EASTERN VIRGINIA BANKSHARES INC (Form: 10-Q, Received: 05/08/2017 14:45:01)

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 March 31, 2017

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-23565

EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA	54-1866052
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10900 Nuckols Road, Suite 325, Glen Allen, Virginia	23060
(Address of principal executive office)	(Zip Code)

(804) 443-8400

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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 ¨

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

The number of shares of the registrant’s Common Stock outstanding as of May 5, 2017 was 13,112,393.

EASTERN VIRGINIA BANKSHARES, INC.

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2017 (unaudited) and December 31, 2016	2

	Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016	3

	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016	4

	Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016	5

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2017 and March 31, 2016	6

	Notes to the Interim Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

	SIGNATURES	62

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)

	March 31, 2017			December 31, 2016*
Assets:	(unaudited)
Cash and due from banks	$	4,797		$	4,997
Interest bearing deposits with banks		16,648			11,919
Federal funds sold		924			699
Securities available for sale, at fair value		230,593			219,632
Securities held to maturity, at carrying value (fair value of $27,090 and $28,735, respectively)		26,230			27,956
Restricted securities, at cost		9,557			11,557
Loans, net of allowance for loan losses of $10,952 and $11,270, respectively		1,060,504			1,021,961
Deferred income taxes, net		11,275			12,419
Bank premises and equipment, net		23,965			27,694
Assets held for sale		2,970			-
Accrued interest receivable		4,921			4,705
Other real estate owned, net of valuation allowance of $49 and $36, respectively		1,631			2,656
Goodwill		17,081			17,081
Bank owned life insurance		25,885			25,734
Other assets		9,620			9,583
Total assets	$	1,446,601		$	1,398,593

Liabilities and Shareholders' Equity:
Liabilities
Noninterest-bearing demand accounts	$	225,976		$	209,138
Interest-bearing deposits		920,679			842,223
Total deposits		1,146,655			1,051,361
Federal funds purchased and repurchase agreements		5,460			5,140
Short-term borrowings		123,890			173,650
Junior subordinated debt		10,310			10,310
Senior subordinated debt		19,151			19,125
Accrued interest payable		1,128			752
Other liabilities		7,064			7,055
Total liabilities		1,313,658			1,267,393

Shareholders' Equity
Preferred stock, $2 par value per share, authorized 10,000,000 shares, issued and outstanding:
Series B; 5,240,192 shares non-voting mandatorily convertible non-cumulative preferred		10,480			10,480
Common stock, $2 par value per share, authorized 50,000,000 shares,
issued and outstanding 13,112,393 and 13,116,600 including
152,750 and 168,000 nonvested shares in 2017 and 2016, respectively		25,919			25,897
Surplus		49,336			49,321
Retained earnings		52,281			51,051
Accumulated other comprehensive loss, net		(5,073	)		(5,549	)
Total shareholders' equity		132,943			131,200
Total liabilities and shareholders' equity	$	1,446,601		$	1,398,593

*Derived from audited consolidated financial statements.

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended
	March 31,
	2017		2016
Interest and Dividend Income
Interest and fees on loans	$	12,417	$	10,953
Interest on investments:
Taxable interest income		1,377		1,506
Tax exempt interest income		52		70
Dividends		138		115
Interest on deposits with banks		27		10
Interest on federal funds sold		2		-
Total interest and dividend income		14,013		12,654

Interest Expense
Deposits		1,354		1,071
Federal funds purchased and repurchase agreements		6		7
Short-term borrowings		257		122
Junior subordinated debt		99		88
Senior subordinated debt		351		351
Total interest expense		2,067		1,639
Net interest income		11,946		11,015
Provision for Loan Losses		-		17
Net interest income after provision for loan losses		11,946		10,998
Noninterest Income
Service charges and fees on deposit accounts		743		739
Debit card/ATM fees		417		397
Gain on sale of available for sale securities, net		2		65
Gain (loss) on sale of bank premises and equipment		8		(4	)
Earnings on bank owned life insurance policies		150		159
Other operating income		242		195
Total noninterest income		1,562		1,551
Noninterest Expenses
Salaries and employee benefits		5,790		5,248
Occupancy and equipment expenses		1,476		1,430
Telephone		263		208
FDIC expense		198		203
Consultant fees		155		222
Collection, repossession and other real estate owned		211		165
Marketing and advertising		233		461
Loss on sale of other real estate owned		233		1
Impairment losses on other real estate owned		31		-
Merger and merger related expenses		478		-
Other operating expenses		1,761		1,481
Total noninterest expenses		10,829		9,419
Income before income taxes		2,679		3,130
Income Tax Expense		899		903
Net Income	$	1,780	$	2,227

Net income per common share: basic and diluted	$	0.10	$	0.12

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

	Three Months Ended
	March 31,
	2017			2016
Net income	$	1,780		$	2,227
Other comprehensive income, net of tax:
Unrealized securities gains arising during
period (net of tax, $237 and $1,210, respectively)		458			2,350
Amortization of unrealized losses on securities transferred from
available for sale to held to maturity (net of tax, $10 and $10, respectively)		19			18
Less: reclassification adjustment for securities gains
included in net income (net of tax, ($1) and ($22), respectively)		(1	)		(43	)
Other comprehensive income		476			2,325
Comprehensive income	$	2,256		$	4,552

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Three Months Ended March 31, 2017 and 2016

(dollars in thousands)

												Accumulated
				Preferred								Other
	Common			Stock					Retained			Comprehensive
	Stock			Series B		Surplus			Earnings			(Loss) Income			Total
Balance, December 31, 2015	$	25,817		$	10,480	$	48,923		$	44,941		$	(3,886	)	$	126,275
Net income		-			-		-			2,227			-			2,227
Other comprehensive income		-			-		-			-			2,325			2,325
Cash dividends - preferred stock, Series B		-			-		-			(105	)		-			(105	)
Cash dividends - common stock ($0.02 per share)		-			-		-			(260	)		-			(260	)
Repurchase of common stock		(3	)		-		(6	)		-			-			(9	)
Stock based compensation		-			-		61			-			-			61
Restricted common stock vested		18			-		(18	)		-			-			-
Balance, March 31, 2016	$	25,832		$	10,480	$	48,960		$	46,803		$	(1,561	)	$	130,514

Balance, December 31, 2016	$	25,897		$	10,480	$	49,321		$	51,051		$	(5,549	)	$	131,200
Net income		-			-		-			1,780			-			1,780
Other comprehensive income		-			-		-			-			476			476
Cash dividends - preferred stock, Series B		-			-		-			(157	)		-			(157	)
Cash dividends - common stock ($0.03 per share)		-			-		-			(393	)		-			(393	)
Repurchase of common stock		(9	)		-		(36	)		-			-			(45	)
Stock based compensation		-			-		82			-			-			82
Restricted common stock vested		31			-		(31	)		-			-			-
Balance, March 31, 2017	$	25,919		$	10,480	$	49,336		$	52,281		$	(5,073	)	$	132,943

The accompanying notes are an integral part of the consolidated financial statements.

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

	Three Months Ended
	March 31,
	2017			2016
Operating Activities:
Net income	$	1,780		$	2,227
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			17
Depreciation and amortization		613			633
Stock based compensation		82			61
Amortization of debt issuance costs		26			26
Net accretion of certain acquisition related fair value adjustments		(51	)		(56	)
Net amortization of premiums and accretion of discounts
on investment securities, net		618			636
(Gain) on sale of available for sale securities, net		(2	)		(65	)
(Gain) loss on sale of bank premises and equipment		(8	)		4
Loss on sale of other real estate owned		233			1
Impairment losses on other real estate owned		31			-
Loss on LLC investments		12			24
Earnings on bank owned life insurance policies		(150	)		(159	)
Net change in:
Deferred taxes		899			913
Accrued interest receivable		(216	)		(431	)
Other assets		(98	)		343
Accrued interest payable		376			326
Other liabilities		9			(90	)
Net cash provided by operating activities		4,154			4,410
Investing Activities:
Purchase of securities available for sale		(21,507	)		(22,238	)
Purchase of restricted securities		(1,725	)		(3,128	)
Purchases of bank premises and equipment		(362	)		(574	)
Purchases of loans		(6,872	)		(5,372	)
Improvements to other real estate owned		(13	)		-
Net change in loans		(32,095	)		(23,551	)
Proceeds from:
Maturities, calls, and paydowns of securities available for sale		8,024			6,776
Maturities, calls, and paydowns of securities held to maturity		1,644			146
Sale of securities available for sale		2,709			12,931
Sale of restricted securities		3,725			3,042
Sale of bank premises and equipment		516			-
Sale of other real estate owned		1,299			87
Net cash (used in) investing activities		(44,657	)		(31,881	)
Financing Activities:
Net change in:
Demand, interest-bearing demand and savings deposits		59,945			6,773
Time deposits		35,347			3,378
Federal funds purchased and repurchase agreements		320			994
Short-term borrowings		(49,760	)		147
Debt issuance costs		-			(2	)
Repurchase of common stock		(45	)		(9	)
Dividends paid - preferred stock, Series B		(157	)		(105	)
Dividends paid - common stock		(393	)		(260	)
Net cash provided by financing activities		45,257			10,916
Net increase (decrease) in cash and cash equivalents		4,754			(16,555	)
Cash and cash equivalents, December 31		17,615			31,955
Cash and cash equivalents, March 31	$	22,369		$	15,400
Supplemental disclosure:
Interest paid	$	1,691		$	1,313
Supplemental disclosure of noncash investing and financing activities:
Unrealized gains on securities available for sale	$	693		$	3,495
Loans transferred to other real estate owned	$	(525	)	$	(466	)
Reclassification of bank premises and equipment to assets held for sale	$	(2,970	)	$	-

The accompanying notes are an integral part of the consolidated financial statements.

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

Notes to the Interim Consolidated Financial Statements

(unaudited)

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements of Eastern Virginia Bankshares, Inc. (the “Company”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), which is unconsolidated, and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”).

The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Company owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to the Trust is reported as a liability of the Company.

Nature of Operations

Eastern Virginia Bankshares, Inc. is a bank holding company that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. The Company was headquartered in Tappahannock, Virginia until October 2016 at which time it was relocated to Glen Allen, Virginia. The Company conducts its primary operations through its wholly-owned bank subsidiary, EVB, which is headquartered in Tappahannock, Virginia. Two of EVB’s three predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In April 2006, these three banks were merged and the surviving bank was re-branded as EVB. Additionally, the Company acquired Virginia Company Bank (“VCB”) on November 14, 2014 and merged VCB with and into the Bank, with the Bank surviving, thus adding three additional branches to the Bank located in Hampton, Newport News and Williamsburg, respectively. On December 13, 2016, the Company entered into an Agreement and Plan of Merger to merge with and into Southern National Bancorp of Virginia, Inc. (“Southern National”), with Southern National surviving (such transaction, the “Pending Merger”). The Pending Merger, which is expected to be completed by the third quarter of 2017, is subject to the approval of the shareholders of both companies, as well as customary closing conditions.

The Bank provides a full range of banking and related financial services to individuals and businesses through its network of retail branches. With twenty-four retail branches, the Bank serves diverse markets that primarily are in the counties of Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Northumberland, Southampton, Surry, Sussex and the cities of Colonial Heights, Hampton, Newport News, Richmond and Williamsburg. The Bank also operates a loan production office in Chesterfield County, Virginia, that the Bank opened during the second quarter of 2014. The Bank operates under a state bank charter and as such is subject to regulation by the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”).

The Bank owns EVB Financial Services, Inc., which in turn has a 100% ownership interest in EVB Investments, Inc. EVB Investments, Inc. offers a comprehensive range of investment services through Infinex Investments, Inc. On May 15, 2014, the Bank acquired a 4.9% ownership interest in Southern Trust Mortgage, LLC. Pursuant to an independent contractor agreement with Southern Trust Mortgage, LLC, the Company advises and consults with Southern Trust Mortgage, LLC and facilitates the marketing and brand recognition of their mortgage business. In addition, the Company provides Southern Trust Mortgage, LLC with offices at two retail branches in the Company’s market area and access to office equipment at these locations during normal business hours. For its services, the Company receives fixed monthly compensation from Southern Trust Mortgage, LLC in the amount of $2 thousand, which is adjustable on a quarterly basis.

On October 1, 2014, the Bank acquired a 6.0% ownership interest in Bankers Title, LLC. Bankers Title, LLC is a multi-bank owned title agency providing a full range of title insurance settlement and related financial services. The Bank has a 2.94% ownership interest in Bankers Insurance, LLC, which primarily sells insurance products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has a 100% ownership interest in Dunston Hall LLC and POS LLC which were formed to hold the title to real estate acquired by the Bank upon foreclosure on property of real estate secured loans. The financial position and operating results of all of these subsidiaries are not significant to the Company as a whole and are not considered principal activities of the Company at this time. The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “EVBS.”

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make 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, loans acquired in a business combination, impairment of loans, impairment of securities, the valuation of other real estate owned (or “OREO”), the valuation of assets held for sale, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred income taxes and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these interim financial statements, have been made. Certain prior year amounts have been reclassified to conform to the 2017 presentation. These reclassifications have no effect on previously reported net income.

Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will be required to use additional forward-looking information when determining their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for public companies that file reports with the SEC for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, 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 still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years 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 does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017 - 08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310 - 20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017 - 08 will have on its consolidated financial statements.

Note 2. Investment Securities

The amortized cost and fair value, with gross unrealized gains and losses, of investment securities at March 31, 2017 and December 31, 2016 were as follows:

(dollars in thousands)	March 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available for Sale:	Cost		Gains		Losses		Value
SBA Pool securities	$	60,144	$	6	$	1,083	$	59,067
Agency residential mortgage-backed securities*		28,988		-		950		28,038
Agency commercial mortgage-backed securities		28,480		1		484		27,997
Agency CMO securities		59,162		39		1,054		58,147
Non agency CMO securities*		37		-		-		37
State and political subdivisions		56,208		153		1,067		55,294
Corporate securities		2,000		13		-		2,013
Total	$	235,019	$	212	$	4,638	$	230,593

*The combined unrealized gains on these securities were less than $1.

(dollars in thousands)	December 31, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
Available for Sale:	Cost		Gains		Losses		Value
SBA Pool securities	$	58,787	$	13	$	1,081	$	57,719
Agency residential mortgage-backed securities		26,710		9		890		25,829
Agency commercial mortgage-backed securities		28,522		-		670		27,852
Agency CMO securities		52,991		42		1,350		51,683
Non agency CMO securities*		43		-		-		43
State and political subdivisions		55,698		182		1,379		54,501
Corporate securities		2,000		5		-		2,005
Total	$	224,751	$	251	$	5,370	$	219,632

*The combined unrealized gains on these securities were less than $1.

(dollars in thousands)	March 31, 2017
			Net Unrealized
			Losses				Gross		Gross
	Amortized		Recorded		Carrying		Unrealized		Unrealized		Fair
	Cost		in AOCI*		Value		Gains		Losses		Value
Held to Maturity:
Agency CMO securities	$	9,139	$	31	$	9,108	$	170	$	7	$	9,271
State and political subdivisions		17,486		364		17,122		703		6		17,819
Total	$	26,625	$	395	$	26,230	$	873	$	13	$	27,090

*Represents the unamortized net unrealized holding loss for securities transferred from available for sale to held to maturity, net of amortization or accretion.

(dollars in thousands)	December 31, 2016
			Net Unrealized
			Losses				Gross		Gross
	Amortized		Recorded		Carrying		Unrealized		Unrealized		Fair
	Cost		in AOCI*		Value		Gains		Losses		Value
Held to Maturity:
Agency CMO securities	$	9,830	$	37	$	9,793	$	153	$	8	$	9,938
State and political subdivisions		18,550		387		18,163		643		9		18,797
Total	$	28,380	$	424	$	27,956	$	796	$	17	$	28,735

*Represents the unamortized net unrealized holding loss for securities transferred from available for sale to held to maturity, net of amortization or accretion.

There were no investment securities classified as “Trading” at March 31, 2017 or December 31, 2016. During the fourth quarter of 2013, the Company transferred investment securities with an amortized cost of $35.5 million, previously designated as “Available for Sale,” to “Held to Maturity” classification. The fair value of those investment securities as of the date of the transfer was $34.5 million, reflecting a gross unrealized loss of $994 thousand. The gross unrealized loss net of tax at the time of transfer remained in Accumulated Other Comprehensive Income (Loss) and is being amortized over the remaining life of the investment securities as an adjustment to interest income.

At March 31, 2017, the Company’s mortgage-backed investment securities consisted of commercial and residential mortgage-backed investment securities. The Company’s mortgage-backed investment securities are all backed by an Agency of the U.S. government and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.

