loan portfolio and ALLL methodology. The information from these reviews is used to monitor individual loans as well as to evaluate the overall adequacy of the allowance for loan losses. In reviewing the adequ acy of the allowance for loan losses at each period, management takes into consideration the historical loan losses experienced by the Company, current economic conditions affecting the borrowers’ ability to repay, the volume of loans, trends in delinquent, non-accruing, and potential problem loans, and the quality of collateral securing loans. Loan losses are charged against the allowance when the Company believes that the collection of the

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principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. After charging off all known losses incurred in the loan portfolio, management considers on a quarterly basis whether the allowance for loan losses remains adequate to cover its estimate of probable future losses, and establishes a provision for loan losses as appropriate. Because the allowance for loan losses is an estimate, the composition of the loan portfolio changes and allowance for loan losses review process continues to evolve, there may be changes to this estimate and elements used in the methodology that may have an effect on the overall level of allowance maintained.

The allowance for loan losses model is reviewed and evaluated each quarter by management to ensure its adequacy and applicability in relation to the Company’s past and future experience with the loan portfolio, from a credit quality perspective.



Table M10: Analysis of the Allowance for Loan Losses
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Balance at beginning of period	$	14,074		$	12,595		$	13,582		$	12,289
Provision for loan losses	375			1,035			2,315			2,640
Charge-offs:
Construction and development	—			—			(13		)	(31		)
Commercial real estate - owner occupied	—			—			—			(34		)
Commercial real estate - non-owner occupied	—			(90		)	—			(636		)
Residential real estate	(79		)	—			(249		)	(48		)
Commercial and industrial	(246		)	(612		)	(1,711		)	(1,302		)
Consumer loans	—			—			(15		)	(1		)
Total charge-offs	(325		)	(702		)	(1,988		)	(2,052		)
Recoveries:
Construction and development	—			—			6			2
Commercial real estate - owner occupied	—			10			13			10
Commercial real estate - non-owner occupied	—			—			—			—
Residential real estate	9			16			96			49
Commercial and industrial	—			5			81			19
Consumer	4			1			32			3
Total recoveries	13			32			228			83
Net recoveries/(charge-offs)	(312		)	(670		)	(1,760		)	(1,969		)
Balance at end of period	$	14,137		$	12,960		$	14,137		$	12,960

Allowance for loan losses to total loans held for investment	0.86		%	0.91		%	0.86		%	0.91		%
Adjusted allowance for loan losses to total loans held for investment ⁽¹⁾	1.04		%	1.17		%	1.04		%	1.17		%
Allowance for loan losses to non-accrual loans	143.12		%	220.15		%	143.12		%	220.15		%
Allowance for loan losses to non-performing assets	57.89		%	117.39		%	57.89		%	117.39		%
Non-performing assets to total assets	1.19		%	0.58		%	1.19		%	0.58		%
Net charge-offs to average loans held for investment	0.08		%	0.18		%	0.15		%	0.19		%
⁽¹⁾ This is a non-GAAP financial measure. Refer to the table below outlining the reconciliation of GAAP Allowance Ratio to Adjusted Allowance Ratio.

Of the B ank’s $1.6 billion in gross loans outstanding as of September 30, 2017 , approximately $38.7 million or 2.4% were initially recorded at fair value in connection with the Alliance and the Millennium Transactions and have an aggregate discount of $3.4 million as of September 30, 2017 . This discount is a net amount consisting of credit-related mark-downs of $3.0 million , yield-related mark-downs of $0.8 million and yield-related mark-ups of $0.4 million .

