As filed with the Securities and Exchange Commission on August 9, 2017

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017


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

For the transition period from ____________ to ____________.

Commission File Number: 001-35768



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

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

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

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

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

Yes x No ¨

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

Yes x No ¨

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

Large accelerated filer ¨ Accelerated filer x

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

Emerging growth company x

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

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

Yes ¨ No x

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As of August 1, 2017, the registrant had outstanding 12,508,498 shares of voting common stock and 572,835 shares of non-voting common stock.

Table of Contents

Table of Contents to Q2 2017 Form 10-Q



	Glossary of Acronyms	3
PART I		4
Item 1.	Consolidated Financial Statements	4
	Consolidated Balance Sheets	4
	Consolidated Statements of Income	5
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Shareholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to the Consolidated Financial Statements	9
	1. Organization & Significant Accounting Policies	9
	2. Acquisition Activities	15
	3. Cash and Cash Equivalents	16
	4. Investment Securities	16
	5. Loans Held For Investment	18
	6. Allowance For Loan Losses	25
	7. Other Real Estate Owned	29
	8. Goodwill and Identifiable Intangible Assets	29
	9. Deposits	30
	10. Other Borrowings	31
	11. Federal Home Loan Bank Advances	31
	12. Long-Term Borrowings	32
	13. Shareholder’s Equity	33
	14. Commitments and Contingencies	34
	15. Related Party Transactions	36
	16. Capital Requirements	36
	17. Share Based Compensation	38
	18. Earnings Per Share	39
	19. Fair Value Disclosures	40
	20. Segment Reporting	45
	21. Subsequent Events	48
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
	Cautionary Note Regarding Forward-Looking Statements	49
	Critical Accounting Policies and Estimates	49
	Overview	51
	Results of Operations	52
	Financial Condition	58
	Capital Resources	67
	Liquidity	68
	Concentrations	69
	Off-Balance Sheet Arrangements	69
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	69
Item 4.	Controls and Procedures	71
PART II		72
Item 1.	Legal Proceedings	72
Item 1A.	Risk Factors	72
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Mine Safety Disclosures	72
Item 5.	Other Information	72
Item 6.	Exhibits, Financial Statement Schedules	72
	Signatures	74

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Glossary of Acronyms



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

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PART I

Item 1. Consolidated Financial Statements

WashingtonFirst Bankshares, Inc.

Consolidated Balance Sheets

(unaudited)



	June 30, 2017			December 31, 2016
	($ in thousands)
Assets:
Cash and cash equivalents:
Cash and due from bank balances	$	4,049		$	3,614
Federal funds sold	25,901			93,659
Interest bearing deposits	100			100
Cash and cash equivalents	30,050			97,373
Investment securities, available-for-sale, at fair value	309,107			280,204
Restricted stock, at cost	10,182			11,726
Loans held for sale, at lower of cost or fair value	48,399			32,109
Loans held for investment:
Loans held for investment, at amortized cost	1,638,751			1,534,543
Allowance for loan losses	(14,074		)	(13,582		)
Total loans held for investment, net of allowance	1,624,677			1,520,961
Premises and equipment, net	6,396			6,955
Goodwill	11,420			11,420
Identifiable intangibles	1,484			1,619
Deferred tax asset, net	7,525			8,944
Accrued interest receivable	5,778			5,243
Other real estate owned	725			1,428
Bank-owned life insurance	16,572			13,880
Other assets	10,862			11,049
Total Assets	$	2,083,177		$	2,002,911
Liabilities and Shareholders' Equity:
Liabilities:
Non-interest bearing deposits	$	515,861		$	381,887
Interest bearing deposits	1,228,830			1,140,854
Total deposits	1,744,691			1,522,741
Other borrowings	15,275			5,852
FHLB advances	73,103			232,097
Long-term borrowings	32,757			32,638
Accrued interest payable	1,390			947
Other liabilities	12,383			15,976
Total Liabilities	1,879,599			1,810,251
Commitments and contingent liabilities	—			—
Shareholders' Equity:
Common stock:
Common Stock Voting, $0.01 par value, 50,000,000 shares authorized, 12,334,863 and 10,987,652 shares issued and outstanding, respectively	123			109
Common Stock Non-Voting, $0.01 par value, 10,000,000 shares authorized; 742,278 and 1,908,733 shares issued and outstanding, respectively	7			19
Additional paid-in capital	179,915			177,924
Accumulated earnings	25,140			17,187
Accumulated other comprehensive loss	(1,607		)	(2,579		)
Total Shareholders' Equity	203,578			192,660
Total Liabilities and Shareholders' Equity	$	2,083,177		$	2,002,911