The amortized cost, carrying value and fair value of investment securities at March 31, 2017, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

(dollars in thousands)	March 31, 2017
Available for Sale:	Amortized Cost		Fair Value

Due in one year or less	$	2,051	$	2,037
Due after one year through five years		96,336		94,885
Due after five years through ten years		121,617		118,889
Due after ten years		15,015		14,782
Total	$	235,019	$	230,593

(dollars in thousands)	March 31, 2017
Held to Maturity:	Carrying Value		Fair Value

Due after one year through five years	$	23,789	$	24,568
Due after five years through ten years		1,693		1,781
Due after ten years		748		741
Total	$	26,230	$	27,090

The following table presents the gross realized gains and losses on the sale of investment securities available for sale and proceeds from the sale of investment securities available for sale during the three months ended March 31, 2017 and 2016 :

	Three Months Ended		Three Months Ended
(dollars in thousands)	March 31, 2017		March 31, 2016
Realized gains (losses):
Gross realized gains	$	2	$	84
Gross realized (losses)		-		(19	)
Net realized gains	$	2	$	65
Proceeds from sales of investment securities
available for sale	$	2,709	$	12,931

Proceeds from maturities, calls and paydowns of investment securities available for sale for the three months ended March 31, 2017 and 2016 were $8.0 million and $6.8 million, respectively. Proceeds from maturities, calls and paydowns of investment securities held to maturity for the three months ended March 31, 2017 and 2016 were $1.6 million and $146 thousand, respectively.

The Company pledges investment securities to secure public deposits, balances with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and repurchase agreements. Investment securities with an aggregate book value of $39.3 million and an aggregate fair value of $39.8 million were pledged at March 31, 2017. Investment securities with an aggregate book of $57.9 million and an aggregate fair value of $58.1 million were pledged at December 31, 2016.

Investment securities in an unrealized loss position at March 31, 2017, by duration of the period of the unrealized loss, are shown below:

	March 31, 2017
(dollars in thousands)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Investment Securities	Value		Loss		Value		Loss		Value		Loss
SBA Pool securities	$	32,249	$	556	$	18,469	$	527	$	50,718	$	1,083
Agency residential mortgage-backed securities		21,989		875		3,949		75		25,938		950
Agency commercial mortgage-backed securities		25,966		484		-		-		25,966		484
Agency CMO securities		41,876		800		8,349		261		50,225		1,061
State and political subdivisions		35,914		1,009		2,170		64		38,084		1,073
Total	$	157,994	$	3,724	$	32,937	$	927	$	190,931	$	4,651

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment that may result due to adverse economic conditions and associated credit deterioration. A determination as to whether an investment security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain investment securities in unrealized loss positions, the Company will enlist independent third-party firms to prepare cash flow analyses to compare the present value of cash flows expected to be collected from the investment security with the amortized cost basis of the investment security.

Based on the Company’s evaluation, management does not believe any unrealized losses at March 31, 2017 represent an other-than-temporary impairment as these unrealized losses are primarily attributable to current financial market conditions for these types of investments, particularly changes in interest rates, which rose during 2016 causing bond prices to decline and are not attributable to credit deterioration. During the first three months of 2017, unrealized losses declined due to decreases in interest rates, which caused bond prices to increase. At March 31, 2017, there were 153 debt investment securities with fair values totaling $190.9 million considered temporarily impaired. Of these debt investment securities, 124 with fair values totaling $158.0 million were in an unrealized loss position of less than 12 months and 29 with fair values totaling $32.9 million were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities until recovery of the amortized cost basis and it is more likely than not that the Company will not be required to sell these investment securities before a recovery of unrealized losses, the Company does not consider these investment securities to be other-than-temporarily impaired at March 31, 2017 and no impairment has been recognized. At March 31, 2017, there were no equity investment securities in an unrealized loss position.

Investment securities in an unrealized loss position at December 31, 2016, by duration of the period of the unrealized loss, are shown below:

	December 31, 2016
(dollars in thousands)	Less than 12 months				12 months or more				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Investment Securities	Value		Loss		Value		Loss		Value		Loss
SBA Pool securities	$	33,591	$	547	$	19,223	$	534	$	52,814	$	1,081
Agency residential mortgage-backed securities		18,617		802		4,063		88		22,680		890
Agency commercial mortgage-backed securities		27,853		670		-		-		27,853		670
Agency CMO securities		47,468		1,226		3,605		132		51,073		1,358
State and political subdivisions		39,000		1,309		2,165		79		41,165		1,388
Total	$	166,529	$	4,554	$	29,056	$	833	$	195,585	$	5,387

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $6.5 million and $8.5 million at March 31, 2017 and December 31, 2016, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Because the FHLB generated positive net income for each quarterly period beginning April 1, 2016, and ending March 31, 2017, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2017 and no impairment has been recognized. FHLB stock is included in a separate line item on the consolidated balance sheets (Restricted securities, at cost) and is not part of the Company’s investment securities portfolio. The Company’s restricted securities also include investments in the Reserve Bank and Community Bankers Bank totaling $3.0 million at both March 31, 2017 and December 31, 2016, which are carried at cost.

Note 3. Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the Company’s total gross loans at the dates indicated:

	March 31, 2017					December 31, 2016
(dollars in thousands)	Amount			Percent		Amount			Percent
Commercial, industrial and agricultural	$	150,469			14.04%	$	148,963			14.42%
Real estate - one to four family residential:
Closed end first and seconds		212,758			19.85%		215,462			20.85%
Home equity lines		124,192			11.59%		122,506			11.85%
Total real estate - one to four family residential		336,950			31.44%		337,968			32.70%
Real estate - multifamily residential		31,569			2.95%		32,400			3.14%
Real estate - construction:
One to four family residential		18,822			1.76%		16,204			1.57%
Other construction, land development and other land		104,277			9.73%		92,466			8.95%
Total real estate - construction		123,099			11.49%		108,670			10.52%
Real estate - farmland		11,229			1.05%		11,289			1.09%
Real estate - non-farm, non-residential:
Owner occupied		216,597			20.22%		201,284			19.48%
Non-owner occupied		146,464			13.67%		139,649			13.52%
Total real estate - non-farm, non-residential		363,061			33.89%		340,933			33.00%
Consumer		44,303			4.13%		42,403			4.10%
Other		10,776			1.01%		10,605			1.03%
Total loans		1,071,456			100.00%		1,033,231			100.00%
Less allowance for loan losses		(10,952	)				(11,270	)
Loans, net	$	1,060,504				$	1,021,961

Deferred costs, net of deferred fees, are included in the table above and totaled $1.8 million for both March 31, 2017 and December 31, 2016.

The following table presents the aging of the recorded investment in past due loans as of March 31, 2017 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total Current*		Total Loans
Commercial, industrial and agricultural	$	45	$	-	$	58	$	103	$	150,366	$	150,469
Real estate - one to four family residential:
Closed end first and seconds		1,237		444		3,773		5,454		207,304		212,758
Home equity lines		301		-		150		451		123,741		124,192
Total real estate - one to four family residential		1,538		444		3,923		5,905		331,045		336,950
Real estate - multifamily residential		-		-		-		-		31,569		31,569
Real estate - construction:
One to four family residential		-		-		191		191		18,631		18,822
Other construction, land development and other land		-		-		-		-		104,277		104,277
Total real estate - construction		-		-		191		191		122,908		123,099
Real estate - farmland		-		-		-		-		11,229		11,229
Real estate - non-farm, non-residential:
Owner occupied		28		70		634		732		215,865		216,597
Non-owner occupied		92		-		-		92		146,372		146,464
Total real estate - non-farm, non-residential		120		70		634		824		362,237		363,061
Consumer		17		12		17		46		44,257		44,303
Other		-		-		-		-		10,776		10,776
Total loans	$	1,720	$	526	$	4,823	$	7,069	$	1,064,387	$	1,071,456

*For purposes of this table only, the "Total Current" column includes loans that are 1-29 days past due.

The following table presents the aging of the recorded investment in past due loans as of December 31, 2016 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total Current*		Total Loans
Commercial, industrial and agricultural	$	118	$	89	$	166	$	373	$	148,590	$	148,963
Real estate - one to four family residential:
Closed end first and seconds		3,408		1,472		3,505		8,385		207,077		215,462
Home equity lines		92		219		369		680		121,826		122,506
Total real estate - one to four family residential		3,500		1,691		3,874		9,065		328,903		337,968
Real estate - multifamily residential		-		-		-		-		32,400		32,400
Real estate - construction:
One to four family residential		240		-		15		255		15,949		16,204
Other construction, land development and other land		-		-		-		-		92,466		92,466
Total real estate - construction		240		-		15		255		108,415		108,670
Real estate - farmland		-		-		-		-		11,289		11,289
Real estate - non-farm, non-residential:
Owner occupied		61		-		225		286		200,998		201,284
Non-owner occupied		-		-		-		-		139,649		139,649
Total real estate - non-farm, non-residential		61		-		225		286		340,647		340,933
Consumer		77		7		17		101		42,302		42,403
Other		-		-		-		-		10,605		10,605
Total loans	$	3,996	$	1,787	$	4,297	$	10,080	$	1,023,151	$	1,033,231

*For purposes of this table only, the "Total Current" column includes loans that are 1-29 days past due.

The following table presents nonaccrual loans, loans past due 90 days and accruing interest and troubled debt restructurings (accruing) at the dates indicated:

(dollars in thousands)	March 31, 2017		December 31, 2016
Nonaccrual loans	$	5,606	$	5,181
Loans past due 90 days and accruing interest		1,272		1,341
Troubled debt restructurings (accruing)		10,669		10,441

At March 31, 2017 and December 31, 2016, there were approximately $1.8 million and $2.2 million, respectively, in troubled debt restructurings (“TDRs”) included in nonaccrual loans.

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans greater than 90 days past due may remain on an accrual status if management determines it has adequate collateral to cover the principal and interest. If a loan or a portion of a loan is adversely classified, or is partially charged off, the loan is generally classified as nonaccrual. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on a nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due.

When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, and the amortization of related deferred loan fees or costs is suspended. While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. These policies are applied consistently across our loan portfolio.

A loan (including a TDR) may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

Outstanding principal balance and the carrying amount of loans acquired pursuant to the Company’s acquisition of VCB (or “Acquired Loans”) that were recorded at fair value at the acquisition date and are included in the consolidated balance sheet at March 31, 2017 and December 31, 2016 were as follows:

	March 31, 2017						December 31, 2016
	Acquired						Acquired
	Loans -		Acquired				Loans -		Acquired
	Purchased		Loans -		Acquired		Purchased		Loans -		Acquired
	Credit		Purchased		Loans -		Credit		Purchased		Loans -
(dollars in thousands)	Impaired		Performing		Total		Impaired		Performing		Total
Commercial, industrial and agricultural	$	393	$	2,341	$	2,734	$	420	$	2,452	$	2,872
Real estate - one to four family residential:
Closed end first and seconds		1,136		4,730		5,866		1,135		4,914		6,049
Home equity lines		32		7,991		8,023		32		8,417		8,449
Total real estate - one to four family residential		1,168		12,721		13,889		1,167		13,331		14,498
Real estate - multifamily residential		-		1,566		1,566		-		1,652		1,652
Real estate - construction:
One to four family residential		-		353		353		-		360		360
Other construction, land development and other land		236		115		351		252		2,182		2,434
Total real estate - construction		236		468		704		252		2,542		2,794
Real estate - farmland		-		-		-		-		-		-
Real estate - non-farm, non-residential:
Owner occupied		2,527		10,846		13,373		2,988		12,298		15,286
Non-owner occupied		943		6,084		7,027		1,475		6,639		8,114
Total real estate - non-farm, non-residential		3,470		16,930		20,400		4,463		18,937		23,400
Consumer		-		138		138		-		148		148
Other		-		476		476		-		642		642
Total loans	$	5,267	$	34,640	$	39,907	$	6,302	$	39,704	$	46,006

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at March 31, 2017 and December 31, 2016:

					Over 90 Days Past
	Nonaccrual				Due and Accruing
	March 31,		December 31,		March 31,		December 31,
(dollars in thousands)	2017		2016		2017		2016
Commercial, industrial and agricultural	$	758	$	784	$	-	$	-
Real estate - one to four family residential:
Closed end first and seconds		3,290		3,240		1,136		1,135
Home equity lines		324		543		-		-
Total real estate - one to four family residential		3,614		3,783		1,136		1,135
Real estate - construction:
One to four family residential		191		15		-		-
Total real estate - construction		191		15		-		-
Real estate - non-farm, non-residential:
Owner occupied		1,026		578		136		206
Total real estate - non-farm, non-residential		1,026		578		136		206
Consumer		17		21		-		-
Total loans	$	5,606	$	5,181	$	1,272	$	1,341

The Company uses a risk grading system for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

Pass Grades

Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;

Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

Risk Grade 4 loans are satisfactory loans with borrowers not as strong as risk grade 3 loans but may exhibit a higher degree of financial risk based on the type of business supporting the loan; and

Risk Grade 5 loans are loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay.

Special Mention

Risk Grade 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position.

Classified Grades

Risk Grade 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged. These have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;

Risk Grade 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined; and

Risk Grade 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as a bank asset is not warranted.

The Company uses a past due grading system for consumer loans, including one to four family residential first and seconds and home equity lines. The past due status of a loan is based on the contractual due date of the most delinquent payment due. The past due grading of consumer loans is based on the following categories: current, 1-29 days past due, 30-59 days past due, 60-89 days past due and over 90 days past due. The consumer loans are segregated between performing and nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue interest, are greater than 90 days past due and accruing interest or considered impaired. Non-impaired consumer loans are assigned an allowance factor which increases with the severity of past due status. This 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.

The allocation methodology applied by the Company includes management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of migration analysis and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of classified loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. In determining the allowance for loan losses, the Company considers its portfolio segments and loan classes to be the same.

The following table presents commercial loans by credit quality indicator at March 31, 2017:

											Acquired
											Loans -
											Purchased
			Special								Credit
(dollars in thousands)	Pass		Mention		Substandard		Doubtful		Impaired		Impaired		Total
Commercial, industrial and agricultural	$	145,087	$	3,066	$	707	$	28	$	1,188	$	393	$	150,469
Real estate - multifamily residential		31,569		-		-		-		-		-		31,569
Real estate - construction:
One to four family residential		18,260		131		265		-		166		-		18,822
Other construction, land development and other land		96,695		-		210		-		7,136		236		104,277
Total real estate - construction		114,955		131		475		-		7,302		236		123,099
Real estate - farmland		7,239		3,481		-		-		509		-		11,229
Real estate - non-farm, non-residential:
Owner occupied		199,338		4,826		1,969		-		7,937		2,527		216,597
Non-owner occupied		136,290		1,193		680		-		7,358		943		146,464
Total real estate - non-farm, non-residential		335,628		6,019		2,649		-		15,295		3,470		363,061
Total commercial loans	$	634,478	$	12,697	$	3,831	$	28	$	24,294	$	4,099	$	679,427

The following table presents commercial loans by credit quality indicator at December 31, 2016:

									Acquired
									Loans -
									Purchased
			Special						Credit
(dollars in thousands)	Pass		Mention		Substandard		Impaired		Impaired		Total
Commercial, industrial and agricultural	$	136,533	$	9,839	$	531	$	1,640	$	420	$	148,963
Real estate - multifamily residential		32,400		-		-		-		-		32,400
Real estate - construction:
One to four family residential		15,624		319		91		170		-		16,204
Other construction, land development
and other land		84,832		-		212		7,170		252		92,466
Total real estate - construction		100,456		319		303		7,340		252		108,670
Real estate - farmland		7,270		3,504		-		515		-		11,289
Real estate - non-farm, non-residential:
Owner occupied		179,400		9,359		1,892		7,645		2,988		201,284
Non-owner occupied		127,817		2,222		689		7,446		1,475		139,649
Total real estate - non-farm, non-residential		307,217		11,581		2,581		15,091		4,463		340,933
Total commercial loans	$	583,876	$	25,243	$	3,415	$	24,586	$	5,135	$	642,255

At March 31, 2017 and December 31, 2016, the Company did not have any loans classified as Loss.

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at March 31, 2017:

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	201,933	$	10,825	$	212,758
Home equity lines		123,817		375		124,192
Total real estate - one to four family residential		325,750		11,200		336,950
Consumer		43,985		318		44,303
Other		10,776		-		10,776
Total consumer loans	$	380,511	$	11,518	$	392,029

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at December 31, 2016:

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	204,847	$	10,615	$	215,462
Home equity lines		121,912		594		122,506
Total real estate - one to four family residential		326,759		11,209		337,968
Consumer		42,077		326		42,403
Other		10,605		-		10,605
Total consumer loans	$	379,441	$	11,535	$	390,976

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. The Company measures impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are considered impaired loans. TDRs occur when we agree to modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions can be temporary and are made in an attempt to avoid foreclosure and with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include, without limitation, rate reductions to below market rates, payment deferrals, forbearance, and, in some cases, forgiveness of principal or interest.