The adjustment required to reconcile allowance for loan losses with the Company’s adjusted allowance for loan losses and adjusted allowance for loan losses to total loans ratios is the addition of the credit purchase accounting marks on purchased loans in the portfolio. In acquisition accounting, there is no carryover of previously established allowance for loan losses, as acquired loans are recorded at fair value. Loans that were acquired under the purchase accounting method are carried at book value with certain accounting marks set up on them at the time of purchase in order to adjust the acquired loans to fair value. These accounting marks can be pricing marks or credit marks. Pricing marks account for the difference in current interest rates and the interest rate on the loan

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being acquired, and may be either positive or negative. Credit marks may only be negative and are similar to an allowance for loans losses based on credit quality. Therefore, in determining the adjusted allowance for loan losses and related ratio, the credit mark component is added to the allowance for loan losses and to the total loans held for investment. Below is a reconciliation of the allowance for loan losses and related ratios to the adjusted allowance for loan losses and related ratios as of September 30, 2017 , and December 31, 2016 :



Table M11: Reconciliation of GAAP Allowance Ratio to Adjusted Allowance Ratio ⁽¹⁾
	September 30, 2017			December 31, 2016
	($ in thousands)
GAAP allowance for loan losses	$	14,137		$	13,582
GAAP loans held for investment, at amortized cost	1,635,645			1,534,543

GAAP allowance for loan losses to total loans held for investment	0.86		%	0.89		%

GAAP allowance for loan losses	$	14,137		$	13,582
Plus: Credit purchase accounting marks	2,903			3,537
Adjusted allowance for loan losses	$	17,040		$	17,119

GAAP loans held for investment, at amortized cost	$	1,635,645		$	1,534,543
Plus: Credit purchase accounting marks	2,903			3,537
Adjusted loans held for investment, at amortized cost	$	1,638,548		$	1,538,080

Adjusted allowance for loan losses to total loans held for investment ⁽¹⁾	1.04		%	1.11		%
⁽¹⁾ This is a non-GAAP financial measure. Credit purchase accounting marks are GAAP marks under purchase accounting guidance.

Non-performing Assets

As of September 30, 2017 , the Company had $24.4 million of non-performing assets compared to $8.5 million as of December 31, 2016 , an increase of $15.9 million . The ratio of non-performing assets to total assets increased 76 basis points to 1.19% as of September 30, 2017 , from 0.43% as of December 31, 2016 .



Table M12: Non-Performing Assets
	September 30, 2017			December 31, 2016
	($ in thousands)
Non-accrual loans	$	9,878		$	5,746
90+ days still accruing	12,676			2
Troubled debt restructurings still accruing	1,231			1,361
Other real estate owned	636			1,428
Total non-performing assets	$	24,421		$	8,537
Non-performing assets to total assets	1.19		%	0.43		%

Non-accrual loans were $9.9 million as of September 30, 2017 , compared to $5.7 million as of December 31, 2016 . The $9.9 million non-accrual loan balance consists primarily of loans secured by commercial real estate. Specific reserves for impaired loans were $0.7 million and $1.3 million , respectively, as of September 30, 2017 and December 31, 2016 .

As of September 30, 2017 , loans more than 90 days past due and accruing increased $12.6 million from December 31, 2016 . This increase is primarily attributable to one commercial real estate loan. The COmpany is pursuing collection efforts on this loan which remains on accrual as management believes the collateral to be of sufficient value to protect the Company against losses. Tenant rent payments are being collected and are sufficient to service the loan.

As of September 30, 2017 , OREO was $0.6 million compared to $1.4 million as of December 31, 2016 . During the nine months ended September 30, 2017 , the Bank acquired no OREO properties and sold one property for $ 538.1 thousand .

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Table M13: Changes in Other Real Estate Owned
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Balance at beginning of period	$	725		$	2,159		$	1,428
Properties acquired at foreclosure	—			—			—			2,256
Sales of foreclosed properties	—			(190		)	(538		)	(190		)
Write downs	(89		)	—			(254		)	(97		)
Balance at end of period	$	636		$	1,969		$	636		$	1,969

Restricted Stock

From time to time, the Bank invests in restricted stock of correspondent banks and the FRB as part of its banking operations. Unlike other types of stock, these investments are acquired primarily for the right to receive advances and make loan participations rather than for the purpose of maximizing dividends or value appreciation. No market exists for these stocks, and they have no quoted market value. Restricted stock is carried at cost.