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Income

(unaudited)



	For the Three Months Ended				For the Six Months Ended
	June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
	($ in thousands)
Interest and dividend income:
Interest and fees on loans	$	19,872	$	16,836	$	38,651	$	33,227
Interest and dividends on investments:
Taxable	1,354		1,178		2,619		2,170
Tax-exempt	61		19		126		41
Dividends on other equity securities	161		81		357		152
Interest on Federal funds sold and other short-term investments	81		68		155		136
Total interest and dividend income	21,529		18,182		41,908		35,726
Interest expense:
Interest on deposits	2,902		2,200		5,319		4,195
Interest on borrowings	1,052		981		2,277		1,977
Total interest expense	3,954		3,181		7,596		6,172
Net interest income	17,575		15,001		34,312		29,554
Provision for loan losses	925		980		1,940		1,605
Net interest income after provision for loan losses	16,650		14,021		32,372		27,949
Non-interest income:
Service charges on deposit accounts	40		81		88		160
Earnings on bank-owned life insurance	107		90		192		180
Gain on sale of loans, net	4,601		5,287		7,250		8,029
Mortgage banking activities	925		1,358		1,869		2,557
Wealth management income	519		443		1,019		871
Gain on sale of available-for-sale investment securities, net	—		1,077		—		1,152
Gain on debt extinguishment	—		—		301		—
Other operating income	372		154		678		322
Total non-interest income	6,564		8,490		11,397		13,271
Non-interest expense:
Compensation and employee benefits	7,134		7,251		14,568		13,949
Mortgage commission	2,140		2,102		3,410		3,208
Premises and equipment	1,849		1,863		3,563		3,680
Data processing	1,164		1,121		2,170		2,125
Professional fees	194		350		465		669
Merger expenses	532		—		532		—
Mortgage loan processing expenses	318		354		517		550
Debt extinguishment	—		1,044		—		1,044
Other operating expenses	1,737		1,450		3,539		2,811
Total non-interest expense	15,068		15,535		28,764		28,036
Income before provision for income taxes	8,146		6,976		15,005		13,184
Provision for income taxes	2,809		2,578		5,232		4,862
Net income	$	5,337	$	4,398	$	9,773	$	8,322

Earnings per common share: ⁽¹⁾
Basic earnings per common share	$	0.41	$	0.34	$	0.75	$	0.65
Diluted earnings per common share	$	0.40	$	0.34	$	0.74	$	0.64
⁽¹⁾ Prior periods adjusted for 5% stock dividend issued in December 2016

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Comprehensive Income

(unaudited)



	For the Three Months Ended						For the Six Months Ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
	($ in thousands)
Net income	$	5,337		$	4,398		$	9,773		$	8,322
Other comprehensive income:
Unrealized gain/(loss) on hedge:
Unrealized holding gain/(loss)	—			—			—			—
Reclassification adjustment for realized gains	—			—			—			(66		)
Tax effect	—			—			—			—
Unrealized gain on hedge, net of tax	—			—			—			(66		)
Unrealized gain/(loss) on securities available for sale:
Unrealized holding gain arising during the period	922			1,317			1,543			4,464
Reclassification adjustment for realized gains	—			(1,077		)	—			(1,152		)
Tax effect	(341		)	(88		)	(571		)	(1,214		)
Unrealized gain on securities available for sale, net of tax	581			152			972			2,098
Total other comprehensive income	581			152			972			2,032
Comprehensive income	$	5,918		$	4,550		$	10,745		$	10,354

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Changes in Shareholders' Equity

(unaudited)