At the time of a TDR, the loan is placed on nonaccrual status. A loan (including a TDR) may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2017:

	Beginning										Ending
	Balance										Balance
(dollars in thousands)	January 1, 2017		Charge-offs			Recoveries		Provision			March 31, 2017
Commercial, industrial and agricultural	$	3,035	$	(207	)	$	98	$	(265	)	$	2,661
Real estate - one to four family residential:
Closed end first and seconds		1,487		(193	)		70		113			1,477
Home equity lines		653		(76	)		3		(76	)		504
Total real estate - one to four family residential		2,140		(269	)		73		37			1,981
Real estate - multifamily residential		71		-			-		(22	)		49
Real estate - construction:
One to four family residential		197		-			1		45			243
Other construction, land development and other land		2,632		-			-		427			3,059
Total real estate - construction		2,829		-			1		472			3,302
Real estate - farmland		157		-			-		(2	)		155
Real estate - non-farm, non-residential:
Owner occupied		1,267		-			-		4			1,271
Non-owner occupied		584		-			-		(156	)		428
Total real estate - non-farm, non-residential		1,851		-			-		(152	)		1,699
Consumer		459		(9	)		11		48			509
Other		728		(24	)		8		(116	)		596
Total	$	11,270	$	(509	)	$	191	$	-		$	10,952

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2016:

	Beginning										Ending
	Balance										Balance
(dollars in thousands)	January 1, 2016		Charge-offs			Recoveries		Provision			March 31, 2016
Commercial, industrial and agricultural	$	1,894	$	(46	)	$	26	$	348		$	2,222
Real estate - one to four family residential:
Closed end first and seconds		1,609		(373	)		81		320			1,637
Home equity lines		795		-			12		312			1,119
Total real estate - one to four family residential		2,404		(373	)		93		632			2,756
Real estate - multifamily residential		78		-			-		11			89
Real estate - construction:
One to four family residential		295		-			1		(9	)		287
Other construction, land development and other land		2,423		-			-		(116	)		2,307
Total real estate - construction		2,718		-			1		(125	)		2,594
Real estate - farmland		272		-			-		4			276
Real estate - non-farm, non-residential:
Owner occupied		1,964		(208	)		63		(470	)		1,349
Non-owner occupied		1,241		-			61		(428	)		874
Total real estate - non-farm, non-residential		3,205		(208	)		124		(898	)		2,223
Consumer		287		(33	)		15		37			306
Other		469		(15	)		8		8			470
Total	$	11,327	$	(675	)	$	267	$	17		$	10,936

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of March 31, 2017:

	Allowance allocated to loans:								Total Loans:
					Acquired								Acquired
	Individually		Collectively		loans -				Individually		Collectively		loans -
	evaluated		evaluated		purchased				evaluated		evaluated		purchased
	for		for		credit				for		for		credit
(dollars in thousands)	impairment		impairment		impaired		Total		impairment		impairment		impaired		Total
Commercial, industrial and agricultural	$	638	$	2,023	$	-	$	2,661	$	1,188	$	148,888	$	393	$	150,469
Real estate - one to four family residential:
Closed end first and seconds		557		903		17		1,477		7,052		204,570		1,136		212,758
Home equity lines		50		454		-		504		225		123,935		32		124,192
Total real estate - one to four family residential		607		1,357		17		1,981		7,277		328,505		1,168		336,950
Real estate - multifamily residential		-		49		-		49		-		31,569		-		31,569
Real estate - construction:
One to four family residential		54		189		-		243		166		18,656		-		18,822
Other construction, land development and other land		1,572		1,487		-		3,059		7,136		96,905		236		104,277
Total real estate - construction		1,626		1,676		-		3,302		7,302		115,561		236		123,099
Real estate - farmland		37		118		-		155		509		10,720		-		11,229
Real estate - non-farm, non-residential:
Owner occupied		449		822		-		1,271		7,937		206,133		2,527		216,597
Non-owner occupied		157		271		-		428		7,358		138,163		943		146,464
Total real estate - non-farm, non-residential		606		1,093		-		1,699		15,295		344,296		3,470		363,061
Consumer		59		450		-		509		301		44,002		-		44,303
Other		-		596		-		596		-		10,776		-		10,776
Total	$	3,573	$	7,362	$	17	$	10,952	$	31,872	$	1,034,317	$	5,267	$	1,071,456

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2016:

	Allowance allocated to loans:								Total Loans:
					Acquired								Acquired
	Individually		Collectively		loans -				Individually		Collectively		loans -
	evaluated		evaluated		purchased				evaluated		evaluated		purchased
	for		for		credit				for		for		credit
(dollars in thousands)	impairment		impairment		impaired		Total		impairment		impairment		impaired		Total
Commercial, industrial and agricultural	$	865	$	2,170	$	-	$	3,035	$	1,640	$	146,903	$	420	$	148,963
Real estate - one to four family residential:
Closed end first and seconds		416		1,054		17		1,487		7,110		207,217		1,135		215,462
Home equity lines		50		603		-		653		225		122,249		32		122,506
Total real estate - one to four family residential		466		1,657		17		2,140		7,335		329,466		1,167		337,968
Real estate - multifamily residential		-		71		-		71		-		32,400		-		32,400
Real estate - construction:
One to four family residential		55		142		-		197		170		16,034		-		16,204
Other construction, land development and other land		1,368		1,264		-		2,632		7,170		85,044		252		92,466
Total real estate - construction		1,423		1,406		-		2,829		7,340		101,078		252		108,670
Real estate - farmland		40		117		-		157		515		10,774		-		11,289
Real estate - non-farm, non-residential:
Owner occupied		321		946		-		1,267		7,645		190,651		2,988		201,284
Non-owner occupied		177		407		-		584		7,446		130,728		1,475		139,649
Total real estate - non-farm, non-residential		498		1,353		-		1,851		15,091		321,379		4,463		340,933
Consumer		63		396		-		459		309		42,094		-		42,403
Other		-		728		-		728		-		10,605		-		10,605
Total	$	3,355	$	7,898	$	17	$	11,270	$	32,230	$	994,699	$	6,302	$	1,033,231

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2017:

					Recorded		Recorded
			Unpaid		Investment		Investment				Average		Interest
	Recorded		Principal		With No		With		Related		Recorded		Income
(dollars in thousands)	Investment		Balance		Allowance		Allowance		Allowance		Investment		Recognized
Commercial, industrial and agricultural	$	1,188	$	1,199	$	550	$	638	$	638	$	1,346	$	20
Real estate - one to four family residential:
Closed end first and seconds		7,052		7,665		3,423		3,629		557		7,080		89
Home equity lines		225		225		175		50		50		225		1
Total real estate - one to four family residential		7,277		7,890		3,598		3,679		607		7,305		90
Real estate - construction:
One to four family residential		166		166		16		150		54		168		2
Other construction, land development and other land		7,136		7,136		1,745		5,391		1,572		7,144		95
Total real estate - construction		7,302		7,302		1,761		5,541		1,626		7,312		97
Real estate - farmland		509		512		257		252		37		512		8
Real estate - non-farm, non-residential:
Owner occupied		7,937		7,940		6,133		1,804		449		7,678		100
Non-owner occupied		7,358		7,358		6,097		1,261		157		7,608		77
Total real estate - non-farm, non-residential		15,295		15,298		12,230		3,065		606		15,286		177
Consumer		301		313		-		301		59		305		4
Total loans*	$	31,872	$	32,514	$	18,396	$	13,476	$	3,573	$	32,066	$	396

*PCI loans are excluded from this table.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2016:

					Recorded		Recorded
			Unpaid		Investment		Investment				Average		Interest
	Recorded		Principal		With No		With		Related		Recorded		Income
(dollars in thousands)	Investment		Balance		Allowance		Allowance		Allowance		Investment		Recognized
Commercial, industrial and agricultural	$	1,640	$	1,640	$	668	$	972	$	865	$	1,094	$	70
Real estate - one to four family residential:
Closed end first and seconds		7,110		7,712		3,760		3,350		416		6,893		393
Home equity lines		225		225		175		50		50		453		2
Total real estate - one to four family residential		7,335		7,937		3,935		3,400		466		7,346		395
Real estate - construction:
One to four family residential		170		170		17		153		55		178		8
Other construction, land development and other land		7,170		7,170		1,745		5,425		1,368		5,885		317
Total real estate - construction		7,340		7,340		1,762		5,578		1,423		6,063		325
Real estate - farmland		515		517		261		254		40		525		34
Real estate - non-farm, non-residential:
Owner occupied		7,645		7,647		6,195		1,450		321		6,176		407
Non-owner occupied		7,446		7,446		6,166		1,280		177		11,509		380
Total real estate - non-farm, non-residential		15,091		15,093		12,361		2,730		498		17,685		787
Consumer		309		322		3		306		63		323		17
Total loans*	$	32,230	$	32,849	$	18,990	$	13,240	$	3,355	$	33,036	$	1,628

*PCI loans are excluded from this table.

Determining the fair value of purchased credit-impaired (“PCI”) loans at November 14, 2014 required the Company to estimate cash flows expected to result from those loans and to discount those cash flows at appropriate rates of interest. For such loans, the excess of the cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans and is called the accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference and is not recorded. In accordance with U.S. GAAP, the Company did not “carry over” any allowances for loan losses that were reserved for the VCB loan portfolio prior to the Company’s acquisition of VCB. PCI loans had unpaid principal balances of $6.0 million and $7.1 million and recorded carrying values of $5.3 million and $6.3 million at March 31, 2017 and December 31, 2016, respectively.

The following table presents a summary of the changes in the accretable yield of the PCI loan portfolio for the periods indicated:

	Three months ended			Three months ended
	March 31, 2017			March 31, 2016
(dollars in thousands)	Accretable Yield			Accretable Yield
Balance at beginning of period	$	903		$	1,280
Accretion		(110	)		(129	)
Reclassification of nonaccretable difference due to
improvement in expected cash flows		248			24
Other changes, net		583			46
Balance at end of period	$	1,624		$	1,221

The following table presents, by loan class, information related to loans modified as TDRs during the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31, 2017						Three Months Ended March 31, 2016
			Pre-		Post-				Pre-		Post-
			Modification		Modification				Modification		Modification
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
(dollars in thousands)	Loans		Balance		Balance*		Loans		Balance		Balance*
Commercial, industrial and agricultural		-	$	-	$	-		1	$	68	$	68
Real estate - one to four family residential:
Closed end first and seconds		1		112		111		1		41		41
Total		1	$	112	$	111		2	$	109	$	109

*The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

The following table presents, by loan class, information related to the loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three months ended March 31, 2017 and 2016 and were modified as TDRs within the 12 months prior to default:

	Three Months Ended				Three Months Ended
	March 31, 2017				March 31, 2016
	Number of		Recorded		Number of		Recorded
(dollars in thousands)	Loans		Balance		Loans		Balance
Real estate - one to four family residential:
Closed end first and seconds		2	$	501		-	$	-
Total		2	$	501		-	$	-

At March 31, 2017, $1.6 million in foreclosed residential real estate properties were included in OREO, and $127 thousand in residential real estate loans were in the process of foreclosure.

Note 4. Deferred Income Taxes

As of March 31, 2017 and December 31, 2016, the Company had recorded net deferred income tax assets of approximately $11.3 million and $12.4 million, respectively. The realization of deferred income tax assets is assessed quarterly and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Further, management has considered future reversals of existing taxable temporary differences and limited, prudent and feasible tax-planning strategies, such as changes in investment security income (tax-exempt to taxable), additional sales of loans and sales of branches/buildings with an appreciated asset value over the tax basis. Based upon an analysis of available evidence, management has determined that it is “more likely than not” that the Company’s deferred income tax assets as of March 31, 2017 and December 31, 2016 will be fully realized and therefore no valuation allowance to the Company’s deferred income tax assets was recorded. However, the Company can give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions which are subject to uncertainty and based on estimates that may change due to changing economic conditions and other factors. Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

The Company’s ability to realize its deferred income tax assets may be limited if the Company experiences an ownership change as defined by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). For additional information see Part I, Item 1A. “Risk Factors” included in the Company’s 2016 Form 10-K.

Note 5. Bank Premises and Equipment

Bank premises and equipment are summarized as follows:

(dollars in thousands)	March 31, 2017			December 31, 2016
Land and improvements	$	5,208		$	7,788
Buildings and leasehold improvements		25,460			29,091
Furniture, fixtures and equipment		15,455			21,152
Construction in progress		1,034			798
		47,157			58,829
Less accumulated depreciation		(23,192	)		(31,135	)
Net balance	$	23,965		$	27,694

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2017 and 2016 amounted to $613 thousand and $633 thousand, respectively.

Note 6. Borrowings

Federal funds purchased and repurchase agreements. The Company has unsecured lines of credit with SunTrust Bank, Community Bankers Bank and Pacific Coast Bankers Bank for the purchase of federal funds in the amount of $20.0 million, $15.0 million and $5.0 million, respectively. These lines of credit have a variable rate based on the lending bank’s daily federal funds sold rate and are due on demand. Repurchase agreements are secured transactions and generally mature the day following the day sold. Customer repurchases are standard transactions that involve a Bank customer instead of a wholesale bank or broker. The Company offers this product as an accommodation to larger retail and commercial customers that request safety for their funds beyond the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limits. The Company does not use or have any open repurchase agreements with broker-dealers.

The tables below present selected information on federal funds purchased and repurchase agreements during the three months ended March 31, 2017 and the year ended December 31, 2016:

Federal funds purchased
(dollars in thousands)	March 31, 2017		December 31, 2016
Balance outstanding at period end	$	1,500	$	-
Maximum balance at any month end during the period	$	1,500	$	2,000
Average balance for the period	$	26	$	42
Weighted average rate for the period		0.60%		0.93%
Weighted average rate at period end		0.40%		0.00%

Repurchase agreements
(dollars in thousands)	March 31, 2017		December 31, 2016
Balance outstanding at period end	$	3,960	$	5,140
Maximum balance at any month end during the period	$	5,079	$	11,942
Average balance for the period	$	4,711	$	5,777
Weighted average rate for the period		0.47%		0.47%
Weighted average rate at period end		0.47%		0.47%

Short-term borrowings. Short-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. Short-term advances from the FHLB at March 31, 2017 consisted of $123.9 million in fixed rate one month advances. Short-term advances from the FHLB at December 31, 2016 consisted of $6.8 million using a daily rate credit, which is due on demand, and $166.9 million in fixed rate one month advances. Outstanding accrued interest at March 31, 2017 and December 31, 2016 totaled $54 thousand and $53 thousand, respectively.

The table below presents selected information on short-term borrowings during the three months ended March 31, 2017 and the year ended December 31, 2016:

Short-term borrowings
(dollars in thousands)	March 31, 2017		December 31, 2016
Balance outstanding at period end	$	123,890	$	173,650
Maximum balance at any month end during the period	$	171,625	$	173,650
Average balance for the period	$	150,675	$	119,366
Weighted average rate for the period		0.69%		0.43%
Weighted average rate at period end		0.79%		0.53%

Long-term borrowings. From time to time, the Company may obtain long-term borrowings from the FHLB, which consist of advances from the FHLB that are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by one to four family residential properties. At March 31, 2017 and December 31, 2016, the Company had no long-term FHLB advances outstanding.

The Company’s line of credit with the FHLB can equal up to 30% of the Company’s gross assets or approximately $419.4 million at March 31, 2017. This line of credit totaled $224.6 million with approximately $100.8 million available at March 31, 2017. As of March 31, 2017 and December 31, 2016, loans with a carrying value of $297.6 million and $301.0 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

Note 7. Net Income Per Common Share

The Company applies the two-class method of computing basic and diluted net income per common share. Under the two-class method, net income per common share is determined for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Based on FASB guidance, the Company considers its Series B Preferred Stock (defined below) to be a participating security. FASB guidance requires that all outstanding unvested share-based payment awards that contain voting rights and rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Accordingly, the weighted average number of shares of the Company’s common stock used in the calculation of basic and diluted net income per common share includes unvested shares of the Company’s outstanding restricted common stock.