As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB in an amount equal to 4.25% of aggregate outstanding advances in addition to the membership stock requirement of 0.09% of total assets as of September 30, 2017 (subject to a cap of $15.0 million). FHLB stock pays a quarterly dividend, the dividend rate at September 30, 2017 was 4.91% .

As a member of the FRB, the Bank is required to subscribe to Federal Reserve stock in the amount equivalent to six percent of its capital and surplus. On a quarterly basis, the Bank measures its capital and makes adjustments as appropriate to its holdings of Federal Reserve stock.



Table M14: Composition of Restricted Stocks
	September 30, 2017		December 31, 2016
	($ in thousands)
FHLB stock	$	5,958	$	11,370
ACBB stock	100		100
CBB stock	256		256
FRB Stock	4,925		—
Total other equity securities	$	11,239	$	11,726

Deposits

The Ban k seeks deposits within its market area by offering high-quality customer service, using technology to deliver deposit services effectively and paying competitive interest rates.

As of September 30, 2017 , the deposit portfolio totaled $1.7 billion , comprised of $463.8 million of non-interest bearing deposits and $1.2 billion of interest bearing deposits. Total deposits increased $170.5 million ( 11.2% ) from $1.5 billion as of December 31, 2016 to $1.7 billion as of September 30, 2017 . As of December 31, 2016 , the deposit portfolio totaled $1.5 billion , which was composed of $381.9 million of non-interest bearing deposits and $1.1 billion of interest bearing deposits.

The average balance of interest bearing deposits was $1.2 billion and $1.2 billion for the three and nine months ended September 30, 2017 , compared to $1.1 billion and $1.1 billion for the same periods 2016 . The increase in the average interest-bearing deposits in 2017 was a mix of organic growth as well as strategic investments in brokered CDs. The related interest expense from interest-bearing deposits was $3.1 million for the three months ended 2017 , compared to $2.2 million for the same period 2016 . The average rate on these deposits was 1.00% and 0.95% for the three and nine months ended September 30, 2017 , compared to 0.81% and 0.80% for the same period 2016 . The increase in interest expense is primarily attributable to an increase in the average balance of interest bearing liabilities as well as changes in the mix of deposit funding.

Average non-interest bearing deposits were $428.3 million and $418.2 million for the three and nine months ended September 30, 2017 , compared to $375.6 million and $348.8 million for the same periods 2016 . The increase in the average non-interest-bearing deposits in 2017 from the same periods in 2016 is the result of organic growth.

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A significant component of the Bank’s deposit portfolio is related to title companies, predominantly held in non-interest bearing transaction accounts. Balances with these relationships tends to fluctuate on a seasonal cycle with lows in the 1st and 4th quarters, and highs in the 2nd and 3rd quarters. For the nine months ended September 30, 2017 , title company balances were $283.6 million compared to $168.1 million for the prior year.



Table M15: Certificates of Deposit by Maturity
	As of September 30, 2017
	Under $100,000		$100,000 through $250,000		Over $250,000		Total
	($ in thousands)
Three months or less	$	22,299	$	55,758	$	50,545	$	128,602
Three through six months	23,392		56,792		17,988		98,172
Six through twelve months	29,661		81,425		81,835		192,921
Over twelve months	58,223		79,650		32,146		170,019
Total certificates of deposit	$	133,575	$	273,625	$	182,514	$	589,714



	As of December 31, 2016
	Under $100,000		$100,000 through $250,000		Over $250,000		Total
	($ in thousands)
Three months or less	$	9,964	$	73,655	$	18,996	$	102,615
Three through six months	14,234		45,200		34,114		93,548
Six through twelve months	19,449		79,979		55,261		154,689
Over twelve months	33,632		109,982		30,695		174,309
Total certificates of deposit	$	77,279	$	308,816	$	139,066	$	525,161

