~~United~~UNITED ~~States Securities and Exchange Commission~~STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, ~~2016~~2017

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

For the transition period from _____to _____

Commission file number 0-23090

BAY BANCORP, INC.

(Exact name of registrant as specified in its charter)

MARYLAND		52-1660951
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

7151 Columbia Gateway Drive, Suite A, Columbia, Maryland 21046

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (410) 312-5400

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:		Name of Each Exchange on Which Registered:
Common Stock, par value $1.00 per share		NASDAQ Capital Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑

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 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 ☑ 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 ☑ No ☐

Indicate by check mark if disclosures of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. (See definition of “large accelerated filer”, “~~large~~ accelerated filer”, ~~and~~ “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act). ~~(check one): Large accelerated filer ☐Accelerated filer ☐ Non-accelerated filer ☐Smaller reporting company ☑~~

(Check one):Large accelerated filer ☐Accelerated filer ☐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 Act). Yes ☐ No ☑

The aggregate market value of the registrant’s outstanding voting and non-voting common equity held by non-affiliates was $3753,~~695~~625,~~810~~336, computed by reference to the closing sales price of such equity asat of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, ~~2016~~2017). For the purposes of this calculation, directors, executive officers, and the controlling investor are considered affiliates.

At March 2026, ~~2017~~2018, the number of shares outstanding of the registrant’s common stock was 10,~~543~~717,~~792~~889.

~~Documents~~DOCUMENTS ~~Incorporated~~INCORPORATED byBY ~~Reference~~REFERENCE

Portions of the registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-KNone.

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BAY BANCORP, INC.

TABLE OF CONTENTS

PART I.		PAGE
Item 1.	Business	4
Item 1A.	Risk Factors	22
Item 1B.	Unresolved Staff Comments	3236
Item 2.	Properties	3337
Item 3.	Legal Proceedings	3437
Item 4.	Mine Safety Disclosures	3438
PART II.
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	3438
Item 6.	Selected Financial Data	3640
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3741
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5862
Item 8.	Financial Statements and Supplementary Data	5862
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	~~113~~117
Item 9A.	Controls and Procedures	~~113~~117
Item 9B.	Other Information	~~116~~120
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	~~116~~120
Item 11.	Executive Compensation	~~116~~124
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~116~~131
Item 13.	Certain Relationships and Related Transactions and Director Independence	~~117~~133
Item 14.	Principal Accountant Fees and Services	~~117~~134
PART IV.
Item 15.	Exhibits and Financial Statement Schedules	~~117~~135
SIGNATURES		~~118~~138

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PART I

As used in this Annual Report, the term “the Company” refers to Bay Bancorp, Inc. and, unless the context clearly requires otherwise, the terms “we,” “us,” and “our,” refer to Bay Bancorp, Inc. and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains 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, as amended (the “Exchange Act”). Such statements include projections, predictions, expectations or statements as to beliefs or future events or results, or refer to other matters that are not purely statements of historical facts. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking statements contained in this ~~annual~~Annual ~~report~~Report are based on various factors and were derived using numerous assumptions. In some cases, you can identify these forward-looking statements by words like “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “intend”, “believe”, “estimate”, “predict”, “potential”, or “continue” or the negative of those words and other comparable words. You should be aware that those statements ~~are not guarantees of future performance and~~ reflect only our predictions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. ~~You~~ ~~should bear this in mind when reading this Annual Report and not place undue reliance on these forward-looking statements.~~ Further, factors or events that could cause our actual results to differ from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Factors that might cause such differences include, but are not limited to:

changes in our plans and strategies and the results thereof;

the impact of acquisitions and other strategic transactions;

unexpected changes in the housing market, business markets, and/or general economic conditions in our market area, or a slower-than-anticipated economic recovery, which might lead to increased or decreased demand for loans, deposits and other products and services;

unexpected changes in market interest rates or monetary policy;

the impact of new laws, regulations and governmental policies and guidelines that might require changes to our business model;

changes in laws, regulations and governmental policies and guidelines that might impact our ability to collect on outstanding loans or otherwise negatively impact our business;

higher than anticipated loan losses or the insufficiency of the allowance for credit losses;

our potential exposure to various types of market risks, such as interest rate risk and credit risk;

our ability to recover the fair values of available for sale securities;

our obligation to fund commitments to extend credit and unused lines of credit;

changes in consumer confidence, spending and savings habits relative to the services we provide;

continued relationships with major customers;

competition from other financial institutions in originating loans, attracting deposits, and providing various financial services that may affect our profitability;

the ability to continue to grow our business internally and through acquisition and successful integration of bank entities while controlling our costs;

changes in competitive, governmental, regulatory, accounting, technological and other factors that may affect us specifically or the banking industry generally, including as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”);

changes in our sources and availability of liquidity;

the impact of pending and future legal proceedings; and

losses that we may realize from off-balance sheet arrangements.