The following table shows the computation of basic and diluted net income per common share for the periods presented:

	Three Months Ended
(dollars in thousands, except share and per share amounts)	March 31, 2017		March 31, 2016
Basic Net Income Per Common Share
Net income	$	1,780	$	2,227
Less: Net income allocated to participating securities, Series B
Preferred Stock		508		639
Net income allocated to common shareholders	$	1,272	$	1,588
Weighted average common shares outstanding for basic net
income per common share		13,116,554		13,035,249
Basic net income per common share	$	0.10	$	0.12

Diluted Net Income Per Common Share
Net income	$	1,780	$	2,227
Weighted average common shares outstanding for basic net
income per common share		13,116,554		13,035,249
Effect of dilutive securities, stock options		-		-
Effect of dilutive securities, Series B Preferred Stock		5,240,192		5,240,192
Weighted average common shares outstanding for diluted net
income per common share		18,356,746		18,275,441
Diluted net income per common share	$	0.10	$	0.12

At March 31, 2017 and 2016, options to acquire 35,750 and 67,525 shares of common stock, respectively, were not included in computing diluted net income per common share for the three months ended March 31, 2017 and 2016 because their effects were anti-dilutive.

On June 12, 2013, the Company issued 5,240,192 shares of non-voting mandatorily convertible non-cumulative preferred stock, Series B (the “Series B Preferred Stock”) through private placements to certain investors. Each share of Series B Preferred Stock can, under certain limited circumstances as set forth in the Company’s articles of incorporation, be converted into one share of the Company’s common stock, and is therefore reflected in the dilutive weighted average common shares outstanding. For more information related to the conversion rights of these preferred shares, see Note 11 – Preferred Stock.

Note 8. Stock Based Compensation Plans

On September 21, 2000, the Company adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan (the “2000 Plan”) to provide a means for selected key employees and directors to increase their personal financial interest in the Company, thereby stimulating their efforts and strengthening their desire to remain with the Company. Under the 2000 Plan, up to 400,000 shares of Company common stock could be granted in the form of stock options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the “2003 Plan”) and still authorizing the issuance of up to 400,000 shares of common stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights, common stock, restricted stock and phantom stock. No additional awards may be granted under the 2003 Plan. Any awards previously granted under the 2003 Plan that were outstanding as of April 17, 2013 remain outstanding and will vest in accordance with their regular terms.

On April 19, 2007, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative and to encourage such persons to have a greater financial interest in the Company. Under the 2007 Plan, the Company could issue up to 400,000 additional shares of common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units. No additional awards may be granted under the 2007 Plan. Any awards previously granted under the 2007 Plan that were outstanding as of May 19, 2016 remain outstanding and will vest in accordance with their regular terms.

On May 19, 2016, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2016 Equity Compensation Plan (the “2016 Plan”) to promote the success of the Company by providing incentives to key employees, non-employee directors, consultants and advisors to associate their personal interests with the long-term financial success of the Company and with growth in shareholder value consistent with the Company’s risk management practices. The 2016 Plan authorizes the Company to issue up to 500,000 additional shares of common stock pursuant to stock options, restricted stock units, stock appreciation rights, stock awards, performance units and performance cash awards. There were 484,232 shares still available to be granted as awards under the 2016 Plan as of March 31, 2017.

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant.

Accounting standards also require that new awards to employees eligible for accelerated vesting at retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.

Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock option award. There were no stock options granted or exercised in the three months ended March 31, 2017 and 2016. There was no remaining unrecognized compensation expense related to stock options at March 31, 2017, and there was no stock option compensation expense for three months ended March 31, 2017 and 2016.

A summary of the Company’s stock option activity and related information is as follows:

						Remaining		Aggregate
	Options			Weighted Average		Contractual Life		Intrinsic Value*
	Outstanding			Exercise Price		(in years)		(in thousands)
Stock options outstanding at December 31, 2016		36,500		$	15.81
Forfeited		(750	)		12.36
Stock options outstanding at March 31, 2017		35,750		$	15.88		1.00	$	-

Stock options exercisable at March 31, 2017		35,750		$	15.88		1.00	$	-

*Intrinsic value is the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date.

The table below summarizes information concerning stock options outstanding and exercisable at March 31, 2017:

Stock Options Outstanding and Exercisable
Exercise		Number		Weighted Average
Price		Outstanding		Remaining Term
$	19.25		18,250	0.50 years
$	12.36		17,500	1.50 years
$	15.88		35,750	1.00 year

On April 29, 2016, the Company granted 6,500 shares of restricted stock under the 2007 Plan to various senior officers of the Bank. All of the shares are subject to time vesting over a one-year period and will vest on April 29, 2017. On March 24, 2016, the Company granted 65,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2017. The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2019 to the extent certain financial performance requirements for fiscal year 2018 are met. On March 19, 2015, the Company granted 45,000 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2016. The remaining fifty percent (50%) of the shares are subject to performance vesting and will vest on March 31, 2018 to the extent certain financial performance requirements for fiscal year 2017 are met. On October 15, 2014, the Company granted 42,500 shares of restricted stock under the 2007 Plan to its executive officers. Fifty percent (50%) of the shares are subject to time vesting in five equal annual installments beginning on March 31, 2015. The remaining fifty percent (50%) of these shares were originally subject to performance vesting based on financial performance requirements for fiscal year 2016. However, in light of the Pending Merger and the fact that a comparison to the peer group was challenging as a result of the recent merger activity within the peer group, in March 2017 the Company’s compensation committee converted these shares into time-based restricted stock. In connection with the Pending Merger, all outstanding time and performance based shares of restricted stock will vest on an accelerated basis upon completing the Pending Merger.

For the three months ended March 31, 2017, restricted stock compensation expense was $82 thousand, compared to restricted stock compensation expense of $61 thousand for the same period in 2016, and in each case was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair value of the Company’s common stock on the date the restricted shares were awarded, which was $7.00 per share for the April 29, 2016 awards, $6.80 per share for the March 24, 2016 awards, $6.28 per share for the March 19, 2015 awards and $6.10 per share for the October 15, 2014 awards.

A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of March 31, 2017, and changes during the three months ended March 31, 2017, is presented below; the weighted average price is the weighted average fair value at the date of grant:

				Weighted-Average
	Shares			Price
Nonvested as of December 31, 2016		168,000		$	6.41
Vested		(15,250	)		6.45
Nonvested as of March 31, 2017		152,750		$	6.40

At March 31, 2017, there was $557 thousand of total unrecognized compensation expense related to restricted stock awards. This unearned compensation is being amortized over the remaining vesting period for the time and performance based shares.

Note 9. Employee Benefit Plan – Pension

The Company historically maintained a defined benefit pension plan covering substantially all of the Company’s employees. The plan was amended January 28, 2008 to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participants’ account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year.

The Company made no contributions to the pension plan during 2016. In connection with the Pending Merger, the Company expects to fully fund the pension plan and terminate it effective May 1, 2017.

Components of net periodic pension expense (benefit) related to the Company’s pension plan were as follows for the periods indicated:

	Three Months Ended
	March 31,
(dollars in thousands)	2017			2016
Components of net periodic pension expense (benefit)
Interest cost	$	86		$	98
Expected return on plan assets		(36	)		(158	)
Amortization of prior service cost		2			2
Recognized net actuarial loss		30			27
Net periodic pension expense (benefit)	$	82		$	(31	)

Note 10. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an 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. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

Level 1 – Valuation is based upon quoted prices (unadjusted) for identical instruments traded in active markets.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market.

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any fair value option elections as of March 31, 2017.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets Measured at Fair Value on a Recurring Basis

Securities Available For Sale . Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Currently, all of the Company’s available for sale securities are considered to be Level 2 securities.

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Recurring Basis at March 31, 2017 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		March 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2017
Assets
Securities available for sale
SBA Pool securities	$	-	$	59,067	$	-	$	59,067
Agency residential mortgage-backed securities		-		28,038		-		28,038
Agency commercial mortgage-backed securities		-		27,997		-		27,997
Agency CMO securities		-		58,147		-		58,147
Non agency CMO securities		-		37		-		37
State and political subdivisions		-		55,294		-		55,294
Corporate securities		-		2,013		-		2,013
Total securities available for sale	$	-	$	230,593	$	-	$	230,593

Assets Measured at Fair Value on a Recurring Basis at December 31, 2016 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		December 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2016
Assets
Securities available for sale
SBA Pool securities	$	-	$	57,719	$	-	$	57,719
Agency residential mortgage-backed securities		-		25,829		-		25,829
Agency commercial mortgage-backed securities		-		27,852		-		27,852
Agency CMO securities		-		51,683		-		51,683
Non agency CMO securities		-		43		-		43
State and political subdivisions		-		54,501		-		54,501
Corporate securities		-		2,005		-		2,005
Total securities available for sale	$	-	$	219,632	$	-	$	219,632

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of fair value accounting or impairment write-downs of individual assets.

Impaired Loans. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a non-recurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

Other Real Estate Owned. OREO is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a non-recurring basis. Any initial fair value adjustment is charged against the allowance for loan losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of income.

Assets Held For Sale. Assets held for sale are measured at fair value less cost to sell, based on real estate tax assessments or appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data. If the fair value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. Assets held for sale are measured at fair value on a non-recurring basis. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the consolidated statements of income.

The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2017 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		March 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2017
Assets
Impaired loans	$	-	$	-	$	9,903	$	9,903
Other real estate owned	$	-	$	-	$	1,631	$	1,631
Assets held for sale	$	-	$	-	$	2,970	$	2,970

Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2016 Using

	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable		Balance at
	Identical Assets		Inputs		Inputs		December 31,
(dollars in thousands)	(Level 1)		(Level 2)		(Level 3)		2016
Assets
Impaired loans	$	-	$	-	$	9,885	$	9,885
Other real estate owned	$	-	$	-	$	2,656	$	2,656

The following table displays quantitative information about Level 3 Fair Value Measurements as of March 31, 2017 and December 31, 2016:

Quantitative information about Level 3 Fair Value Measurements at March 31, 2017

(dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets
Impaired loans	$	9,903	Discounted appraised value	Selling cost	6% - 24% (12%)
				Discount for lack of
				marketability and age
				of appraisal	0% - 20% (12%)

Other real estate owned	$	1,631	Discounted appraised value	Selling cost	10% (10%)
				Discount for lack of
				marketability and age
				of appraisal	0% - 42% (6%)
Assets held for sale	$	2,970	Discounted appraised value	Selling cost	6% (6%)

Quantitative information about Level 3 Fair Value Measurements at December 31, 2016

(dollars in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
Assets
Impaired loans	$	9,885	Discounted appraised value	Selling cost	0% - 93% (13%)
				Discount for lack of
				marketability and age
				of appraisal	0% - 25% (7%)

Other real estate owned	$	2,656	Discounted appraised value	Selling cost	10% (10%)
				Discount for lack of
				marketability and age
				of appraisal	0% - 40% (5%)

Fair Value of Financial Instruments

U.S. GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies and assumptions for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies and assumptions for other financial assets and financial liabilities are discussed below:

Cash and Short-Term Investments. For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment Securities. For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. All securities prices are provided by independent third party vendors.

Restricted Securities. The carrying amount approximates fair value based on the redemption provisions of the correspondent banks.

Loans. The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note.

Bank Owned Life Insurance. Bank owned life insurance represents insurance policies on officers of the Company. The cash values of the policies are estimated using information provided by insurance carriers. The policies are carried at their cash surrender value, which approximates fair value.

Deposits. The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using market rates for deposits of similar remaining maturities.

Short-Term Borrowings. The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.

Long-Term Borrowings. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest approximate fair value.

Off-Balance Sheet Financial Instruments. The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of guarantees of credit card accounts previously sold is based on the estimated cost to settle the obligations with the counterparty at the reporting date. At March 31, 2017 and December 31, 2016, the fair value of loan commitments, standby letters of credit and credit card guarantees are not significant and are not included in the table below.

The fair value and the carrying value of the Company’s recorded financial instruments are as follows:

			Fair Value Measurements at March 31, 2017 Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable		Balance at
	Carrying		Identical Assets		Inputs		Inputs		March 31,
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		2017
Assets:
Cash and short-term investments*	$	5,721	$	5,721	$	-	$	-	$	5,721
Interest bearing deposits with banks		16,648		16,648		-		-		16,648
Securities available for sale		230,593		-		230,593		-		230,593
Securities held to maturity		26,230		-		27,090		-		27,090
Restricted securities		9,557		-		9,557		-		9,557
Loans, net		1,060,504		-		-		1,046,828		1,046,828
Bank owned life insurance		25,885		-		25,885		-		25,885
Accrued interest receivable		4,921		-		4,921		-		4,921
Total	$	1,380,059	$	22,369	$	298,046	$	1,046,828	$	1,367,243

Liabilities:
Noninterest-bearing demand deposits	$	225,976	$	225,976	$	-	$	-	$	225,976
Interest-bearing deposits		920,679		-		844,366		-		844,366
Short-term borrowings**		129,350		129,350		-		-		129,350
Junior subordinated debt		10,310		-		10,983		-		10,983
Senior subordinated debt***		19,151		-		19,580		-		19,580
Accrued interest payable		1,128		-		1,128		-		1,128
Total	$	1,306,594	$	355,326	$	876,057	$	-	$	1,231,383

Includes federal funds sold.

Includes federal funds purchased and repurchase agreements.

***

Net of unamortized debt issuance costs of $849.

			Fair Value Measurements at December 31, 2016 Using
			Quoted Prices in		Significant Other		Significant
			Active Markets for		Observable		Unobservable		Balance at
	Carrying		Identical Assets		Inputs		Inputs		December 31,
(dollars in thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		2016
Assets:
Cash and short-term investments*	$	5,696	$	5,696	$	-	$	-	$	5,696
Interest bearing deposits with banks		11,919		11,919		-		-		11,919
Securities available for sale		219,632		-		219,632		-		219,632
Securities held to maturity		27,956		-		28,735		-		28,735
Restricted securities		11,557		-		11,557		-		11,557
Loans, net		1,021,961		-		-		1,012,425		1,012,425
Bank owned life insurance		25,734		-		25,734		-		25,734
Accrued interest receivable		4,705		-		4,705		-		4,705
Total	$	1,329,160	$	17,615	$	290,363	$	1,012,425	$	1,320,403

Liabilities:
Noninterest-bearing demand deposits	$	209,138	$	209,138	$	-	$	-	$	209,138
Interest-bearing deposits		842,223		-		764,406		-		764,406
Short-term borrowings**		178,790		178,790		-		-		178,790
Junior subordinated debt		10,310		-		10,664		-		10,664
Senior subordinated debt***		19,125		-		19,216		-		19,216
Accrued interest payable		752		-		752		-		752
Total	$	1,260,338	$	387,928	$	795,038	$	-	$	1,182,966

Includes federal funds sold.

Includes federal funds purchased and repurchase agreements.

***

Net of unamortized debt issuance costs of $875.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of the Company’s normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. The Company attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. The Company monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 11. Preferred Stock

In connection with its private placements, on June 12, 2013, the Company issued 5,240,192 shares of its Series B Preferred Stock for a gross purchase price of $23.8 million, or $4.55 per share. The Series B Preferred Stock has no maturity date. The holders of Series B Preferred Stock are entitled to receive dividends if, as and when declared by the Company’s Board of Directors, in an identical form of consideration and at the same time, as those dividends or distributions that would have been payable on the number of whole shares of the Company’s common stock that such shares of Series B Preferred Stock would be convertible into upon satisfaction of certain conditions. The Company will not pay any dividends with respect to its common stock unless an equivalent dividend also is paid to the holders of Series B Preferred Stock. The Series B Preferred Stock ranks junior with regard to dividends to any class or series of capital stock of the Company the terms of which expressly provide that such class or series will rank senior to the common stock or the Series B Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Company.

Note 12. Junior and Senior Subordinated Debt

On September 17, 2003, $10 million of trust preferred securities were placed through the Trust in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the trust preferred securities in Floating Rate Junior Subordinated Deferrable Interest Debentures (“Junior Subordinated Debt”) issued by the Company. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.95%. As of March 31, 2017 and December 31, 2016, the interest rate was 4.10% and 3.94%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Company has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the Junior Subordinated Debt and other related documents. The Company’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Company.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. At March 31, 2017 and December 31, 2016, all of the trust preferred securities qualified as Tier 1 capital.

Subject to certain exceptions and limitations, the Company is permitted to elect from time to time to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debt relating to its trust preferred securities. If the Company defers interest payments on the Junior Subordinated Debt for more than 20 consecutive quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements would be immediately due and payable.