Other Borrowings

Othe r borrowings consist of customer repurchase agreements and overnight borrowings from correspondent banks. As of September 30, 2017 and 2016 , the Company had $0.3 million and no outstanding overnight borrowings from correspondent banks, respectively. Customer repurchase agreements are standard commercial bank transactions and involve a Bank customer rather than a wholesale bank or broker. This product is an accommodation to commercial customers and individuals that require safety for their funds beyond the FDIC deposit insurance limits. Management believes this product offers it a stable source of financing at a reasonable market rate of interest and is continuing the program. As of September 30, 2017 , the Company had $6.2 million of customer repurchase agreements with an average rate of 0.05% , compared to $5.9 million at 0.05% as of December 31, 2016 . As of September 30, 2017 , the Company was in compliance with all related debt agreements and/or debt covenants.

FHLB Advances

The FHLB is a significant source of funding for the Bank, which augments its funding portfolio with FHLB advances for both liquidity and interest rate management. Advances are secured by a lien on certain loans and securities of the Bank that are pledged from time to time.



Table M16: Composition of FHLB Advances
	September 30, 2017			December 31, 2016
	($ in thousands)
FHLB advances	$	97,856		$	232,097
Weighted average outstanding effective interest rate	1.79		%	1.12		%

On March 30, 2017, the Bank prepaid two long-term FHLB advances entered into during November and December 2016. The $10.0 million and $15.0 million advances had coupon rates of 2.12% and 2.28% with final maturity dates of November 16, 2022 and December 9, 2022 , respectively. The gains to terminate the debt instrument was $151.6 thousand and $150.5 thousand , respectively.

In late June 2016, the Bank prepaid a long-term FHLB advance that was assumed during the Alliance acquisition which was completed in December of 2012. This $25.0 million advance had a coupon rate of 3.99% but an effective cost of 2.04% after

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considering the purchase accounting mark on the instrument. The instrument had a final maturity of February 26, 2021 . The effective cost (prepayment penalty less release of the purchase accounting mark) to terminate the debt instrument was $1.04 million .



Table M17: FHLB Advances Average Balances
	For the Three Months Ended						For the Nine Months Ended
	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016
	($ in thousands)
Average FHLB advances during the period	$	145,639		$	85,407		$	164,870		$	103,783
Average effective interest rate paid during the period	1.62		%	1.46		%	1.43		%	1.54		%
Maximum month-end balance outstanding	$	97,938		$	121,343		$	229,515		$	131,098

As of September 30, 2017 , the Company was in compliance with al l FHLB debt agreements and/or debt covenants.

Long-term Borrowings



Table M18: Long-term Borrowings Detail
	September 30, 2017			December 31, 2016
	($ in thousands)
Subordinated debt	$	25,000		$	25,000
Less: debt issuance costs	(310		)	(385		)
Trust preferred capital notes	10,310			10,310
Trust preferred capital notes purchase accounting mark	(2,183		)	(2,287		)
Long-term borrowings	$	32,817		$	32,638

On October 5, 2015 , the Company issued $25.0 million in subordinated debt (the “Company Subordinated Debt”). The Company Subordinated Debt has a maturity of ten (10) years with a five year no-call provision, maturing in full on October 15, 2025, and carries a 6.00% fixed rate coupon, payable quarterly, subject to reset after five years at 3-month LIBOR plus 467 basis points. As of September 30, 2017 , the entire amount of Company Subordinated Debt is considered Tier 2 Capital.