	For the Six Months Ended
	June 30, 2017					June 30, 2016
	Shares		Amount			Shares		Amount
	($ in thousands, except share data)
Common stock:
Balance, beginning of period	12,896,385		$	128		12,195,823		$	121
Exercise of stock options	143,249		2			53,421		1
Forfeiture of restricted stock award	(3,204	)	—			(1,586	)	—
Exercise of warrants	40,711		—			—		—
Balance, end of period	13,077,141		130			12,247,658		122
Additional paid-in capital - common:
Balance, beginning of period			177,924					160,861
Exercise of stock options			1,657					546
Stock compensation expense			334					272
Balance, end of period			179,915					161,679
Accumulated earnings:
Balance, beginning of period			17,187					17,740
Net income			9,773					8,322
Cash dividends declared			(1,820		)			(1,468		)
Balance, end of period			25,140					24,594
Accumulated other comprehensive income/(loss):
Balance, beginning of period			(2,579		)			(127		)
Other comprehensive income			972					2,032
Balance, end of period			(1,607		)			1,905
Total shareholders' equity			$	203,578				$	188,300

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Consolidated Statements of Cash Flows

(unaudited)



	For the Six Months Ended
	June 30, 2017			June 30, 2016
	($ in thousands)
Cash flows from operating activities:
Net income	$	9,773		$	8,322
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	934			1,011
Amortization of deferred loan origination fees and costs	(271		)	(497		)
Net amortization of purchase accounting marks	(238		)	(2,651		)
Write-down of other real estate owned	165			97
Gain on sale of investment securities available-for-sale	—			(1,152		)
Loss on disposal of fixed assets	(12		)	(32		)
Provision for loan losses	1,940			1,605
Earnings on bank-owned life insurance	(192		)	(180		)
Deferred income taxes	491			—
Tax effect on stock options	357			—
Net amortization on investment securities available-for-sale	921			738
Stock based compensation	334			272
Gain on debt extinguishment	(301		)	—
Gain on sale of loans	(7,250		)	(8,029		)
Originations of loans held-for-sale	(314,345		)	(339,563		)
Proceeds from sales of loans held-for-sale	305,620			330,664
Net change in:
Accrued interest receivable	(535		)	(44		)
Other assets	233			(3,692		)
Accrued interest payable	443			57
Other liabilities	(3,647		)	159
Net cash used in operating activities	(5,580		)	(12,915		)
Cash flows from investing activities:
Purchase of investment securities available-for-sale	(44,493		)	(101,389		)
Proceeds from repayment of investment securities available-for-sale	16,212			16,138
Proceeds from sale of investment securities available-for-sale	—			48,415
Net increase in loans held-for-investment	(105,259		)	(84,926		)
Proceeds from sale of real estate owned	538			—
Purchase of bank-owned life insurance	(2,500		)	—
Net decrease in restricted stock	1,544			1,647
Purchases of premises and equipment, net	(315		)	(1,050		)
Net cash used in investing activities	(134,273		)	(121,165		)
Cash flows from financing activities:
Net increase in deposits	221,907			215,596
Proceeds from FHLB advances	37,500			23,000
Repayments of FHLB advances	(196,193		)	(68,990		)
Net increase/(decrease) in other borrowings	9,423			2,079
Proceeds from exercise of stock options	1,659			547
Cash dividends paid	(1,766		)	(1,464		)
Net cash provided by financing activities	72,530			170,768
Net (decrease) increase in cash and cash equivalents	(67,323		)	36,688
Cash and cash equivalents at beginning of period	97,373			62,753
Cash and cash equivalents at end of period	$	30,050		$	99,441

See accompanying notes to unaudited consolidated financial statements.

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WashingtonFirst Bankshares, Inc.