On April 22, 2015, the Company entered into a Senior Subordinated Note Purchase Agreement with certain institutional accredited investors pursuant to which the Company sold $20.0 million in aggregate principal amount of its 6.50% Fixed-to-Floating Rate Subordinated Notes due 2025 (“Senior Subordinated Debt”) to the investors at a price equal to 100% of the aggregate principal amount of the Senior Subordinated Debt. The Senior Subordinated Debt bears interest at an annual rate of 6.50%, payable semi-annually in arrears on May 1 and November 1 of each year ending on May 1, 2020. From and including May 1, 2020 to, but excluding, the maturity date, the Senior Subordinated Debt will bear interest at an annual rate, reset quarterly, equal to LIBOR determined on the determination date of the applicable interest period plus 502 basis points, payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year, beginning on August 1, 2020. The Company may, at its option, redeem, in whole or in part, the Senior Subordinated Debt as early as May 1, 2020, and any partial redemption would be made pro rata among all of the holders. At March 31, 2017 and December 31, 2016, all of the Senior Subordinated Debt qualified as Tier 2 capital. At March 31, 2017, the remaining unamortized debt issuance costs related to the Senior Subordinated Debt totaled $849 thousand.

Note 13. Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet regulatory capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their 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 (such as interest rate risk), risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

In July 2013, the federal bank regulatory agencies adopted rules to implement the Basel III capital framework and a revised framework for calculating risk-weighted assets (the “Basel III Capital Rules”). The Basel III Capital Rules were effective for the Company and the Bank on January 1, 2015 (subject to a phase-in period for certain portions of the new rules). For a summary of these final rules, see Part I, Item 1. “Business” under the heading “Regulation and Supervision – Capital Requirements” included in the Company’s 2016 Form 10-K.

As of March 31, 2017, the most recent notification from the Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, common equity Tier 1 (“CET1”) risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The capital ratios of the Company and the Bank as of March 31, 2017 and December 31, 2016, presented with related minimum regulatory guidelines, is as follows:

					Minimum To Be
As of March 31, 2017					Well-Capitalized
			Minimum		Under Prompt
			Capital		Corrective Action
	Actual Capital		Requirements*		Provisions
CET1 to risk weighted assets:
Company		8.3542%		5.7500%		N/A
Bank		11.8924%		5.7500%		6.5000%

Tier 1 capital to risk weighted assets:
Company		11.0467%		7.2500%		N/A
Bank		11.8924%		7.2500%		8.0000%

Total capital to risk weighted assets:
Company		13.7908%		9.2500%		N/A
Bank		12.8614%		9.2500%		10.0000%

Tier 1 capital to average assets:
Company		8.9310%		4.0000%		N/A
Bank		9.6185%		4.0000%		5.0000%

Except with regard to the Company’s and the Bank’s Tier 1 capital to average assets ratio, includes the portion of the Basel III Capital Rules capital conservation buffer phased in as of March 31, 2017 (1.2500%) which is added to the minimum capital requirements for capital adequacy purposes. The capital conservation buffer is being phased in through four equal annual installments of 0.6250% from 2016 to 2019, with full implementation in January 2019 (2.500%). The Company’s and the Bank’s capital conservation buffer must consist of additional CET1 above regulatory minimum requirements. Failure to maintain the prescribed levels places limitations on capital distributions and discretionary bonuses to executives. As of March 31, 2017, the capital conservation buffer of the Company and the Bank was 3.8542% and 4.8614%, respectively.

					Minimum To Be
As of December 31, 2016					Well-Capitalized
			Minimum		Under Prompt
			Capital		Corrective Action
	Actual Capital		Requirements*		Provisions
CET1 to risk weighted assets:
Company		8.8000%		5.1250%		N/A
Bank		12.2507%		5.1250%		6.5000%

Tier 1 capital to risk weighted assets:
Company		11.5129%		6.6250%		N/A
Bank		12.2507%		6.6250%		8.0000%

Total capital to risk weighted assets:
Company		14.4449%		8.6250%		N/A
Bank		13.3055%		8.6250%		10.0000%

Tier 1 capital to average assets:
Company		9.2748%		4.0000%		N/A
Bank		9.8711%		4.0000%		5.0000%

Except with regard to the Company’s and the Bank’s Tier 1 capital to average assets ratio, includes the portion of the Basel III Capital Rules capital conservation buffer phased in as of December 31, 2016 (0.6250%) which is added to the minimum capital requirements for capital adequacy purposes. The capital conservation buffer is being phased in through four equal annual installments of 0.6250% from 2016 to 2019, with full implementation in January 2019 (2.500%). The Company’s and the Bank’s capital conservation buffer must consist of additional CET1 above regulatory minimum requirements. Failure to maintain the prescribed levels places limitations on capital distributions and discretionary bonuses to executives. As of December 31, 2016, the capital conservation buffer of the Company and the Bank was 4.3000% and 5.3055%, respectively.

Note 14. Low Income Housing Tax Credits

The Company had investments in four separate housing equity funds at March 31, 2017. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver Federal Low Income Housing Credits to investors, allocate tax losses and other possible tax benefits to investors and to preserve and protect project assets. The investments in these funds are recorded as other assets on the consolidated balance sheets and were $2.2 million and $2.3 million at March 31, 2017 and December 31, 2016, respectively. These investments and related tax benefits have expected terms through 2032, with the majority maturing by 2027. Tax credits and other tax benefits recognized related to these investments during the three months ended March 31, 2017 and 2016 were $125 thousand and $119 thousand, respectively. Total projected tax credits to be received for 2017 are $353 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $984 thousand at both March 31, 2017 and December 31, 2016 and are included in other liabilities on the consolidated balance sheets.

Note 15. Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss (net of tax) for the three months ended March 31, 2017 and 2016 are summarized as follows:

(dollars in thousands)	Unrealized Gains (Losses) on Available for Sale Securities			Unrealized (Losses) on Available for Sale Securities Transferred to Held to Maturity			Adjustments Related to Pension Plan			Accumulated Other Comprehensive (Loss) Income
Balance at December 31, 2016	$	(3,379	)	$	(280	)	$	(1,890	)	$	(5,549	)
Other comprehensive income before reclassification and amortization		458			-			-			458
Reclassification adjustment for gains included in net income		(1	)		-			-			(1	)
Net amortization of unrealized losses on securities transferred
from available for sale to held to maturity		-			19			-			19
Net current period other comprehensive income		457			19			-			476
Balance at March 31, 2017	$	(2,922	)	$	(261	)	$	(1,890	)	$	(5,073	)

Balance at December 31, 2015	$	(1,726	)	$	(356	)	$	(1,804	)	$	(3,886	)
Other comprehensive income before reclassification and amortization		2,350			-			-			2,350
Reclassification adjustment for gains included in net income		(43	)		-			-			(43	)
Net amortization of unrealized losses on securities transferred
from available for sale to held to maturity		-			18			-			18
Net current period other comprehensive income		2,307			18			-			2,325
Balance at March 31, 2016	$	581		$	(338	)	$	(1,804	)	$	(1,561	)

Reclassifications of gains on securities available for sale are reported in the consolidated statements of income as “Gain on sale of available for sale securities, net” with the corresponding income tax effect being reflected as a component of income tax expense. Amortization of unrealized losses on securities transferred from available for sale to held to maturity is included in interest on investments (taxable or tax exempt, as appropriate) in the Company’s consolidated statements of income.

During the three months ended March 31, 2017 and 2016, the Company reported gains on the sale of available for sale securities and amortization of unrealized losses on securities transferred from available for sale to held to maturity as shown in the following table:

	Three Months Ended
	March 31,
(dollars in thousands)	2017			2016
Gains on sale of available for sale securities	$	2		$	65
Less: tax effect		(1	)		(22	)
Net gains on the sale of available for sale securities	$	1		$	43

Amortization of unrealized losses on securities transferred from
available for sale to held to maturity	$	(29	)	$	(28	)
Less: tax effect		10			10
Net amortization of unrealized losses on securities transferred from
available for sale to held to maturity	$	(19	)	$	(18	)

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

We present management’s discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about the major components of our results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes to the Interim Consolidated Financial Statements presented elsewhere in this report and the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in the Company’s 2016 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.

Internet Access to Corporate Documents

Information about the Company can be found on the Company’s investor relations website at http://www.evb.org . The Company posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those documents as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. All such filings are available at no charge. The information on the Company’s website is not, and shall not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated into any other filings the Company makes with the SEC.

Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Exchange Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, income or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services, the performance of portions of the Company’s asset portfolio, employee initiatives and the anticipated financial impact of those initiatives, and the payment of dividends; (iii) statements of future financial performance and economic conditions; (iv) statements regarding the adequacy of the allowance for loan losses; (v) statements regarding the Company’s liquidity; (vi) statements of management’s expectations regarding future trends in interest rates, real estate values, business opportunities and economic conditions generally and in the Company’s markets; (vii) statements regarding future asset quality, including expected levels of charge-offs; (viii) statements regarding potential changes to laws, regulations or administrative guidance; (ix) statements regarding strategic initiatives of the Company or the Bank and the results of these initiatives, including the Pending Merger of the Company and Southern National, and the Company’s initiative to reduce salaries and employee benefits expenses; and (x) statements of assumptions underlying such statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

factors that adversely affect our strategic and business initiatives, including, without limitation, changes in the economic or business conditions in the Company’s markets;

the possibility that any of the anticipated benefits of the Pending Merger will not be realized or will not be realized within the expected time period; the risk that integration of the operations of Southern National and the Company will be materially delayed or will be more costly or difficult than expected; the inability to complete the Pending Merger due to the failure to obtain the required shareholder approvals; the failure to satisfy other conditions to completion of the Pending Merger; the failure of the Pending Merger to close for any other reason; the effect of the announcement of the Pending Merger on customer relationships and operating results; the possibility that the Pending Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; changes in interest rates; general economic conditions and those in the market areas of Southern National and the Company;

our ability and efforts to assess, manage and improve our asset quality;

the strength of the economy in the Company’s target market area, as well as general economic, market, political, or business factors;

changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers or issuers;

concentrations in segments of the loan portfolio or declines in real estate values in the Company’s markets;

the effects of our adjustments to the composition of our investment portfolio;

the strength of the Company’s counterparties;

an insufficient allowance for loan losses;

our ability to meet the capital requirements of our regulatory agencies;

changes in laws, regulations and the policies of federal or state regulators and agencies, including the Basel III Capital Rules;

changes in the interest rates affecting our deposits and loans;

the loss of any of our key employees;

failure, interruption or breach of any of the Company’s communication or information systems, including those provided by external vendors;

the effects of cyber-attacks or other security breaches;

our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth;

changes in government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan products and financial services;

our ability to maintain internal control over financial reporting;

our ability to realize our deferred tax assets;

our ability to raise capital as needed by our business;

our reliance on secondary sources, such as FHLB advances, sales of securities and loans, and federal funds lines of credit from correspondent banks to meet our liquidity needs; and

other circumstances, many of which are beyond our control.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions and projections within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, actions or achievements of the Company will not differ materially from any future results, performance, actions or achievements expressed or implied by such forward-looking statements. Readers should not place undue reliance on such statements, which speak only as of the date of this report. The Company does not undertake any steps to update any forward-looking statement that may be made from time to time by it or on its behalf. For additional information on risk factors that could affect the Company’s forward-looking statements, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and other reports filed with the SEC.

Critical Accounting Policies

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.

Allowance for Loan Losses

The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. For more information see the section titled “Asset Quality” within this Item 2.

Impairment of Loans

The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The Company does not consider a loan impaired during a period of insignificant payment shortfalls if we expect the ultimate collection of all amounts due. Impairment is measured on a loan by loan basis for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans by either the present value of expected future cash flows 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. Large groups of smaller balance homogeneous loans, representing consumer, one to four family residential first and seconds and home equity lines, are collectively evaluated for impairment. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are also considered impaired loans. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial condition, grants a concession (including, without limitation, rate reductions to below-market rates, payment deferrals, forbearance and, in some cases, forgiveness of principal or interest) to the borrower that it would not otherwise consider. For more information see the section titled “Asset Quality” within this Item 2.

Loans Acquired in a Business Combination

The Company accounts for loans acquired in a business combination in accordance with the FASB Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” Accordingly, acquired loans are segregated between PCI loans and purchased performing loans and are recorded at fair value on the date of acquisition without the carryover of the related allowance for loan losses.

PCI loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that the Company will not collect all contractually required principal and interest payments. When determining fair market value, PCI loans are aggregated into pools of loans based on common characteristics as of the date of acquisition such as loan type, date of origination, and evidence of credit quality deterioration such as internal risk grades and past due and nonaccrual status. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. The Company accounts for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing or PCI loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition.

Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss). For equity securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

Assets Held for Sale

As of March 31, 2017, the Company had four assets classified as held for sale which includes two previously occupied administrative facilities in Tappahannock, Virginia and two land development sites in Hanover County, Virginia previously held for future use that qualified as held for sale. Assets held for sale are reported at the lower of carrying amount or fair value, less costs to sell, if any. Once an asset is classified as held for sale, depreciation expense is no longer recorded. The fair value is reviewed periodically by management and any write-downs are charged against current earnings.

Other Real Estate Owned

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings.

Goodwill

With the adoption of FASB ASU 2011-08, “ Intangible-Goodwill and Other-Testing Goodwill for Impairment ,” the Company is no longer required to perform a test for impairment unless, based on an assessment of qualitative factors related to goodwill, it determines that it is more likely than not that the fair value of goodwill is less than its carrying amount. If the likelihood of impairment is more than 50 percent, the Company must perform a test for impairment and we may be required to record impairment charges. In assessing the recoverability of the Company’s goodwill, the Company must make assumptions in order to determine the fair value of the respective assets. Major assumptions used in the impairment analysis were discounted cash flows, merger and acquisition transaction values (including as compared to tangible book value), and stock market capitalization. The Company chose to bypass the preliminary assessment of qualitative impairment factors and completed its annual goodwill impairment test during the fourth quarter of 2016 through the use of an independent third party specialist and determined there was no impairment to be recognized in 2016. If the underlying estimates and related assumptions change in the future, the Company may be required to record impairment charges.

Retirement Plan

The Company historically maintained a defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended on February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participant’s account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued using market quotations. The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense. The Company intends to terminate the plan effective May 1, 2017 in connection with the Pending Merger.

Accounting for Income Taxes

Determining the Company’s effective tax rate requires judgment. In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Company’s tax returns are subject to audit by various tax authorities. Although we believe that the estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred income tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. For more information, see Item 1. “Financial Statements,” under the heading “Note 4. Deferred Income Taxes” in this Quarterly Report on Form 10-Q and Item 8. “Financial Statements and Supplementary Data,” under the headings “Note 1. Summary of Significant Accounting Policies” and “Note 11. Income Taxes” in the Company’s 2016 Form 10-K.

For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1. Summary of Significant Accounting Policies” in the Company’s 2016 Form 10-K.

Business Overview

The Company provides a broad range of personal and commercial banking services including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower to make decisions at the local level, so they can provide timely lending decisions and respond promptly to customer inquiries. Having been in many of our markets for over 100 years, we have established relationships with and an understanding of our customers. We believe that, by offering our customers personalized service and a breadth of products, we can compete effectively as we expand within our existing markets and into new markets.

The Company is committed to delivering strong, long-term earnings using a prudent allocation of capital, in business lines where we have demonstrated the ability to compete successfully. During the first three months of 2017, the national and local economies continued to show slow, but measured signs of recovery with the main challenges continuing to be underemployment above historical levels and uneven economic growth. Macro-economic and geo-political issues continue to temper the global economic outlook and, as such, the Company remains cautiously optimistic regarding the improvements seen in our local markets. Despite this, the Company believes that our local markets are poised for stronger growth in the coming months and years than the economic recovery has provided in our markets in recent periods.