On June 30, 2003, Alliance invested $310.0 thousand as common equity into a wholly-owned Delaware statutory business trust (the “Trust”). Simultaneously, the Trust privately issued $10.0 million face amount of thirty -year floating rate trust preferred capital securities (the “Trust Preferred Capital Notes”) in a pooled trust preferred capital securities offering. The Trust used the offering proceeds, plus the equity, to purchase $10.3 million principal amount of Alliances’ floating rate junior subordinated debentures due 2033 (the “Subordinated Debentures”). The Trust Preferred Capital Notes are callable at any time without penalty. The interest rate associated with the Trust Preferred Capital Notes is three month LIBOR plus 3.15% subject to quarterly interest rate adjustments. The interest rate as of September 30, 2017 , and December 31, 2016 , was 4.47% and 4.11% , respectively. The Trust Preferred Capital Notes are guaranteed by the Company on a subordinated basis, and were recorded on the Company’s books at the time of the Alliance acquisition at a discounted amount of $7.5 million , which was the fair value of the instruments at the time of the acquisition. The $2.5 million discount is being expensed monthly over the life of the obligation.

Under the indenture governing the Trust Preferred Capital Notes, the Company has the right to defer payments of interest for up to twenty consecutive quarterly periods. The interest deferred under the indenture compounds quarterly at the interest rate then in effect. the Company is not currently deferring the interest payments.

Under current regulatory guidelines, the Trust Preferred Capital Notes may constitute no more than 25% of total Tier 1 Capital. Any amount not eligible to be counted as Tier 1 Capital is considered to be Tier 2 Capital. As of September 30, 2017 , and December 31, 2016 , the entire amount of Trust Preferred Capital Notes was co nsidered Tier 1 Capital. As of September 30, 2017 , the Company was in compliance with all debt agreements and/or debt covenants.

Capital Resources

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The Company is subject to ca pital adequacy requirements imposed by the FRB and the Bank is subject to capital adequacy requirements imposed by the FDIC. Both the FRB and the FDIC have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy.

As of September 30, 2017 and December 31, 2016 , the Bank had $121.9 million and $107.2 million , respectively, of capital in excess of the amount needed to meet the regulatory minimum Tier 1 leverage ratio required to be considered “well capitalized.”

Total shareholders’ equity increased $16.1 million , or 8.4% , from $192.7 million as of December 31, 2016 , to $208.8 million as of September 30, 2017 . The increase in total shareholders’ equity during that period is primarily attributable to net income of $15.3 million , stock option exercises of $1.8 million , less year to date cash dividends declared of $2.7 million , and $1.2 million of other comprehensive income as a result of the change in fair value of it available-for-sale investment portfolio.



Table M19: Consolidated Capital Categories and Ratio Components
	September 30, 2017			December 31, 2016
	($ in thousands)
Tier 1 Capital:
Common stock	$	130		$	128
Capital surplus	180,257			177,924
Accumulated earnings	29,791			17,187
Less: disallowed assets	(12,516		)	(13,218		)
Total Common Equity Tier 1 Capital	197,662			182,021

Add: Trust preferred	8,127			8,023
Less: Additional tier 1 capital deductions	332			552
Total Tier 1 Capital	205,457			189,492

Tier 2 Capital:
Qualifying allowance for loan losses	14,470			13,891
Qualifying subordinated debt	25,000			25,000
Total Tier 2 Capital	39,470			38,891

Total risk-based capital	$	244,927		$	228,383
Risk weighted assets	$	1,724,264		$	1,632,651
Qualifying quarterly average assets	$	2,046,169		$	1,867,961



Table M20: Consolidated Capital Ratios and Regulatory Requirements Summary
	September 30, 2017		December 31, 2016		To Be Well Capitalized Under Prompt Corrective Action Provisions		For Minimum Capital Adequacy Requirements
	September 30, 2017		December 31, 2016				For Minimum Capital Adequacy Requirements
Capital Ratios:
Total risk-based capital ratio	14.20	%	13.99	%	10.00	%	8.00	%
Tier 1 risk-based capital ratio	11.92	%	11.61	%	8.00	%	6.00	%
CET 1 risk-based capital ratio	11.46	%	11.15	%	6.50	%	4.50	%
Tier 1 leverage ratio	10.04	%	10.14	%	5.00	%	4.00	%

Both the Company and the Bank are considered “well capitalized” under the risk-based capital guidelines currently in effect for the federal banking regulatory agencies, and maintaining a “well capitalized” regulatory position is important for each organization. Both the Company and the Bank monitor their respective capital positions to ensure appropriate capital for the respective risk profile of each organization, as well as sufficient levels to promote depositor and investor confidence in the respective organizations.