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You should also consider carefully the risk factors discussed in ~~Item~~detail 1Ain ofthe ~~Part~~periodic Ireports ofthat ~~this~~Bay ~~annual~~Bancorp, ~~report~~Inc. files with the Securities and Exchange Commission (the “SEC”), which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements and could materially and adversely affect our business, operating results and financial condition~~. The~~ ~~risks~~(see ~~discussed~~Part in1, ~~this~~Item ~~annual~~1A of this report for further information). The risks discussed are factors that, individually or in the aggregate, management believes could cause our actual results to differ materially from expected and historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider such disclosures to be a complete discussion of all potential risks or uncertainties.

The forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

ITEM 1. BUSINESS

~~GENERAL~~ RECENT DEVELOPMENTS

~~Bay~~On ~~Bancorp~~September 27, ~~Inc.~~2018, athe ~~Maryland~~Company ~~corporation~~and ~~organized~~Old inLine ~~1990~~Bancshares, isInc. a(“Old ~~savings~~Line ~~and~~Bancshares”), ~~loan~~the ~~holding~~parent company ~~headquartered~~of inOld ~~Columbia,~~Line ~~Maryland~~Bank, ~~that~~a isMaryland ~~the~~trust ~~parent~~ company, ofentered ~~Bay~~into ~~Bank,~~an ~~FSB,~~Agreement aand ~~federal~~Plan ~~savings~~of ~~bank~~Merger (the “~~FSB~~Merger Agreement”), ~~that~~pursuant isto ~~also~~which ~~headquartered~~the inCompany ~~Columbia~~will be merged with and into Old Line Bancshares, ~~Maryland~~with Old Line Bancshares as the surviving corporation (the “~~Bank~~Merger”). ~~Until~~ ~~November~~The 1Merger Agreement, ~~2013~~which has been approved by the boards of directors of both companies, provides that each outstanding share of the Company’s ~~operated~~common ~~under~~stock will be converted into the ~~name~~right ~~Carrollton~~to ~~Bancorp. Effective~~receive ~~November~~a 1number of shares of common stock of Old Line, ~~2013~~with the exact exchange ratio to be determined prior to closing. Immediately following the Merger, the Company’s ~~name~~federal ~~was~~savings ~~changed~~bank to(“FSB”) subsidiary, Bay ~~Bancorp~~Bank, ~~Inc.~~FSB (the “Bank”), will be merged with and into Old Line Bank, with Old Line bank as the surviving depository institution (the “Bank Merger”).