Since 2013, the Company has completed strategic initiatives that have significantly improved the Company’s financial condition. These initiatives represent significant progress toward the Company’s long-term goal of growing a more robust community banking business. These initiatives include:

Raising in 2013 an aggregate of $50.0 million of gross proceeds from sales of the Company’s common stock and Series B Preferred Stock in private placements to certain institutional investors ($45.0 million in gross proceeds) and a rights offering to existing shareholders ($5.0 million in gross proceeds) (collectively, the “2013 Capital Initiative”);

Using a portion of the proceeds from the 2013 Capital Initiative to prepay long-term, higher-rate FHLB advances and to accelerate the disposition of adversely classified assets;

Paying all current and previously deferred interest and all current and previously deferred, but accumulated, dividends on the Company’s Junior Subordinated Debt and Series A preferred stock, respectively;

Redeeming all of the Company’s Series A preferred stock, which eliminated one of the Company’s most expensive sources of capital;

Acquiring VCB effective November 14, 2014, thus adding three branches to the Bank’s branch network and an aggregate of $128.9 million of assets to the Company’s balance sheet. All former VCB branches have been fully integrated into the Bank’s branch network and operate as branches of the Bank, expanding the Bank’s branch network into the Virginia cities of Hampton, Newport News and Williamsburg;

Opening a loan production office in Chesterfield County, Virginia to increase the Bank’s presence in the Richmond metropolitan area and contribute to loan portfolio growth and diversification;

Declaring dividends to holders of both the Company’s common stock and Series B Preferred Stock. Beginning in March 2015, dividends of $0.01 per share were declared and paid quarterly. The Company increased the quarterly dividends to $0.02 per share starting in August 2015 through August 2016, and again in November 2016 to $0.03 per share;

Raising in the second quarter of 2015 an aggregate of $20.0 million in gross proceeds from sales of Senior Subordinated Debt (as defined in Item 1 “Financial Statements,” under the heading “Note 12. Junior and Senior Subordinated Debt” in this Quarterly Report on Form 10-Q) in private placements to certain institutional investors. A portion of these proceeds were used to redeem the remainder of the Company’s Series A preferred stock and to repurchase the warrant that was issued to the U.S. Treasury through the Capital Purchase Program;

On October 11, 2016 the Company’s corporate headquarters was relocated to the Innsbrook business park in Glen Allen, Virginia in order to increase collaboration and productivity, while gaining operating efficiencies throughout the Company;

On December 13, 2016, the Company and Southern National jointly announced the signing of a definitive agreement to merge. The combination brings together two banking companies with complementary business lines creating one of the premier banking institutions headquartered in the Commonwealth of Virginia. The combined company will use the name Southern National Bancorp of Virginia, Inc. The Pending Merger, which is expected to be completed by the third quarter of 2017, is still subject to the approval of the shareholders of both companies, as well as customary closing conditions; and

In connection with the Pending Merger, the Company intends to terminate its defined benefit pension plan effective May 1, 2017.

The Company expects to recognize the continued benefits of these initiatives during the remainder of 2017, including through lower interest expense related to the extinguished FHLB advances in 2013, elimination of the Series A preferred stock dividend as of June 15, 2015, additional interest income and cost savings related to the acquisition of VCB and positive contributions to the Company’s loan portfolio generated by the three branches acquired from VCB and the Chesterfield County, Virginia loan production office.

As previously disclosed, and related to the Company’s continued commitment to drive operating efficiencies and reduce noninterest expenses, during the fourth quarter of 2016 the Company implemented a hiring freeze. In connection with this hiring freeze, through attrition and other job eliminations, the Company reduced the number of its full-time equivalent employees by 27 between December 1, 2016 and March 31, 2017. The Company currently expects this initiative to reduce salaries and employee benefits expense by approximately $1.4 million on an annualized basis.

Summary of First Quarter 2017 Operating Results and Financial Condition

Table 1: Performance Summary

	Three Months Ended March 31,
(dollars in thousands, except per share data)	2017			2016
Net income	$	1,780		$	2,227
Basic and diluted net income per common share	$	0.10		$	0.12
Return on average assets (annualized)		0.51	%		0.70	%
Return on average common shareholders' equity (annualized)		6.52	%		8.34	%
Net interest margin (tax equivalent basis) ⁽¹⁾		3.66	%		3.78	%

(1)

For more information on the calculation of net interest margin on a tax equivalent basis, see the average balance sheet and net interest margin analysis for the three months ended March 31, 2017 and 2016 contained in "Results of Operations" in this Item 2.

For the three months ended March 31, 2017, the following were significant factors in the Company’s reported results:

Increase in net interest income of $931 thousand from the same period in 2016 principally due to an increase in interest and fees on loans driven primarily by loan growth, partially offset by decreases in interest income on taxable investment securities and increases in interest expense associated with our deposits and short-term borrowings;

Net interest margin (tax equivalent basis) decreased 12 basis points from the same period in 2016 primarily due to a decrease in the yield earned on average loans, higher average balances of and rates paid on interest-bearing liabilities and a decrease in the average balances of and yields earned on investment securities, partially offset by an increase in average loans;

OREO decreased by $1.0 million during the first quarter of 2017, primarily due to the sale of one property with a cost basis of $1.3 million;

Performing TDRs decreased from March 31, 2016 to March 31, 2017 by $4.5 million primarily due to the collection of principal on two previously restructured loans;

Increase in salaries and employee benefits of $542 thousand from the same period in 2016, primarily due to merit increases, severance costs of $165 thousand associated with our hiring freeze and job eliminations, staffing changes and increased incentive compensation expense related to improved financial performance;

Marketing and advertising expenses decreased $228 thousand from the same period in 2016 due to the timing of advertising campaigns and other initiatives and a reduction in branding activities due to the Pending Merger;

Loss on sale of OREO increased from the same period in 2016 primarily due to the sale of one property for $1.2 million for which the Company incurred a loss of $194 thousand;

Merger and merger related expenses of $478 thousand were incurred during the first quarter of 2017 in connection with the Pending Merger; and

Other operating expenses increased $280 thousand from the same period in 2016, primarily due to increases in data processing expenses and director fees.

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income, the fundamental source of the Company’s earnings, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and investment securities, while deposits, short-term borrowings, Junior Subordinated Debt and Senior Subordinated Debt represent the major portion of interest-bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations and the yield of our interest earning assets compared to our cost of funding these assets.

Net interest margin is calculated by expressing tax-equivalent net interest income as a percentage of average interest earning assets, and represents the Company’s net yield on its earning assets. Net interest margin is an indicator of the Company’s effectiveness in generating income from its earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competitive pressures, Federal Reserve Board policies and the economy. The spread that can be earned between interest earning assets and interest-bearing liabilities is also dependent to a large extent on the slope of the yield curve.

Table 2 presents the average balances of assets and liabilities, the average yields earned on such assets (on a tax equivalent basis) and rates paid on such liabilities, and the net interest margin for the three months ended March 31, 2017 and 2016.

Table 2: Average Balance Sheet and Net Interest Margin Analysis

	Three Months Ended March 31,
(dollars in thousands)	2017							2016
	Average			Income/		Yield/		Average			Income/		Yield/
	Balance			Expense		Rate ⁽¹⁾		Balance			Expense		Rate ⁽¹⁾
Assets:
Securities
Taxable	$	243,169		$	1,377		2.30%	$	251,217		$	1,506		2.41%
Restricted securities		10,590			138		5.28%		8,984			115		5.15%
Tax exempt (2)		7,479			74		4.03%		10,508			100		3.84%
Total securities		261,238			1,589		2.47%		270,709			1,721		2.56%
Interest bearing deposits in other banks		20,600			27		0.53%		8,321			10		0.48%
Federal funds sold		1,473			2		0.55%		142			-		0.00%
Loans, net of unearned income (3)		1,042,747			12,417		4.83%		895,742			10,953		4.92%
Total earning assets		1,326,058			14,035		4.29%		1,174,914			12,684		4.34%
Less allowance for loan losses		(11,357	)						(11,221	)
Total non-earning assets		103,871							111,556
Total assets	$	1,418,572						$	1,275,249

Liabilities & Shareholders' Equity:
Interest-bearing deposits
Checking	$	305,288		$	295		0.39%	$	303,348		$	276		0.37%
Savings		109,696			51		0.19%		99,422			41		0.17%
Money market savings		220,396			409		0.75%		164,539			196		0.48%
Large dollar certificates of deposit (4)		131,879			308		0.95%		122,123			321		1.06%
Other certificates of deposit		116,398			291		1.01%		119,675			237		0.80%
Total interest-bearing deposits		883,657			1,354		0.62%		809,107			1,071		0.53%
Federal funds purchased and repurchase
agreements		4,737			6		0.51%		5,530			7		0.51%
Short-term borrowings		150,675			257		0.69%		114,696			122		0.43%
Junior subordinated debt		10,310			99		3.89%		10,310			88		3.43%
Senior subordinated debt		19,136			351		7.44%		19,033			351		7.42%
Total interest-bearing liabilities		1,068,515			2,067		0.78%		958,676			1,639		0.69%
Noninterest-bearing liabilities
Demand deposits		208,944							180,038
Other liabilities		8,766							7,591
Total liabilities		1,286,225							1,146,305
Shareholders' equity		132,347							128,944
Total liabilities and shareholders' equity	$	1,418,572						$	1,275,249

Net interest income (2)				$	11,968						$	11,045

Interest rate spread (2)(5)							3.51%							3.65%
Interest expense as a percent of
average earning assets							0.63%							0.56%
Net interest margin (2)(6)							3.66%							3.78%

Notes:

(1)

Yields are annualized and based on average daily balances.

(2)

Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%, with a $22 adjustment for 2017 and a $30 adjustment in 2016.

(3)

Nonaccrual loans have been included in the computations of average loan balances.

(4)

Large dollar certificates of deposit are certificates issued in amounts of $100 or greater.

(5)

Interest rate spread is the average yield on earning assets, calculated on a fully taxable basis, less the average rate incurred on interest-bearing liabilities.

(6)

Net interest margin is the net interest income, calculated on a fully taxable basis, expressed as a percentage of average earning assets.

Interest Income and Expense

Net interest income and net interest margin

Net interest income in the first quarter of 2017 increased $931 thousand, or 8.5%, when compared to the first quarter of 2016. The Company's net interest margin (tax equivalent basis) decreased to 3.66%, representing a decrease of 12 basis points for the three months ended March 31, 2017 as compared to the same period in 2016. The decrease in the net interest margin (tax equivalent basis) was primarily due to a decrease in the yield earned on average loans, higher average balances of and rates paid on interest-bearing liabilities and a decrease in average balances of and yields earned on investment securities. These margin pressures were offset by increases in average loan balances. Total interest and dividend income increased 10.7% for the three months ended March 31, 2017 while total interest expense increased 26.1%, both as compared to the same period in 2016. The most significant factors impacting net interest income during the three months ended March 31, 2017 were as follows:

Positive Impact:

Increases in average loan balances, primarily due to organic loan growth and loan purchases, partially offset by lower loan yields.

Negative Impacts:

Decreases in average balances of and yields earned on investment securities resulting from changes in the composition of the investment securities portfolio driven by the Company’s liquidity needs;

Increases in average interest-bearing deposit balances and rates paid, in each case primarily due to the Company offering a promotional rate for its money market savings accounts; and

Increases in average short-term borrowings balances and rates paid, primarily due to loan growth outpacing deposit growth.

Loans

Average loan balances increased $147.0 million for the three months ended March 31, 2017, as compared to the same period in 2016, primarily due to organic loan growth and the purchase of $32.3 million in performing commercial, student and consumer loans between March 2016 and March 2017. Loan growth during the three months ended March 31, 2017 outpaced our internal targets. However, loan growth in our rural markets, especially with respect to consumer loans, remains weak while competition for commercial loans, especially in the Richmond and Tidewater markets, has been and we expect will continue to be intense given the historically low rate environment. Total average loans were 78.6% of total average interest-earning assets for the three months ended March 31, 2017, compared to 76.2% for the three months ended March 31, 2016.

Investment securities

Average total investment securities balances decreased by $9.5 million, or 3.5%, during the three months ended March 31, 2017, as compared to the same period in 2016. This decline was the result of management of the investment securities portfolio in light of the Company’s liquidity needs, with proceeds provided by sales and pay downs of investment securities used primarily to fund loan growth, and unrealized losses on the available for sale investment securities portfolio. The Company remains committed to its long-term target of managing the investment securities portfolio to comprise 20% of the Company’s total assets. The yields on average total investment securities decreased 9 basis points for the three months ended March 31, 2017, as compared to the same period in 2016. The decrease in yields on average total investment securities during the three months ended March 31, 2017, as compared to the same period in 2016, was driven by a lower allocation of the total investment securities portfolio to SBA Pool securities and tax exempt municipal securities, both of which also tend to be higher-yielding segments of the Company’s investment securities portfolio. These decreases were partially offset by generally higher interest rates and a greater allocation of the total investment securities portfolio to higher yielding Agency CMO securities and Agency residential mortgage-backed securities.

Interest-bearing deposits

Average total interest-bearing deposit balances and rates paid increased for the three months ended March 31, 2017, as compared to the same period in 2016, primarily due to the Bank offering a promotional rate on money market saving accounts and an increase in brokered and other time deposits obtained through a non-brokered listing service.

Borrowings

Average total borrowings increased for the three months ended March 31, 2017, as compared to the same period in 2016, primarily due to increased short-term borrowings. Average short-term borrowings increased for the three months ended March 31, 2017, as compared to the same period in 2016, due to additional short-term FHLB advances taken to fund loan growth.

Noninterest Income

Noninterest income is comprised of all sources of income other than interest and dividend income on our earning assets. Significant revenue items include fees collected on certain deposit account transactions, debit card and ATM fees, fees from other general services, earnings from other investments we own in part or in full and gains or losses on sales of investment securities, loans, and fixed assets.

The following table depicts the components of noninterest income for the three months ended March 31, 2017 and 2016:

Table 3: Noninterest Income

	Three Months Ended March 31,
(dollars in thousands)	2017		2016			Change $			Change %
Service charges and fees on deposit accounts	$	743	$	739		$	4			0.5%
Debit card/ATM fees		417		397			20			5.0%
Gain on sale of available for sale securities, net		2		65			(63	)		-96.9%
Gain (loss) on sale of bank premises and equipment		8		(4	)		12			300.0%
Earnings on bank owned life insurance policies		150		159			(9	)		-5.7%
Other operating income		242		195			47			24.1%
Total noninterest income	$	1,562	$	1,551		$	11			0.7%

Key changes in the components of noninterest income for the three months ended March 31, 2017, as compared to the same period in 2016, are discussed below:

Gain on sale of available for sale securities, net was lower as adjustments made in the prior year to the composition of the investment securities portfolio as part of the Company’s overall asset/liability management strategy generated gains that were not repeated during the three months ended March 31, 2017; and

Other operating income increased primarily due to higher earnings from the Bank’s subsidiaries and its investment in Bankers Insurance, LLC, partially offset by losses from the Bank’s investment in Southern Trust Mortgage, LLC. Other operating income also includes losses from the Bank’s investment in housing equity funds.

Noninterest Expense

Noninterest expense includes all expenses with the exception of those paid for interest on borrowings and deposits. Significant expense items included in this component are salaries and employee benefits, occupancy and equipment expenses and other operating expenses.

The following table depicts the components of noninterest expense for the three months ended March 31, 2017 and 2016:

Table 4: Noninterest Expense

	Three Months Ended March 31,
(dollars in thousands)	2017		2016		Change $			Change %
Salaries and employee benefits	$	5,790	$	5,248	$	542			10.3%
Occupancy and equipment expenses		1,476		1,430		46			3.2%
Telephone		263		208		55			26.4%
FDIC expense		198		203		(5	)		-2.5%
Consultant fees		155		222		(67	)		-30.2%
Collection, repossession and other real estate owned		211		165		46			27.9%
Marketing and advertising		233		461		(228	)		-49.5%
Loss on sale of other real estate owned		233		1		232			23200.0%
Impairment losses on other real estate owned		31		-		31			100.0%
Merger and merger related expenses		478		-		478			100.0%
Other operating expenses		1,761		1,481		280			18.9%
Total noninterest expenses	$	10,829	$	9,419	$	1,410			15.0%

Key changes in the components of noninterest expense for the three months ended March 31, 2017, as compared to the same period in 2016, are discussed below:

Salaries and employee benefits increased due to $165 thousand in severance costs associated with our hiring freeze, job eliminations, and other staffing related changes, merit increases and increased incentive compensation and pension plan costs;

Telephone expenses were higher due to additional expenses related to our data center relocation;

Consultant fees decreased as certain engagements were completed in 2016 and were not repeated in 2017;

Collection, repossession and other real estate owned expenses were higher due to an increase in equipment repossession and foreclosure activity;

Marketing and advertising expenses were lower due to the timing of advertising campaigns and other marketing expenses and a reduction in branding activities related to the Pending Merger;

Loss on sale of other real estate owned incurred during the three months ended March 31, 2017 was primarily due to the sale of one property for $1.2 million for which the Company incurred a loss of $194 thousand;

Impairment losses on other real estate owned incurred during the three months ended March 31, 2017 were the result of lowering the sales price on two properties;

Merger and merger related expenses incurred during the three months ended March 31, 2017 were for legal fees and other costs associated with the Pending Merger; and

Other operating expenses increased primarily due to increases in data processing expenses, internet banking expenses, director fees, legal fees, franchise taxes, HELOC closing expenses, other losses and write offs and appraisal expenses.