Notes to the Consolidated Financial Statements

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

1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

Basis of Presentation

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

Principles of Consolidation

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

Assets Under Management

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

Use of Estimates

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

Cash and Cash Equivalents and Statements of Cash Flows

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



Table 1: Certain Cash and Non-Cash Transactions
	For the Six Months Ended
	June 30, 2017		June 30, 2016
	($ in thousands)
Cash paid during the period for:
Interest paid	$	7,153	$	6,115
Income taxes paid	3,293		2,768
Non-cash activity:
Loans converted into other real estate owned	—		2,256
Reclassifications from goodwill to other liabilities	—		(11		)
Reclassifications from LHFS to LHFI	315		—

Investment Securities

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

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

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

Loans Held for Sale

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

Loans Held for Investment

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

Allowance for Loan Losses

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

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

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allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

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

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

Premises and Equipment

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

Other Real Estate Owned

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

Leases

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

Marketing & Advertising

Marketing and advertising costs are generally expensed as incurred.

Income Taxes

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

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

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

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

Valuation of Long-Lived Assets

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

Transfer of Financial Assets

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

Derivative Financial Instruments

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

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Income. The period of time between issuance of a loan commitment to the customer and closing and sale of the loan to an investor generally ranges from 30 to 90 days under current market conditions. The gross gains on loan sales are recognized based on new loan commitments with adjustment for price and pair-off activity. Commission expenses on loans held for sale are recognized based on loans closed.

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

Purchased Credit Impaired Loans

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

Recent Accounting Pronouncements

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

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

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

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

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that time. Further, to date, no guidance has been issued by either the Company’s or the Bank’s primary regulators with respect to how the impact of the amended standard is to be treated for regulatory capital purposes.

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

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

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

FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts. Further, the update requires the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt. The new guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance must be applied retrospectively. Adoption of this pronouncement by the Company resulted in an entry amounting to $335 thousand being made to reclass debt issuance costs from other assets to long-term borrowings in 2016.

FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update creates a new topic in ASC Topic 606. In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, financing arrangements, financial instruments,

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guarantees other than product or service warranties, and non-monetary exchanges between entities in the same line of business to facilitate sales to customers. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company does not expect the adoption of this pronouncement to have a significant impact on its Consolidated Financial Statements.

2. ACQUISITION ACTIVITIES

On May 16, 2017, the Company and Sandy Spring Bancorp, Inc. (NASDAQ: SASR) issued a joint press release announcing that Sandy Spring and the Company have entered into a definitive agreement and plan of merger pursuant to which WashingtonFirst will merge with and into Sandy Spring.

On July 31, 2015, the Company completed its acquisition of 1^stPortfolio Holding Corporation. 1^st Portfolio Holding Corporation’s wholly owned subsidiary, 1^stPortfolio Wealth Advisors became a wholly owned subsidiary of the Company and wholly owned subsidiary 1^stPortfolio Lending Corporation (now WashingtonFirst Mortgage Corporation) became a wholly owned subsidiary of the Bank. Under the terms of the 1^stPortfolio Agreement, accredited shareholders of 1^st Portfolio Holding Corporation received 916,382 shares of WFBI common stock valued at $17.05 per share.



Table 2: Goodwill on 1^st Portfolio Acquisition
	Amount
	($ in thousands)
Consideration paid:
Common shares issued (916,382 shares)	$	15,625
Cash paid to shareholders in lieu of fractional shares	1
Fair value of options	149
	15,775
Assets acquired:
Cash and cash equivalents	5,732
Loans held for sale	32,912
Premises and equipment	1,164
Customer list intangible	1,447
Other assets	1,371
Total assets	42,626
Liabilities assumed:
Borrowings	27,759
Other liabilities	4,272
Total liabilities	32,031
Net assets acquired	10,595
Goodwill	$	5,180

For income tax purposes, the acquired assets and assumed liabilities were recorded at their existing basis with no resulting goodwill. Goodwill recognized in the consolidated financial statements at the time of closing of the 1^st Portfolio acquisition was allocated between the Mortgage Company and the Wealth Advisors at $3.6 million and $1.6 million respectively. The customer list intangible was attributed to the Wealth Advisors and is being amortized straight line over 15 years.