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Table M21: Reconciliation of Tangible Common Equity to Tangible Assets Ratio ⁽¹⁾
	September 30, 2017		December 31, 2016			September 30, 2016
	($ in thousands)
Tangible Common Equity:
Common Stock Voting	$	124		$	109		$	104
Common Stock Non-Voting	6			19			18
Additional paid-in capital - common	180,257			177,924			161,918
Accumulated earnings	29,791			17,187			28,800
Accumulated other comprehensive income (loss)	(1,428		)	(2,579		)	1,140
Total Common Equity	208,750			192,660			191,980

Less Intangibles:
Goodwill	11,420			11,420			11,420
Identifiable intangibles	1,417			1,619			1,686
Total Intangibles	12,837			13,039			13,106

Tangible Common Equity	$	195,913		$	179,621		$	178,874

Tangible Assets:
Total Assets	2,055,476			2,002,911			1,916,938

Less Intangibles:
Goodwill	11,420			11,420			11,420
Identifiable intangibles	1,417			1,619			1,686
Total Intangibles	12,837			13,039			13,106

Tangible Assets	$	2,042,639		$	1,989,872		$	1,903,832

Tangible Common Equity to Tangible Assets ⁽¹⁾	9.59		%	9.03		%	9.40		%
⁽¹⁾ Tangible common equity to tangible assets ratio is a non-GAAP financial measure that is presented to facilitate an understanding of the Company's capital structure. This table provides a reconciliation between certain GAAP amounts and this non-GAAP financial measure.

Liquidity

Liquidity is the ability to meet the demand for funds from depositors and borrowers as well as expenses incurred in the operation of the business. The Company has a formal liquidity management policy and a contingency funding policy used to assist management in executing its liquidity strategies. Similar to other banking organizations, management monitors the need for funds to support depositor activities and funding of loans on a daily basis. Liquid assets include cash, interest-bearing balances, Federal funds sold, securities available for sale, loans held for sale and loans maturing within one year. Additional liquidity sources available to the Company include its capacity to borrow funds through correspondent bank lines of credit, a line of credit with the FHLB, the purchase of wholesale and brokered deposits and a corporate line of credit at a correspondent bank. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors requirements and to meet its customers’ credit needs.

Cash and cash equivalents and investment securities available for sale comprised 16.3% of total assets as of September 30, 2017 , compared to 18.9% as of December 31, 2016 . Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The Bank maintains $127.0 million in unsecured lines of credit with a variety of correspondent banks. As of September 30, 2017 , there were $0.3 million outstanding balances on these lines of credit. The Bank also maintains a secured line of credit with the FHLB up to 25% of total assets or $513.9 million as of September 30, 2017 based on available collateral. As of September 30, 2017 , the Bank’s borrowing capacity was $519.6 million of which $97.9 million was outstanding. The Company maintains a $5.0 million unsecured line of credit with a correspondent bank.

Community banks may also acquire funding from brokers through a nationally recognized network of financial institutions. The Bank may utilize such funding when rates are more favorable than other comparable sources of funding. As of September 30, 2017 , the Bank had $55.0 million in brokered funds.

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As of September 30, 2017 , loans held for investment, loans held for sale, and investments that mature within one year totaled $448.6 million or 21.8% of total assets.

Concentrations

Substantially all of the Comp any’s loans, commitments and standby letters of credit have been granted to customers located in the greater Washington, D.C. metropolitan area. The Company’s overall business includes a significant focus on commercial and residential real estate activities. As of September 30, 2017 , commercial real estate loans were 52.8% of the total loan portfolio, construction and development loans were 16.5% of the total loan portfolio and residential real estate loans were 19.3% of the total loan portfolio.

The banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. As of September 30, 2017 , the Bank’s total reported loans for construction, land development, and other land acquisitions represented 113.1% of total bank risk based capital, and its total commercial real estate loans, loans for construction, land development, and other land acquisitions represented 474.8% of total bank risk based capital.

For more information regarding risks, see Part I, Item 1A. Risk Factors - “Risks Associated With WashingtonFirst’s Business”, “WashingtonFirst’s profitability depends significantly on local economic conditions, and may be adversely affected by reductions in Federal spending” and Part I, Item 1A. Risk Factors - “Risks Associated With WashingtonFirst’s Business”, “Our concentration of loans may create a greater risk of loan defaults and losses ” both located in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 14, 2017.

Off-Balance Sheet Arrangements

The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of customers. These arrangements include commitments to extend credit, standby letters of credit and financial guarantees which would impact the overall liquidity and capital resources to the extent customers accept and/or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. With the exception of these arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is defined as the sensitivity of net income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market prices and rates. The Company’s primary market risk exposure is interest rate risk inherent in our lending, deposit taking and borrowing activities, since net interest income is the largest component on net income. The board of directors has delegated interest rate risk management to the ALCO. ALCO is governed by policy approved annually by our board of directors. The overall interest rate risk position and strategies are reviewed by executive management, ALCO and the Company’s board of directors on an ongoing basis. ALCO formulates and monitors management of interest rate risk through policies and guidelines it establishes and through review of detailed reports discussed at least quarterly. In establishing guidelines, ALCO considers impact on earnings, capital, level and direction of interest rates, liquidity, local economic conditions, external threats and other factors as part of its process to identify and manage maturity and re-pricing mismatches inherent in its cash flows to provide net interest growth consistent with the Company’s earnings objectives.

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The Company uses an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk, and to model balance sheet and income statement effects in alternative interest rate scenarios. In modeling interest rate risk, the Company measures NII sensitivity and EVE. The resulting percentage change in NII over various rate scenarios is an indication of short-term interest rate risk. The resulting change in EVE over various rate scenarios is an indication of long-term interest rate risk.

The earnings simulation model utilizes a static current balance sheet and related attributes, and adjusts for assumptions such as interest rates, loan and investment prepayment speeds, deposit early withdrawal assumptions, the sensitivity of non-maturity deposit rates, non-interest income and expense and other factors deemed significant by ALCO. Maturing and repayment dollars are assumed to roll back into like instruments for new terms at current market rates. Pricing floors on discretionary priced liability products are used which limit how low various deposit products could go under declining interest rate scenarios, reflective of our pricing philosophy in response to changing interest rates. Additional assumptions are applied to modify volumes and pricing under various rate scenarios. This information is then shock tested which assumes a simultaneous change in interest rates ranging from +400 basis points to -200 basis points. Results are then analyzed for the impact on NII, net income and EVE over the next 12 months and 24 months. In addition to simultaneous changes in interest rates, alternative interest rate changes such as changes based on interest rate ramps are also performed.

As part of its interest rate risk management, the Company typically uses its investment portfolio and wholesale funding instruments to balance its interest rate exposure.

The board of directors has established interest rate risk limits in its ALCO policy for static gap analysis and both NII and EVE. The Co mpany engages an outside consulting firm to assist in modeling its short-term and long-term interest rate risk profile. On a periodic basis, management reports to ALCO and the board of directors on the Company’s interest rate risk profile and expectations of changes in the profiles based on certain interest rate shocks. The Company believes its strategies are prudent and is within its policy guidelines as of September 30, 2017 .