OnConsummation ~~April~~of ~~19, 2013,~~ the ~~Company,~~Merger ~~then~~is ~~the~~subject ~~parent~~to ~~company~~certain ~~of Carrollton Bank~~conditions, ~~completed its merger with Jefferson Bancorp~~including, ~~Inc.~~among ~~(“Jefferson”)~~others, the ~~then-current~~approval ~~parent company~~ of the ~~Bank,~~Merger inby ~~which Jefferson was merged into~~ the ~~Company. Immediately~~stockholders ~~following~~of ~~that~~Old ~~merger,~~Line ~~Carrollton~~Bancshares ~~Bank~~and ~~was merged into~~ the ~~Bank,~~Company ~~with~~and the ~~Bank~~receipt asof ~~the~~required ~~surviving~~regulatory ~~FSB~~approvals. ~~(these~~The ~~merger~~stockholders ~~transactions~~of ~~are~~the ~~collectively~~Company ~~referred~~and toof asOld ~~the~~Line ~~“Jefferson~~Bancshares ~~Merger”). In~~approved the ~~Jefferson~~ Merger, ~~the~~at ~~Company~~special ~~acquired~~meetings ~~all~~thereof ofheld ~~the~~on ~~outstanding~~March ~~shares~~28, of2018. ~~common~~The ~~stock~~Board of ~~Jefferson~~Governors ~~in an all-stock transaction, with each outstanding share~~ of ~~Jefferson~~the ~~common~~Federal ~~stock~~Reserve ~~converted~~System ~~into~~ (the ~~right~~“Federal toReserve”) ~~receive~~approved ~~2.2217 shares of~~ the ~~Company’s common stock. The Jefferson~~ Merger ~~was~~and ~~accounted~~related ~~for~~transactions ason aMarch ~~reverse acquisition~~2, ~~which means that for accounting and financial reporting purposes~~2018, ~~Jefferson~~the ~~was~~Federal ~~deemed~~Deposit toInsurance ~~have~~Corporation ~~acquired~~ (the ~~Company~~“FDIC”) inapproved the ~~Jefferson~~Bank Merger ~~even~~on ~~though~~March ~~the~~6, ~~Company was the legal successor in the Jefferson Merger~~2018, and the ~~historical~~Maryland ~~financial~~Commissioner ~~statements~~ of ~~Jefferson~~Financial ~~have~~Regulation ~~become~~approved the ~~Company’s~~Bank ~~historical~~Merger ~~financial~~on ~~statements. Consequently~~March 9, ~~the~~2018. ~~assets~~Therefore, ~~and~~all ~~liabilities~~required stockholder and ~~the~~regulatory ~~operations~~approvals ~~that~~with ~~are~~respect ~~reflected in the historical consolidated financial statements prior~~ to the ~~Jefferson~~ Merger ~~are those of Jefferson,~~ and ~~the~~its ~~historical~~related ~~consolidated~~transactions ~~financial~~have ~~statements~~now ~~after~~been ~~the~~received. ~~Jefferson~~However, ~~Merger~~a ~~include~~lawsuit ~~the~~has ~~assets~~been ~~and~~filed ~~liabilities~~against ~~of Jefferson and~~ the Company, ~~historical~~its ~~operations~~directors ~~of Jefferson~~ and ~~operations~~Old ~~of the combined Company after April l9, 2013.~~ Line

OnBancshares ~~July~~pursuant 8,to ~~2016,~~which the ~~Company~~plaintiff ~~completed~~seeks, ~~its~~among ~~merger~~other ~~with Hopkins Bancorp~~things, ~~Inc.~~to ~~(“Hopkins”),~~enjoin the ~~parent~~Merger ~~company~~unless ofcertain ~~Hopkins~~conditions ~~Federal~~are ~~Savings~~satisfied. ~~Bank~~Information ~~(“Hopkins~~about ~~Bank”),~~this inlawsuit ~~which~~is ~~Hopkins~~set ~~was~~forth ~~merged~~in ~~into~~Item ~~the~~1A ~~Company,~~of ~~with~~Part ~~the~~I ~~Company~~of asthis ~~the~~annual ~~surviving~~report ~~corporation. Immediately~~under ~~following that merger, Hopkins Bank was merged into~~ the ~~Bank~~heading, ~~with~~“Pending ~~the~~litigation ~~Bank~~related ~~as the surviving FSB (these merger transactions are collectively referred~~ to as the ~~“Hopkins~~ Merger~~”). In~~ ~~the~~may ~~Hopkins~~delay ~~Merger,~~or ~~the~~prevent ~~Company acquired all of~~ the ~~outstanding~~Merger ~~shares~~and ofcould ~~common~~cause ~~stock~~Old ofLine ~~Hopkins~~Bancshares ~~for~~and ~~$23,855,141 in cash, with each outstanding share of Hopkins common stock converted into~~ the ~~right~~Company to ~~receive~~incur ~~$98.7578~~significant incosts ~~cash~~and expenses.”

WeThe ~~are~~Merger ~~focused~~Agreement onincludes ~~providing~~customary ~~superior financial and customer service to small and medium-sized commercial and retail businesses~~representations, ~~owners~~warranties ~~of these businesses~~ and ~~their~~covenants ~~employees, to business professionals and to individual consumers located in the central Maryland region, through our network~~ of ~~11 branch locations. We attract deposit customers from~~ the ~~general public and use such funds, together with other borrowed funds, to make loans~~parties. ~~Our~~ ~~results of operations are primarily determined by the difference between interest income earned on our interest-earning assets,~~ The

Merger Agreement contains termination rights of the Company and Old Line Bancshares and further provides that we will be required to pay Old Line Bancshares a termination fee of $5,076,000 if the Merger Agreement is terminated under specified circumstances set forth therein.