In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. The most significant category of assets for which this procedure was used was the acquired loans. The excess of expected cash flows above the fair value of the performing portion of loans is being accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20. Those loans for which specific credit-related deterioration since origination was identified were recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on expectations about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

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3. CASH AND CASH EQUIVALENTS

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

4. INVESTMENT SECURITIES

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



Table 4.1: Available-for-Sale Investment Securities Summary
	As of June 30, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
	($ in thousands)
U.S. Treasuries	$	8,073	$	14	$	(6	)	$	8,081
U.S. Government agencies	106,056		111		(592		)	105,575
Mortgage-backed securities	95,048		268		(633		)	94,683
Collateralized mortgage obligations	77,170		41		(1,236		)	75,975
Taxable state and municipal securities	10,646		33		(300		)	10,379
Tax-exempt state and municipal securities	14,639		55		(280		)	14,414
Total available-for-sale investment securities	$	311,632	$	522	$	(3,047	)	$	309,107



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

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes amounted to $182.6 million and $132.9 million as of June 30, 2017, and December 31, 2016, respectively.

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The Bank did not recognize in earnings any other-than-temporary impairment losses on available-for-sale investment securities during the three and six months ended June 30, 2017 and June 30, 2016. During the three and six months ended June 30, 2017, the Bank received no proceeds from the sale of securities from its available-for-sale investment portfolio resulting in no gross realized gains and no gross realized losses, compared to proceeds of $30.7 million resulting in gross realized gains of $1.1 million and no gross realized losses during the three months ended June 30, 2016. During the six months ended June 30, 2016, the Bank received proceeds of $48.4 million resulting in gross realized gains of $1.2 million and gross realized losses of $26.0 thousand.



Table 4.2: Continuous Gross Unrealized Losses by Length of Time
	As of June 30, 2017
	For less than 12 months					For more than 12 months
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	($ in thousands)
U.S. Treasuries	$	2,048	$	(6	)	$	—	$	—
U.S. Government agencies	72,388		(592		)	—		—
Mortgage-backed securities	59,096		(596		)	1,257		(37		)
Collateralized mortgage obligations	64,541		(1,087		)	6,820		(149		)
Taxable state and municipal securities	6,145		(244		)	894		(56		)
Tax-exempt state and municipal securities	11,146		(280		)	—		—
Total	$	215,364	$	(2,805	)	$	8,971	$	(242	)



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

As of June 30, 2017, there were $9.0 million, or seven positions, of individual securities that had been in a continuous loss position for more than 12 months with a total unrealized loss of $242.0 thousand. As of December 31, 2016, there were $5.1 million, or four positions, of individual securities that had been in a continuous loss position for more than 12 months with a total unrealized loss of $184.0 thousand. Management has determined these securities are temporarily impaired at June 30, 2017 for the following reasons:

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

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

Tax-exempt state and municipal securities. The unrealized losses in the category were generally the result of changes in market interest rates and interest spread relationships since original purchases. The contractual terms of the investments do

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not permit the issuer to settle the securities at a price less than the cost basis of each investment. The Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be at maturity, therefore the Company does not consider these investments to be other than temporarily impaired.



Table 4.3: Contractual Maturity of Available-For-Sale Securities
	As of June 30, 2017
	Amortized Cost		Fair Value
	($ in thousands)
Due within one year	$	6,135	$	6,139
Due after one year through five years	110,805		110,578
Due after five years through ten years	53,409		52,367
Due after ten years	141,283		140,023
Total	$	311,632	$	309,107

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

5. LOANS HELD FOR INVESTMENT

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



Table 5.1: Composition of Loans Held for Investment
	June 30, 2017		December 31, 2016
	($ in thousands)
Construction and development	$	285,277	$	288,193
Commercial real estate - owner occupied	264,358		231,414
Commercial real estate - non-owner occupied	607,206		557,846
Residential real estate	307,575		287,250
Real estate loans	1,464,416		1,364,703
Commercial and industrial	170,260		165,172
Consumer	4,075		4,668
Total loans held for investment	1,638,751		1,534,543
Less: allowance for loan losses	14,074		13,582
Total loans held for investment, net of allowance	$	1,624,677	$	1,520,961