Income Taxes

The Company recorded income tax expense of $899 thousand for the three months ended March 31, 2017, as compared to $903 thousand for the same period of 2016, reflecting a $4 thousand decrease in income tax expense. Although income tax expense was virtually unchanged, the Company’s pre-tax income was lower in the current year primarily due to the recognition of $478 thousand in nondeductible merger and merger related expenses. Additionally, tax exempt interest income was lower in the current year due to a lower percentage of tax-exempt investment securities comprising a portion of the Company’s investment securities portfolio and a reduction in average balances of tax exempt loans.

The effective tax rate for the three months ended March 31, 2017 was 33.6%, as compared to 28.8% for the same period in 2016. The increase in the effective tax rate from the three months ended March 31, 2016 to the same period in 2017 was primarily due to the recognition of $478 thousand in nondeductible expenses related to the Pending Merger and a decrease in tax-exempt interest income, as discussed above.

Asset Quality

Provision and Allowance for Loan Losses

The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as probable credit losses inherent in the loan portfolio, and is based on periodic evaluations of the collectability and historical loss experience of loans. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio. Actual credit losses are deducted from the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is comprised of a specific allowance for identified problem loans and a general allowance representing estimations performed pursuant to either FASB ASC Topic 450 “ Accounting for Contingencies” , or FASB ASC Topic 310 “Accounting by Creditors for Impairment of a Loan.” The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal may be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when deemed appropriate. The general component covers non-classified or performing loans and those loans classified as substandard, doubtful or loss that are not impaired. The general component is based on migration analysis adjusted for qualitative factors, such as economic conditions, interest rates and unemployment rates. The Company uses a risk grading system for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

Pass Grades

Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;

Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

Risk Grade 4 loans are satisfactory loans with borrowers not as strong as risk grade 3 loans but may exhibit a higher degree of financial risk based on the type of business supporting the loan; and

Risk Grade 5 loans are loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay.

Special Mention

Classified Grades

Risk Grade 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as a bank asset is not warranted.

The Company's ALL Committee is responsible for assessing the overall appropriateness of the allowance for loan losses and monitoring the Company's allowance for loan losses methodology, particularly in the context of current economic conditions and a rapidly changing regulatory environment. The ALL Committee reviews at least annually the Company's allowance for loan losses methodology.

Management believes that the level of the allowance for loan losses is appropriate in light of the credit quality and anticipated risk of loss in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses through increased provisions for loan losses or may require that certain loan balances be charged-off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examinations.

The following table presents the Company’s loan loss experience for the periods indicated:

Table 5: Allowance for Loan Losses

	Three Months Ended March 31,
(dollars in thousands)	2017			2016
Average loans outstanding*	$	1,042,747		$	895,742
Allowance for loan losses, January 1	$	11,270		$	11,327
Charge-offs:
Commercial, industrial and agricultural		(207	)		(46	)
Real estate - one to four family residential:
Closed end first and seconds		(193	)		(373	)
Home equity lines		(76	)		-
Real estate - non-farm, non-residential:
Owner occupied		-			(208	)
Consumer		(9	)		(33	)
Other		(24	)		(15	)
Total loans charged-off		(509	)		(675	)
Recoveries:
Commercial, industrial and agricultural		98			26
Real estate - one to four family residential:
Closed end first and seconds		70			81
Home equity lines		3			12
Real estate - construction:
One to four family residential		1			1
Real estate - non-farm, non-residential:
Owner occupied		-			63
Non-owner occupied		-			61
Consumer		11			15
Other		8			8
Total recoveries		191			267
Net charge-offs		(318	)		(408	)
Provision for loan losses		-			17
Allowance for loan losses, March 31	$	10,952		$	10,936
Ratios:
Ratio of allowance for loan losses to total loans outstanding, end of period		1.02%			1.20%
Ratio of annualized net charge-offs to average loans outstanding during the period		0.12%			0.18%

*Net of unearned income and includes nonaccrual loans.

The Company made no provision for loan losses for the three months ended March 31, 2017 compared to a provision for loan losses of $17 thousand for the same period in 2016. The allowance for loan losses totaled $11.0 million at March 31, 2017, representing a decline of $318 thousand from December 31, 2016 and an increase of $16 thousand from March 31, 2016. The ratio of allowance for loan losses to total loans outstanding at March 31, 2017 declined 7 basis points from December 31, 2016 and 18 basis points from March 31, 2016.

The ratio of allowance for loan losses to total loans outstanding declined from December 31, 2016 to March 31, 2017 due to loan growth, improvements in economic and financial conditions in the Company’s markets and improvements in the Company’s asset quality which was primarily due to a decline in special mention loans. In addition to these factors, a decline in the ratio of allowance for loan losses to total loans outstanding from March 31, 2016 to March 31, 2017 was also driven by the resolution of certain classified or problem assets. Impaired loans decreased approximately $2.2 million from March 31, 2016, primarily due to the payoff of two previously restructured loans, partially offset by the addition of a large commercial real estate construction relationship to impaired loans as a result of a deterioration in the financial condition of the borrower. Nonperforming loans decreased approximately $865 thousand from March 31, 2016 to March 31, 2017 primarily due to the resolution of and foreclosure on closed end one to four family residential real estate properties related to a single borrower. Additionally, due to acquisition accounting related to the Company’s acquisition of VCB, the Company recorded loans acquired from VCB at fair value at the effective time of the acquisition, and any allowance for loan losses previously established by VCB was not recorded on the Company’s financial statements. Net charge-offs for the three months ended March 31, 2017 were $318 thousand, compared to $408 thousand for the same period of 2016. This represents, on an annualized basis, 0.12% of average loans outstanding for the three months ended March 31, 2017 compared to 0.18% of average loans outstanding for the same period of 2016.

The allowance for loan losses represented 1.02% of period end loans at March 31, 2017, compared with 1.09% of year end loans at December 31, 2016.

The following table shows the allocation of the allowance for loan losses at the dates indicated. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any category of loan.

Table 6: Allocation of Allowance for Loan Losses

	At March 31,				At December 31,
	2017				2016
(dollars in thousands)	Allowance		Percent		Allowance		Percent
Commercial, industrial and agricultural	$	2,661		14.04%	$	3,035		14.42%
Real estate - one to four family residential:
Closed end first and seconds		1,477		19.85%		1,487		20.85%
Home equity lines		504		11.59%		653		11.85%
Real estate - multifamily residential		49		2.95%		71		3.14%
Real estate - construction:
One to four family residential		243		1.76%		197		1.57%
Other construction, land development and other land		3,059		9.73%		2,632		8.95%
Real estate - farmland		155		1.05%		157		1.09%
Real estate - non-farm, non-residential:
Owner occupied		1,271		20.22%		1,267		19.48%
Non-owner occupied		428		13.67%		584		13.52%
Consumer		509		4.13%		459		4.10%
Other		596		1.01%		728		1.03%
Total allowance for loan losses	$	10,952		100.00%	$	11,270		100.00%

(Percent is portfolio loans in category divided by total loans.)

Tabular presentations of commercial loans by credit quality indicator and consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at March 31, 2017 and December 31, 2016 can be found under Item 1. “Financial Statements,” under the heading “Note 3. Loan Portfolio.”

Nonperforming Assets

Real estate acquired through, or in lieu of, foreclosure (or OREO) is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Cost includes loan principal and accrued interest. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings. Development and improvement costs relating to the property are capitalized. Net operating income or expenses of such properties are included in collection, repossession and OREO expenses.

The following table presents information concerning nonperforming assets as of and for the three months ended March 31, 2017 and the year ended December 31, 2016:

Table 7: Nonperforming Assets

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Nonaccrual loans*	$	5,606	$	5,181	$	425			8.2%
Loans past due 90 days and accruing interest		1,272		1,341		(69	)		-5.1%
Total nonperforming loans	$	6,878	$	6,522	$	356			5.5%
Other real estate owned		1,631		2,656		(1,025	)		-38.6%
Total nonperforming assets	$	8,509	$	9,178	$	(669	)		-7.3%

Nonperforming assets to total loans and other real estate owned		0.79%		0.89%
Allowance for loan losses to nonaccrual loans		195.37%		217.53%
Allowance for loan losses to nonperfoming loans		159.24%		172.80%
Annualized net charge-offs to average loans for the period		0.12%		0.01%
Allowance for loan losses to period end loans		1.02%		1.09%

*Includes $1.8 million and $2.2 million in nonaccrual TDRs at March 31, 2017 and December 31, 2016, respectively.

The following table presents the change in the OREO balance for the three months ended March 31, 2017 and 2016:

Table 8: OREO Changes

	March 31,
(dollars in thousands)	2017			2016			Change $			Change %
Balance at the beginning of period, gross	$	2,692		$	522		$	2,170			415.7%
Transfers from loans		525			466			59			12.7%
Capitalized costs		13			-			13			100.0%
Sales proceeds		(1,299	)		(87	)		(1,212	)		-1393.1%
Previously recognized impairment losses on disposition		(18	)		-			(18	)		-100.0%
Loss on disposition		(233	)		(1	)		(232	)		-23200.0%
Balance at the end of period, gross		1,680			900			780			86.7%
Less valuation allowance		(49	)		(2	)		(47	)		-2350.0%
Balance at the end of period, net	$	1,631		$	898		$	733			81.6%

The following table presents the change in the valuation allowance for OREO for the three months ended March 31, 2017 and 2016:

Table 9: OREO Valuation Allowance Changes

	March 31,
(dollars in thousands)	2017			2016
Balance at the beginning of period	$	36		$	2
Valuation allowance		31			-
Charge-offs		(18	)		-
Balance at the end of period	$	49		$	2

Nonperforming assets were $8.5 million, or 0.79%, of total loans and OREO at March 31, 2017 compared to $9.2 million, or 0.89%, at December 31, 2016. The slow and measured economic recovery has prompted the Company to maintain the heightened level of the allowance for loan losses, which was 195.37% of nonaccrual loans at March 31, 2017, compared to 217.53% at December 31, 2016. Nonperforming loans increased $356 thousand, or 5.5%, for the three months ended March 31, 2017 to $6.9 million, primarily due to an increase in nonaccrual loans.

Nonaccrual loans were $5.6 million at March 31, 2017, an increase of $425 thousand, or 8.2%, from $5.2 million at December 31, 2016. Of the current $5.6 million in nonaccrual loans, $4.8 million, or 86.2%, is secured by real estate in our market area. Of these real estate secured loans, $3.8 million are one to four family residential real estate and $1.0 million are commercial properties.

Loans past due 90 days and accruing interest were $1.3 million at March 31, 2017, a decrease of $69 thousand, or 5.1%, from December 31, 2016, and was an increase of $145 thousand, or 12.9%, from March 31, 2016. The balance at March 31, 2017 is comprised of two loans which have remained on accrual status as they are well secured and full recoveries are anticipated.

OREO, net of valuation allowance at March 31, 2017 was $1.6 million, a decrease of $1.0 million, or 38.6%, from December 31, 2016, which was primarily due to the sale of one property with a cost basis of $1.3 million. The balance of OREO at March 31, 2017 was comprised of fourteen properties of which $20 thousand were real estate construction properties and $1.6 million were closed end one to four family residential properties. During the three months ended March 31, 2017 new foreclosures included three properties totaling $525 thousand transferred from loans. Sales of six OREO properties for the three months ended March 31, 2017 resulted in a net loss of $233 thousand. The remaining properties are being actively marketed and the Company does not anticipate any material losses associated with these properties. The Company recorded $31 thousand in losses in its consolidated statements of income for the three months ended March 31, 2017 due to valuation adjustments on OREO properties as compared to no losses for the same period of 2016. Asset quality continues to be a top priority for the Company. The Company continues to allocate significant resources to the expedient disposition and collection of nonperforming and other lower quality assets.

As discussed earlier in this Item 2, the Company measures impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs are considered impaired loans. TDRs occur when we agree to modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. These concessions can be temporary and are made in an attempt to avoid foreclosure and with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include, without limitation, rate reductions to below market rates, payment deferrals, forbearance, and, in some cases, forgiveness of principal or interest.

A tabular presentation of loans individually evaluated for impairment by class of loans at March 31, 2017 and December 31, 2016 can be found under Item 1. “Financial Statements,” under the heading “Note 3. Loan Portfolio” in this Quarterly Report on Form 10-Q.

At March 31, 2017, the balance of impaired loans was $31.9 million, for which there were specific valuation allowances of $3.6 million. At December 31, 2016, the balance of impaired loans was $32.2 million, for which there were specific valuation allowances of $3.4 million. The average balance of impaired loans was $32.1 million for the three months ended March 31, 2017, compared to $33.0 million for the year ended December 31, 2016. Impaired loans decreased approximately $358 thousand from December 31, 2016. The Company’s balance of impaired loans remains elevated over pre-2009 levels primarily due to performing TDRs, the majority of which do not have specific valuation allowances.

The following table presents the balances of TDRs at March 31, 2017 and December 31, 2016:

Table 10: Troubled Debt Restructurings (TDRs)

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Performing TDRs	$	10,669	$	10,441	$	228			2.2%
Nonperforming TDRs*		1,848		2,209		(361	)		-16.3%
Total TDRs	$	12,517	$	12,650	$	(133	)		-1.1%

*Included in nonaccrual loans in Table 7: Nonperforming Assets.

Financial Condition

Summary

At March 31, 2017, the Company had total assets of $1.45 billion, an increase of approximately $48.0 million, or 3.4%, from $1.40 billion at December 31, 2016. The increase in total assets was principally the result of increases in loans and securities available for sale, primarily funded by continued deposit growth. Additionally, deposit growth which outpaced loan growth during the first three months of 2017 drove reductions in short-term borrowings. Major categories and changes in our balance sheet are as detailed in the following schedule.

Table 11: Balance Sheet Changes

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Total assets	$	1,446,601	$	1,398,593	$	48,008			3.4%
Interest bearing deposits with banks		16,648		11,919		4,729			39.7%
Securities available for sale, at fair value		230,593		219,632		10,961			5.0%
Securities held to maturity, at carrying value		26,230		27,956		(1,726	)		-6.2%
Loans, net of unearned income		1,071,456		1,033,231		38,225			3.7%
Total deposits		1,146,655		1,051,361		95,294			9.1%
Total borrowings		158,811		208,225		(49,414	)		-23.7%
Total shareholders' equity		132,943		131,200		1,743			1.3%

Investment Securities

The investment securities portfolio plays a primary role in the management of the Company’s interest rate sensitivity. In addition, the investment securities portfolio serves as a source of liquidity and is used as needed to meet collateral requirements, such as those related to secure public deposits, balances with the Reserve Bank and repurchase agreements. The investment securities portfolio consists of held to maturity and available for sale investment securities. There were no investment securities classified as “trading” at March 31, 2017 or December 31, 2016. We classify investment securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the investment securities until maturity. Management determines the appropriate classification of investment securities at the time of purchase, subject to any subsequent change in our intent and ability to hold the investment securities until maturity. If management has the intent and the Company has the ability at the time of purchase to hold the investment securities to maturity, they are classified as investment securities held to maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts using the interest method. Investment securities which the Company may not hold to maturity are classified as investment securities available for sale, as management has the intent and ability to hold such investment securities for an indefinite period of time, but not necessarily to maturity. Investment securities available for sale may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors and are carried at fair value.

Table 12: Investment Securities

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Available for Sale (at Fair Value):
SBA Pool securities	$	59,067	$	57,719	$	1,348			2.3%
Agency residential mortgage-backed securities		28,038		25,829		2,209			8.6%
Agency commercial mortgage-backed securities		27,997		27,852		145			0.5%
Agency CMO securities		58,147		51,683		6,464			12.5%
Non agency CMO securities		37		43		(6	)		-14.0%
State and political subdivisions		55,294		54,501		793			1.5%
Corporate securities		2,013		2,005		8			0.4%
Total	$	230,593	$	219,632	$	10,961			5.0%

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Held to Maturity (at Carrying Value):
Agency CMO securities	$	9,108	$	9,793	$	(685	)		-7.0%
State and political subdivisions		17,122		18,163		(1,041	)		-5.7%
Total	$	26,230	$	27,956	$	(1,726	)		-6.2%

Total investment securities were $256.8 million at March 31, 2017, reflecting an increase of $9.2 million, or 3.7%, from $247.6 million at December 31, 2016.

During the first three months of 2017, the Company increased its investments in Agency residential mortgage-backed securities and Agency CMO securities in an effort to deploy excess cash, enhance the portfolio’s overall structure and provide more consistent cash flows and reinvestment opportunities. As part of our overall asset/liability management strategy, we are targeting our investment securities portfolio to be approximately 20% of our total assets. As of March 31, 2017 and December 31, 2016, our investment securities portfolio was 17.8% and 17.7%, respectively, of total assets.