We expect the Merger to close on or about April 13, 2018, but this date is subject to change. For additional information regarding the pending Merger, please see as our definitive proxy statement filed with the Securities and

Exchange Commission (the “SEC”) on March 14, 2018, as updated from time to time.

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~~primarily~~ You ~~interest~~should ~~and~~keep ~~fee~~in ~~income~~mind onthat ~~loans~~discussions in this annual report that refer to the Company’s business, operations and ~~interest~~risks ~~paid~~in onthe ~~our~~future ~~interest~~refer to the Company as a stand-~~bearing~~alone ~~liabilities,~~entity ~~including~~up ~~deposits~~to the closing of the proposed Merger or if the Merger does not close, and ~~borrowings~~that these considerations will be different with respect to the combined company after the closing of the Merger.

Our mortgage division is in the business of originating residential mortgage loans and then selling them to investors. The mortgage banking business is structured to provide a source of fee income largely from the process of originating residential mortgage loans for sale in the secondary market. Mortgage banking products include Federal Housing Administration and Federal Veterans Administration loans, conventional and nonconforming first and second mortgages, and construction and permanent financing. Loans originated by the mortgage division are generally sold into the secondary market or retained by us as part of our balance sheet strategy. GENERAL

~~Investments~~The Company, a Maryland corporation organized in ~~joint~~1990, ~~ventures~~is ~~are~~a ~~accounted~~savings ~~for~~and ~~using~~loan ~~the~~holding ~~equity~~company ~~method~~headquartered in Columbia, Maryland. The ~~total~~Bank ~~investment~~is also headquartered in ~~joint~~Columbia, ~~ventures~~Maryland. Until atNovember ~~December 31~~1, ~~2016~~2013, ~~and~~the ~~December~~Company ~~31,~~operated ~~2015~~under isthe ~~not~~name ~~considered~~Carrollton ~~material~~Bancorp. Effective toNovember 1, 2013, the ~~consolidated~~Company’s ~~financial~~name ~~statements~~was aschanged ato ~~whole.~~Bay Bancorp, Inc.

~~Loans~~We ~~serviced~~are ~~for~~focused ~~others~~on ~~are~~providing ~~not~~superior ~~included~~financial and customer service to small and medium-sized commercial and retail businesses, owners of these businesses and their employees, to business professionals and to individual consumers located in the ~~Consolidated~~central ~~Balance~~Maryland ~~Sheets~~region, through our network of 11 branch locations. ~~The~~We ~~unpaid~~attract ~~principal~~deposit ~~balances~~customers offrom ~~residential~~the ~~mortgage~~general ~~loans~~public ~~serviced~~and ~~for~~use ~~others~~such ~~were~~funds, ~~approximately~~together $5with other borrowed funds,~~410,000~~ ~~and~~to $0make atloans. Our ~~December~~results 31of operations are primarily determined by the difference between interest income earned on our interest-earning assets, ~~2016~~primarily interest and ~~December~~fee 31income on loans, ~~2015~~and interest paid on our interest-bearing liabilities, ~~respectively~~including deposits and borrowings.