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

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Table 5.2: Loans Held for Investment Aging Analysis
	As of June 30, 2017
	Current Loans ⁽¹⁾		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due (and accruing)		Non- Accrual		Total Past Due		Total Loans
	($ in thousands)
Construction and development	$	285,277	$	—	$	—	$	—	$	—	$	—	$	285,277
Commercial real estate - owner occupied	261,644		—		277		—		2,437		2,714		264,358
Commercial real estate - non-owner occupied	592,118		2,129		2,519		10,440		—		15,088		607,206
Residential real estate	305,266		1,121		129		—		1,059		2,309		307,575
Commercial and industrial	166,364		732		—		2,617		547		3,896		170,260
Consumer	4,075		—		—		—		—		—		4,075
Balance at end of period	$	1,614,744	$	3,982	$	2,925	$	13,057	$	4,043	$	24,007	$	1,638,751



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

As of June 30, 2017, $910.5 million of loans were pledged as collateral for FHLB advances, compared to $732.7 million as of December 31, 2016. Loans pledged include qualifying home equity lines of credit, commercial real estate loans, multifamily real estate loans, and residential real estate secured loans. As of June 30, 2017, and December 31, 2016, there were $1.6 million and $1.5 million of net unamortized deferred fees, respectively.

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

The characteristics of these ratings are as follows:

•

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

•

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

•

Substandard loans (risk rating 8) are considered to have specific and well-defined weaknesses that jeopardize the repayment terms as originally structured in the Company’s initial credit extension. The payment history for the loan may have been inconsistent and the expected or projected primary repayment source may be inadequate to service the loan, or the estimated net liquidation value of the collateral pledged and/or ability of the personal guarantors to pay the loan may not adequately protect the Company. For loans in this category, there is a distinct possibility that the Company will sustain some loss if the deficiencies associated with the loan are not corrected in the near term. A substandard loan would not automatically meet the

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Company’s definition of an impaired loan unless the loan is significantly past due and the borrower’s performance and financial condition provide evidence that it is probable the Company will be unable to collect all amounts due. Substandard non-accrual loans have the same characteristics as substandard loans. However these loans have a non-accrual classification generally because the borrower’s principal or interest payments are 90 days or more past due.


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


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

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



Table 5.3: Risk Categories of Loans Held for Investment
	As of June 30, 2017
Internal risk rating grades	Pass		Pass Watch		Special Mention		Substandard		Doubtful		Total
Risk rating number	1 to 5		6		7		8		9
	($ in thousands)
Construction and development	$	284,076	$	1,201	$	—	$	—	$	—	$	285,277
Commercial real estate - owner occupied	258,274		2,633		—		3,451		—		264,358
Commercial real estate - non-owner occupied	588,834		13,724		2,129		2,519		—		607,206
Residential real estate	300,388		5,549		227		1,396		15		307,575
Commercial and industrial	161,606		6,390		957		1,307		—		170,260
Consumer	4,075		—		—		—		—		4,075
Balance at end of period	$	1,597,253	$	29,497	$	3,313	$	8,673	$	15	$	1,638,751



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

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

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Table 5.4: Non-Accrual Loans
	June 30, 2017		December 31, 2016
	($ in thousands)
Construction and development	$	—	$	—
Commercial real estate - owner occupied	2,437		2,565
Commercial real estate - non-owner occupied	—		—
Residential real estate	1,059		1,585
Commercial and industrial	547		1,583
Consumer	—		13
Total non-accrual loans	$	4,043	$	5,746

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



Table 5.5: Changes in Troubled Debt Restructurings
	Construction and Development		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Residential Real Estate			Commercial and Industrial			Consumer		Total
	June 30, 2017
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	—	$	—	$	—	$	972		$	454		$	—	$	1,426
New TDRs	—		—		—		70			—			—		70
Increases to existing TDRs	—		—		—		1			—			—		1
Charge-offs post modification	—		—		—		—			(165		)	—		(165		)
Sales, principal payments, or other decreases	—		—		—		(3		)	(2		)	—		(5		)
Ending Balance	$	—	$	—	$	—	$	1,040		$	287		$	—	$	1,327