The available for sale investment securities portfolio had an unrealized (loss), net of tax benefit, of ($2.9) million at March 31, 2017 compared with an unrealized (loss), net of tax benefit, of ($3.4) million at December 31, 2016. These unrealized (losses) as of March 31, 2017 were principally due to financial market conditions for these types of investments, particularly changes in interest rates, which rose during 2016 causing bond prices to decline and are not attributable to credit deterioration. During the first three months of 2017, unrealized (losses) declined due to decreases in interest rates, which caused bond prices to increase.

Loans

The Company offers an array of lending and credit services to customers including mortgage, commercial and consumer loans. A substantial portion of the loan portfolio is represented by commercial and residential mortgage loans in our market area. The ability of our debtors to honor their contracts is dependent upon the real estate and general economic conditions in our market area. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. Total loans were $1.07 billion at March 31, 2017, an increase of approximately $38.2 million, or 3.7%, from $1.03 billion at December 31, 2016. The following table presents the composition of the Company’s loan portfolio at the dates indicated.

Table 13: Loan Portfolio

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Commercial, industrial and agricultural	$	150,469	$	148,963	$	1,506			1.0%
Real estate - one to four family residential:
Closed end first and seconds		212,758		215,462		(2,704	)		-1.3%
Home equity lines		124,192		122,506		1,686			1.4%
Total real estate - one to four family residential		336,950		337,968		(1,018	)		-0.3%
Real estate - multifamily residential		31,569		32,400		(831	)		-2.6%
Real estate - construction:
One to four family residential		18,822		16,204		2,618			16.2%
Other construction, land development and other land		104,277		92,466		11,811			12.8%
Total real estate - construction		123,099		108,670		14,429			13.3%
Real estate - farmland		11,229		11,289		(60	)		-0.5%
Real estate - non-farm, non-residential:
Owner occupied		216,597		201,284		15,313			7.6%
Non-owner occupied		146,464		139,649		6,815			4.9%
Total real estate - non-farm, non-residential		363,061		340,933		22,128			6.5%
Consumer		44,303		42,403		1,900			4.5%
Other		10,776		10,605		171			1.6%
Total loans	$	1,071,456	$	1,033,231	$	38,225			3.7%

Loans increased during the first three months of 2017 primarily due to organic loan growth and the purchase of $6.9 million in performing commercial, student and consumer loans. Closed end first and second loans decreased primarily due to weak demand in our rural markets and refinancing activity in a competitive mortgage lending market driven by the low interest rate environment. Other construction, land development and other land loans increased as the Company has renewed its focus and efforts on this loan segment. Non-farm, non-residential real estate loans increased due to the addition of a new commercial loan officer in the third quarter of 2016, as well as focused efforts of our commercial lending team in our Richmond and Tidewater markets. Loan growth in the Company’s rural markets, especially with respect to consumer loans, remains weak while competition for commercial loans, especially in the Richmond and Tidewater markets, has been and is expected to continue to be intense given the historically low rate environment and increased competition among banks and other financial institutions.

Deposits

The Company’s predominant source of funds is depository accounts. The Company’s deposit base, which is provided by individuals and businesses located within the communities served, is comprised of demand deposits, savings deposits, money market savings deposits and time deposits. The Company augments its deposit base through conservative use of brokered deposits, including through the Certificate of Deposit Account Registry Service program (“CDARS”). The Company’s balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits and the prospects of profitably utilizing the available deposits by increasing the loan or investment securities portfolios.

Total deposits were $1.15 billion as of March 31, 2017, an increase of approximately $95.3 million, or 9.1%, from $1.05 billion as of December 31, 2016. The following table presents the composition of the Company’s deposits at the dates indicated.

Table 14: Deposits

	March 31,		December 31,
(dollars in thousands)	2017		2016		Change $			Change %
Noninterest-bearing demand deposits	$	225,976	$	209,138	$	16,838			8.1%

Interest-bearing deposits:
Demand deposits		308,479		311,279		(2,800	)		-0.9%
Savings deposits		110,429		108,269		2,160			2.0%
Money market savings deposits		237,453		193,707		43,746			22.6%
Time deposits $100 and over		137,724		112,664		25,060			22.2%
Other time deposits		126,594		116,304		10,290			8.8%
Total interest-bearing deposits		920,679		842,223		78,456			9.3%
Total deposits	$	1,146,655	$	1,051,361	$	95,294			9.1%

During the first three months of 2017, the Company’s deposits increased due to organic growth that was in part driven by the Company’s marketing and advertising initiatives as well as new products and services. The increase in our noninterest-bearing demand deposits was due to organic growth and as a result of customers seeking the liquidity and safety of demand deposit accounts in light of continuing economic uncertainty in general. The increase in money market savings deposits was due to the Bank offering a promotional rate on money market savings accounts. Time deposits increased due to an increase in brokered and other time deposits obtained through a non-brokered listing service. At March 31, 2017 and December 31, 2016, the Company had $80.1 million and $57.6 million in brokered certificates of deposits, respectively. The interest rates paid on these deposits are approximately consistent with the market rates offered in our local area. Included in these brokered certificates of deposits as of March 31, 2017 and December 31, 2016 are $33.9 million and $24.7 million, respectively, in deposits under the CDARS program.

Borrowings

The Company’s ability to borrow funds through non-deposit sources provides additional flexibility in meeting the liquidity needs of customers while enhancing its cost of funds structure. Total borrowings were $158.8 million at March 31, 2017, a decrease of approximately $49.4 million, or 23.7%, from $208.2 million at December 31, 2016. Total borrowings decreased as funds from deposit growth, which outpaced loan growth in the first three months of 2017, were utilized to pay down short-term borrowings from the FHLB.

Off-Balance Sheet Arrangements

As of March 31, 2017, there have been no material changes to the off-balance sheet arrangements disclosed in the Company’s 2016 Form 10-K.

Contractual Obligations

As of March 31, 2017, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s 2016 Form 10-K.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations, including through the sale of existing assets or the acquisition of additional funds through short-term borrowings. Our liquidity is provided from cash and due from banks, interest bearing deposits with other banks, federal funds sold, repayments from loans, sales of loans, increases in deposits, lines of credit from the FHLB and three correspondent banks, sales of investments, interest and dividend payments received from investments and maturing investments. We also use other short and long-term borrowings to provide additional liquidity when available on terms favorable to the Company, including entering into repurchase agreements with customers and issuing subordinated debt and notes. Our ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets and available borrowing capacity under certain of our borrowing sources. Depending on our liquidity levels, our capital position, conditions in the capital markets and other factors, we may from time to time consider the issuance of debt, equity or other securities, or other possible capital market transactions, the proceeds of which could provide additional liquidity for operations.

As a result of our management of liquid assets and our ability to generate liquidity through liability funding, we believe that we maintain overall liquidity to satisfy our depositors’ requirements and to meet customers’ credit needs. We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit.

We monitor and plan our liquidity position for future periods. Liquidity strategies are implemented and monitored by our Asset/Liability Committee.

Cash, cash equivalents and federal funds sold totaled $22.4 million as of March 31, 2017 compared to $17.6 million as of December 31, 2016. At March 31, 2017, cash, cash equivalents, federal funds sold and unpledged investment securities available for sale were $239.2 million, or 16.5%, of total assets, compared to $206.9 million, or 14.8%, of total assets at December 31, 2016.

As disclosed in the Company’s consolidated statements of cash flows, net cash provided by operating activities was $4.2 million, net cash used in investing activities was $44.7 million and net cash provided by financing activities was $45.3 million for the three months ended March 31, 2017. Combined, this contributed to a $4.8 million increase in cash and cash equivalents for the three months ended March 31, 2017.

The Company maintains access to short-term funding sources as well, including federal funds lines of credit with three correspondent banks up to $40.0 million and the ability to borrow from the FHLB up to $419.4 million. The Company has no reason to believe these arrangements will not be renewed at maturity. Additional loans and investment securities are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

Certificates of deposit of $100,000 or more, maturing in one year or less, totaled $76.6 million at March 31, 2017. Certificates of deposit of $100,000 or more, maturing in more than one year, totaled $61.1 million at March 31, 2017.

As of March 31, 2017, and other than referenced in this Quarterly Report on Form 10-Q, the Company was not aware of any other known trends, events or risks that have or are reasonably likely to have a material impact on our liquidity. As of March 31, 2017, the Company has no material commitments or long-term debt for capital expenditures.

Capital Resources

The assessment of capital adequacy depends on such factors as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The Company regularly reviews the adequacy of the Company’s capital. The Company maintains a capital structure that it believes will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet regulatory capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weighting, and other factors.

In July 2013, the federal bank regulatory agencies adopted rules to implement the Basel III capital framework and a revised framework for calculating risk-weighted assets. The Basel III Capital Rules were effective for the Company and the Bank on January 1, 2015, and the phase-in period for the capital conservation buffer began for the Company and the Bank on January 1, 2016. For a summary of these final rules, see Part I, Item 1 under the heading “Regulation and Supervision – Capital Requirements” included in the Company’s 2016 Form 10-K.

Quantitative measures established by regulation to ensure capital adequacy require that the Bank maintain minimum amounts and ratios of total, common equity Tier 1 (or CET1) and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The capital conservation buffer requires that the Company and the Bank maintain additional CET1 above minimum capital adequacy requirements. Management believes, as of March 31, 2017, the Bank meets all minimum capital requirements to which it is subject.

As of March 31, 2017, the Bank was categorized as “well capitalized,” the highest level of capital adequacy. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, CET1 risked-based, Tier 1 risk-based, and Tier 1 leverage ratios. The Company’s and the Bank’s actual capital ratios as of March 31, 2017 and December 31, 2016 are presented under Item 1. “Financial Statements,” under the heading “Note 13. Capital Requirements” in this Quarterly Report on Form 10-Q.

Cash Dividends

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the bank. Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years, and may be further limited if the Bank does not meet the applicable capital conservation buffer. For the three months ended March 31, 2017 and 2016, no cash dividends have been paid from the Bank to the Company.

The Company’s Board of Directors determines whether to declare dividends and the amount of any dividends declared. Such determinations by the Board take into account the Company’s financial condition, results of operations and other relevant factors, including any relevant regulatory restrictions including limits that would be imposed if the Company fails to meet the capital conservation buffer.

For the three months ended March 31, 2017, the Company paid $0.03 of cash dividends on each share of the Company’s common stock and Series B Preferred Stock, as compared to paying $0.02 of cash dividends in the same period of 2016.

In July 2016 the Company reinitiated the Company’s Dividend Reinvestment and Stock Purchase Plan (“DRSPP”). The Company’s DRSPP allows registered common shareholders to automatically reinvest some or all of their common stock cash dividends in shares of the Company’s common stock, subject to the terms and conditions of the DRSPP, and provides an opportunity for investors to purchase shares of the Company’s common stock. Of the 353,473 shares reserved for issuance under the Company’s DRSPP, there were 125,595 shares available for issuance under the plan as of March 31, 2017.

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. The primary effect of inflation on the Company’s operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are significantly impacted by changes in the inflation rate, they do not necessarily change at the same time or in the same magnitude as the inflation rate. For additional information, see the Company’s 2016 Form 10-K in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Impact of Inflation and Changing Prices.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes from the quantitative and qualitative disclosures about market risk made in the Company’s 2016 Form 10-K.

Item 4. Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2017 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Company’s periodic reports.

Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There were no changes in the Company’s internal control over financial reporting during the Company’s quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company and its subsidiaries may become a party to legal proceedings, or property of the Company or its subsidiaries may become subject to legal proceedings. As of March 31, 2017 and based on information currently available, there are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Item 1A. Risk Factors

There have been no material changes in the risk factors faced by the Company from those disclosed under Part I, Item 1A. “Risk Factors” in the Company’s 2016 Form 10-K. These risk factors could materially affect our business, financial condition or future results. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

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

In January 2001, the Company announced a stock repurchase program by which management was authorized to repurchase up to 300,000 shares of the Company’s common stock. This plan was amended in 2003 and the number of shares by which management is authorized to repurchase is up to 5% of the outstanding shares of the Company’s common stock on January 1 of each year. There is no stated expiration date for the program. During the three months ended March 31, 2017, the Company did not repurchase any shares of its common stock under the program.

The following table summarizes repurchases of the Company’s common stock that occurred during the three months ended March 31, 2017.

					Total Number		Maximum Number
					of Shares		(or Approximate Dollar
	Total Number				Purchased as Part of		Value) of Shares that May
	of Shares		Average Price Paid		Publicly Announced		Yet Be Purchased Under
	Purchased		per Share		Plans or Programs		the Plans or Programs
January 1, 2017 - January 31, 2017		-	$	-		-	-
February 1, 2017 - February 28, 2017		-		-		-	-
March 1, 2017 - March 31, 2017		4,207		10.48		-	-
Total ⁽¹⁾		4,207	$	10.48		-	655,830 shares

(1) These shares were withheld from employees to satisfy tax withholding obligations arising upon the vesting of restricted shares of the Company’s common stock. Accordingly, these shares are not included in the calculation of shares that may yet be purchased under the publicly announced repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

2.1	Agreement and Plan of Reorganization, dated as of May 29, 2014, among Eastern Virginia Bankshares, Inc., EVB and Virginia Company Bank (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed May 30, 2014).
2.2	Agreement and Plan of Merger, dated as of December 13, 2016, between Southern National Bancorp of Virginia, Inc. and Eastern Virginia Bankshares, Inc. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed December 14, 2016).
2.2.1	Amendment to Agreement and Plan of Merger, dated as of March 8, 2017, by and between Southern National Bancorp of Virginia, Inc. and Eastern Virginia Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed March 9, 2017).
2.2.2	Amendment No. 2 to Agreement and Plan of Merger, dated as of April 5, 2017, by and between Southern National Bancorp of Virginia, Inc. and Eastern Virginia Bankshares, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed April 5, 2017).
3.1	Amended and Restated Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective December 29, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed March 10, 2009).
3.1.1	Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective January 6, 2009 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 13, 2009).
3.1.2	Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective June 10, 2013 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 14, 2013).
3.2	Bylaws of Eastern Virginia Bankshares, Inc., as amended June 4, 2013 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed June 14, 2013).
10.18	Base salaries for executive officers of Eastern Virginia Bankshares, Inc.*
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101	The following materials from Eastern Virginia Bankshares, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to the Interim Consolidated Financial Statements (unaudited).

*	Management contract or compensatory plan or arrangement.

SIGNATURES

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

Eastern Virginia Bankshares, Inc.

(Registrant)

Date: May 8, 2017	/s/ Joe A. Shearin
	Joe A. Shearin
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: May 8, 2017	/s/ J. Adam Sothen
	J. Adam Sothen
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit 10.18

Eastern Virginia Bankshares, Inc.

Base Salaries for Executive Officers

As of March 1, 2017

The current base salaries for the executive officers of Eastern Virginia Bankshares, Inc. (the “Company”) are as follows:

Joe A. Shearin President and Chief Executive Officer of the Company and EVB			$‎ ‎424,200

J. Adam Sothen Chief Financial Officer of the Company and Executive Vice President and Chief Financial Officer of EVB			$‎193,785

James S. Thomas Executive Vice President and Chief Credit Officer of EVB			$‎177,353

Douglas R. Taylor Executive Vice President and Chief Risk Officer of EVB			$‎156,827

Ann-Cabell Williams Executive Vice President and Chief Channel Distribution Officer of EVB			$‎156,827

Bruce T. Brockwell Executive Vice President and Chief Banking Officer of EVB			$‎167,592

Mark C. Hanna Executive Vice President and Regional Executive of EVB			$‎234,090

Dianna B. Emery Executive Vice President and Chief Operations Officer of EVB			$‎156,097

Exhibit 31.1

CERTIFICATION

I, Joe A. Shearin, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Eastern Virginia Bankshares, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2017

/s/ Joe A. Shearin

Joe A. Shearin

President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, J. Adam Sothen, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Eastern Virginia Bankshares, Inc.;

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2017

/s/ J. Adam Sothen

J. Adam Sothen

Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) I, Joe A. Shearin, as the President and Chief Executive Officer of Eastern Virginia Bankshares, Inc., certify that, to the best of my knowledge and belief, the Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2017, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Eastern Virginia Bankshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.

Date: May 8, 2017	/s/ Joe A. Shearin
	Joe A. Shearin
	President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) I, J. Adam Sothen, as the Executive Vice President and Chief Financial Officer of Eastern Virginia Bankshares, Inc., certify that, to the best of my knowledge and belief, the Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2017, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Eastern Virginia Bankshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and shall not be relied upon for any other purpose. The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.

Date: May 8, 2017	/s/ J. Adam Sothen
	J. Adam Sothen
	Executive Vice President and Chief Financial Officer