The interest rate risk model results for September 30, 2017 , and December 31, 2016 , are shown in the table below based on an immediate shift in market interest rates and a static balance sheet. The percentage change indicates what the C ompany would expect NII and EVE to change over the next twelve months under various interest rate shock scen arios:



	Percentage Change in NII and EVE from Base Case
Interest	September 30, 2017				December 31, 2016
Rate Shocks	NII		EVE		NII		EVE
+400 bp	6.5	%	(3.4	)%	2.5	%	(5.0	)%
+300 bp	7.9	%	0.2	%	5.4	%	0.0	%
+200 bp	7.4	%	1.9	%	5.9	%	3.0	%
+100 bp	4.4	%	1.9	%	3.4	%	2.7	%
-100 bp	(0.7	)%	(1.3	)%	3.7	%	(0.1	)%
-200 bp	(1.8	)%	(1.3	)%	3.2	%	(4.5	)%

This analysis suggests that if interest rates were to increase, the Company is positioned for an improvement in net interest income over the next 12 months.

On a periodic basis, the Company back-tests actual changes in its net interest income against expected changes as well as actual market interest rate movements and other factors impacting actual versus projected results.

Certain shortcomings are inherent in this method of analysis. Since the Company’s actual balance sheet movement is not static (maturing and repayment dollars are presumed to be rolled back into like instruments for new terms at current market rates), these simulated changes in net interest income are indicative only of the magnitude of interest rate risk in the balance sheet. These changes do not take into account actions we may take in response to changes in interest rates, and are not necessarily reflective of the income the Company would actually receive. There is no guarantee that the risk management techniques and balance sheet management strategies the Company employs will be effective in periods of rapid rate movements or extremely volatile periods. In addition to changes in interest rates, the level of future net interest income is also dependent on a number of other variables including growth and composition of earning assets and interest bearing liabilities, economic and competitive conditions, changes in lending, investing and deposit gathering strategies and client preferences.

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Item 4. Controls and Procedures

Management's Evaluation of Disclosure Controls and Procedures . The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s periodic filings under the Exchange Act, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management on a timely basis to allow decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2017 . Based on management’s assessment, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017 .

Changes in Internal Control Over Financial Reporting. There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2017 , that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

From time to time, the Company and its subsidiaries may become involved in various legal proceedings relating to claims arising in the normal course of its business. In the opinion of management as of the period ending September 30, 2017 there were no pending or threatened legal proceedings which would have a material adverse effect on the Company’s financial condition or results of operations.

Item 1A. Risk Factors

There were no material changes from the risk factors previously disclosed in WashingtonFirst’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 14, 2017.

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

There were no unregistered sales of equity by the Company during the fiscal period covered by this report that have not been previously reported on a From 8-K.

Item 3. Defaults Upon Senior Securities

(a) None.

(b) None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits, Financial Statement Schedules

(a) The following financial statements, financial statement schedules and exhibits are filed as a part of this report:


1.	Financial Statements. WashingtonFirst’s consolidated financial statements are included in Item 1 of this report.


2.	Financial Statement Schedules. Financial statement schedules have been omitted because they are either not required, not applicable or the information required to be presented is included in WashingtonFirst’s financial statements and related notes.


3.	Exhibits. The following exhibits are filed herewith pursuant to the requirements of Item 601 of Regulation S-K:

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EXHIBIT LIST



Exhibit		Description


31.1*		Certification by CEO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification by CFO pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification by CEO and CFO pursuant to 18 U.S.C. Section 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 Calculation Linkbase Document.

101.DEF*		XBRL Taxonomy Definition Linkbase Document.

101.LAB*		XBRL Taxonomy Label Linkbase Document.

101.PRE*		XBRL Taxonomy Presentation Linkbase Document.




*		Filed with this Quarterly Report on Form 10-Q.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



WASHINGTONFIRST BANKSHARES, INC.
(Registrant)


/s/ Shaza L. Andersen		November 8, 2017
By: Shaza L. Andersen		Date
President & Chief Executive Officer
(Principal Executive Officer)


/s/ Matthew R. Johnson		November 8, 2017
By: Matthew R. Johnson		Date
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)

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