For the Six Months Ended:
Beginning Balance	$	—	$	—	$	—	$	1,073		$	456		$	—	$	1,529
New TDRs	—		—		—		70			—			—		70
Increases to existing TDRs	—		—		—		1			—			—		1
Charge-offs post modification	—		—		—		—			(165		)	—		(165		)
Sales, principal payments, or other decreases	—		—		—		(104		)	(4		)	—		(108		)
Ending Balance	$	—	$	—	$	—	$	1,040		$	287		$	—	$	1,327

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	Construction and Development			Commercial real estate - owner occupied		Commercial real estate - non-owner occupied			Residential Real Estate			Commercial and Industrial			Consumer		Total
	June 30, 2016
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	—		$	—	$	—		$	2,870		$	1,302		$	353	$	4,525
New TDRs	—			—		—			—			28			—		28
Increases to existing TDRs	—			—		—			1			—			—		1
Charge-offs post modification	—			—		—			—			(576		)	—		(576		)
Sales, principal payments, or other decreases	—			—		—			(5		)	(357		)	—		(362		)
Ending Balance	$	—		$	—	$	—		$	2,866		$	397		$	353	$	3,616

For the Six Months Ended:
Beginning Balance	29			—		2,029			1,967			1,949			353		6,327
New TDRs	—			—		—			1,788			28			—		1,816
Increases to existing TDRs	—			—		—			4			—			—		4
Charge-offs post modification	(29		)	—		(544		)	(11		)	(576		)	—		(1,160		)
Sales, principal payments, or other decreases	—			—		(1,485		)	(882		)	(1,004		)	—		(3,371		)
Ending Balance	$	—		$	—	$	—		$	2,866		$	397		$	353	$	3,616



Table 5.6: New Troubled Debt Restructurings Details
	For the Six Months Ended
	June 30, 2017					June 30, 2016
	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
	($ in thousands)
Construction and development	—	$	—	$	—	—	$	—	$	—
Commercial real estate - owner occupied	—	—		—		—	—		—
Commercial real estate - non-owner occupied	—	—		—		—	—		—
Residential real estate	1	84		70		1	1,788		1,788
Commercial and industrial	—	—		—		1	28		28
Consumer	—	—		—		—	—		—
Total loans	1	$	84	$	70	2	$	1,816	$	1,816

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

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Table 5.7: Troubled Debt Restructurings with Modification and Default Date within 12 Months
	As of June 30,
	2017					2016
	Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans	Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
	($ in thousands)
Construction and development	—	$	—	$	—	—	$	—	$	—
Commercial real estate - owner occupied	—	—		—		—	—		—
Commercial real estate - non-owner occupied	—	—		—		—	—		—
Residential real estate	1	84		70		—	—		—
Commercial and industrial	—	—		—		3	808		643
Consumer	—	—		—		—	—		—
Total loans	1	$	84	$	70	3	$	808	$	643

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



Table 5.8: Troubled Debt Restructuring by Type of Concession
	TDRs Entered into During the Three Months Ended June 30,
	2017			2016
	Number of Loans	Post-Modification Outstanding Recorded Balance		Number of Loans	Post-Modification Outstanding Recorded Balance
	($ in thousands)
Extended under forbearance	—	$	—	1	$	28
Interest rate modification	1	70		—	—
Maturity or payment extension	—	—		—	—
Total loans	1	$	70	1	$	28



	TDRs Entered into During the Six Months Ended June 30,
	2017			2016
	Number of Loans	Post-Modification Outstanding Recorded Balance		Number of Loans	Post-Modification Outstanding Recorded Balance
	($ in thousands)
Extended under forbearance	—	$	—	2	$	1,816
Interest rate modification	1	70		—	—
Maturity or payment extension	—	—		—	—
Total loans	1	$	70	2	$	1,816

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The outstanding balances in Table 5.1 include acquired impaired loans with a recorded investment of $2.5 million or 0.2% of total loans as of June 30, 2017, compared to $2.7 million or 0.2% of total loans as of December 31, 2016. The contractual principal of these acquired loans was $2.6 million as of June 30, 2017 compared to $2.9 million as of December 31, 2016. For these loans, the allowance for loan losses decreased by $20.9 thousand and $39.9 thousand during the three and six months ended June 30, 2017 and $9.2 thousand and $199.5 thousand during the three and six months ended June 30, 2016, respectively. The balances do not include future accretable net interest on the acquired impaired loans.



Table 5.9: Accretable Yield of Purchased Credit Impaired Loans
	For the Three Months Ended						For the Six Months Ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
	($ in thousands)
Accretable yield at beginning of period	$	790		$	1,010		$	844		$	1,208
Accretion (including cash recoveries)	(56		)	(48		)	(110		)	(132		)
Net reclassifications to accretable from non-accretable	(14		)	206			(14		)	245
Disposals (including maturities, foreclosures, and charge-offs)	(20		)	—			(20		)	(153		)
Accretable yield at end of period	$	700		$	1,168		$	700		$	1,168



Table 5.10: Non-Performing Assets
	June 30, 2017		December 31, 2016
	($ in thousands)
Non-accrual loans	$	4,043	$	5,746
90+ days still accruing	13,057		2
Troubled debt restructurings still accruing	1,252		1,361
Other real estate owned	725		1,428
Total non-performing assets	$	19,077	$	8,537

If interest had been earned on the non-accrual loans, interest income on these loans would have been approximately $80.1 thousand and $165.7 thousand for the three and six months ended June 30, 2017, and $143.4 thousand and $298.0 thousand for the same periods 2016. The Company has no remaining commitment to fund non-performing loans. As of June 30, 2017, the Company did not have any residential real estate loans in the process of foreclosure.

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6. ALLOWANCE FOR LOAN LOSSES



Table 6.1: Changes in Allowance for Loan Losses
	June 30, 2017
	Construction and Development			Commercial Real Estate - Owner Occupied		Commercial Real Estate - Non-Owner Occupied		Residential Real Estate			Commercial and Industrial			Consumer			Total
	($ in thousands)
For the Three Months Ended:
Beginning Balance	$	2,810		$	2,433	$	5,506	$	1,836		$	1,891		$	29		$	14,505
Provision for loan losses	177			50		37		(74		)	578			157			925
Charge-offs	(13		)	—		—		—			(1,185		)	(177		)	(1,375		)
Recoveries	—			—		—		11			—			8			19
Ending Balance	$	2,974		$	2,483	$	5,543	$	1,773		$	1,284		$	17		$	14,074

For the Six Months Ended:
Beginning Balance	$	2,954		$	2,129	$	4,834	$	1,768		$	1,869		$	28		$	13,582
Provision for loan losses	27			341		709		88			635			140			1,940
Charge-offs	(13		)	—		—		(170		)	(1,301		)	(179		)	(1,663		)
Recoveries	6			13		—		87			81			28			215
Ending Balance	$	2,974		$	2,483	$	5,543	$	1,773		$	1,284		$	17		$	14,074



	June 30, 2016
	Construction and Development			Commercial Real Estate - Owner Occupied			Commercial Real Estate - Non-Owner Occupied			Residential Real Estate			Commercial and Industrial			Consumer			Total
	($ in thousands)
For the Six Months Ended:
Beginning Balance	$	2,413		$	2,505		$	3,718		$	1,464		$	2,090		$	139		$	12,329
Provision for loan losses	160			62			143			120			374			121			980
Charge-offs	—			(34		)	(3		)	(40		)	(652		)	—			(729		)
Recoveries	—			—			—			8			6			1			15
Ending Balance	$	2,573		$	2,533		$	3,858		$	1,552		$	1,818		$	261		$	12,595

For the Six Months Ended:
Beginning Balance	$	2,321		$	2,576		$	3,549		$	1,532		$	2,172		$	139		$	12,289
Provision for loan losses	281			(9		)	855			35			322			121			1,605
Charge-offs	(31		)	(34		)	(546		)	(48		)	(690		)	(1		)	(1,350		)
Recoveries	2			—			—			33			14			2			51
Ending Balance	$	2,573		$	2,533		$	3,858		$	1,552		$	1,818		$	261		$	12,595

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WashingtonFirst Bankshares, Inc. 10-Q