~~The~~Our ~~Bank~~mortgage ~~has~~division ~~eight~~is ~~wholly-owned subsidiaries including three acquired~~ in the ~~Hopkins~~business ~~Merger. Carrollton Community Development Corporation is a subsidiary that was created to promote, develop, and improve the housing and economic conditions~~ of ~~people~~originating inresidential ~~Maryland~~mortgage ~~through the origination of~~ loans, ~~but~~and ~~that~~then ~~has~~selling ~~been~~them ~~inactive since 2015. Three limited liability company subsidiaries are used~~ to ~~manage and dispose of real estate acquired through foreclosure or by deed in lieu of foreclosure~~investors. The ~~Bay~~mortgage ~~Financial~~banking ~~Services,~~business ~~Inc.~~ is anstructured ~~inactive subsidiary that was established~~ to provide ~~brokerage services and~~ a ~~variety~~source of ~~financial~~fee ~~planning~~income ~~and~~largely ~~investment~~from ~~options~~the toprocess ~~customers.~~of ~~Hopkins~~originating ~~Financial~~residential ~~Corporation~~mortgage ~~and~~loans ~~Encore~~for ~~Mortgage,~~sale ~~Inc. are subsidiaries that were acquired~~ in the ~~Hopkins~~secondary ~~Merger~~market. Mortgage ~~and~~banking ~~engage~~products ininclude ~~the~~Federal ~~business~~Housing ofAdministration ~~investing~~and ~~excess~~Federal ~~cash~~Veterans inAdministration ~~certificates~~loans, ofconventional ~~deposit~~and ~~issued~~nonconforming byfirst ~~other~~and ~~depository~~second ~~institutions. Hopkins Properties~~mortgages, ~~Inc.~~and isconstruction ~~a subsidiary that was also acquired in the Hopkins Merger~~ and ~~engages~~permanent infinancing. Loans ~~the~~originated ~~business of investing excess cash in certificates of deposit issued~~ by ~~other~~the ~~depository institutions and making a limited number of residential~~ mortgage ~~loans.~~division ~~The~~are ~~Bank~~generally ~~owns~~sold ainto ~~51% interest in iReverse Home Loans, LLC (“iReverse”), which was acquired in~~ the ~~Hopkins~~secondary ~~Merger~~market ~~and~~or ~~engages~~retained inby ~~the~~us ~~business~~as part of ~~brokering~~our ~~reverse~~balance ~~mortgage~~sheet ~~loans~~strategy. ~~The~~ ~~Bank~~As ~~has~~part ~~entered into an agreement with the other owner~~ of ~~iReverse~~planning ~~pursuant~~for toour ~~which~~proposed ~~the Bank will sell~~Merger, ~~effective~~we ~~March~~expect ~~31,~~to ~~2017,~~close ~~the~~this ~~Bank’s~~division ~~interest~~ in ~~iReverse~~February ~~to the other owner for $70,000~~2018.

Investments in joint ventures are accounted for using the equity method. The total investment in joint ventures at December 31, 2017 and December 31, 2016 is not considered material to the consolidated financial statements as a whole.

On July 8, 2016, the Company completed its merger with Hopkins Bancorp, Inc. (“Hopkins”), the parent company of Hopkins Federal Savings Bank (“Hopkins Bank”), in which Hopkins was merged into the Company, with the Company as the surviving corporation. Immediately following that merger, Hopkins Bank was merged into the Bank, with the Bank as the surviving FSB (these merger transactions are collectively referred to as the “Hopkins Merger”). In the Hopkins Merger, the Company acquired all of the outstanding shares of common stock of Hopkins for $23,855,141 in cash, with each outstanding share of Hopkins common stock converted into the right to receive $98.7578 in cash. The Bank acquired Hopkins Bank’s 51% interest in iReverse Home Loans, LLC (“iReverse”), which is engaged in the business of brokering reverse mortgage loans. Effective March 31, 2017, the Bank sold its interest in iReverse to the other owner of iReverse for $70,000.

The Bank has three wholly-owned subsidiaries, Hopkins Financial Corporation, Hopkins Properties, Inc. and Encore Mortgage, Inc., all of which are Maryland entities that were acquired in the Hopkins Merger and engage in the business of investing excess cash in certificates of deposit issued by other depository institutions.

AVAILABILITY OF INFORMATION

We make available through the Investor Relations area of our website, at www.baybankmd.com, annual reports on Form 10-K, quarterly reports on Form 10-Q, news releases on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. In general, we intend that these reports be available as soon as practicable after they are filed with or furnished to the ~~Securities and Exchange Commission (“~~SEC”). The SEC maintains a website (www.sec.gov) ~~where these filings are also available through the SEC’s EDGAR system. There is no charge for access to these filings through either our site or the SEC’s site.~~

MARKET AREA

We consider our core markets to be the communities within the Baltimore Metropolitan Statistical Area, particularly Baltimore City and the Maryland counties of Baltimore, Anne Arundel, Howard and Harford, as well as south along the Baltimore-Washington corridor with an expanded focus on Prince George’s and Montgomery counties. To this end, in 2015, we added a Corridor Market President and two Directors to the bank and holding company board of directors who are active in these counties and relocated the corporate headquarters to our Columbia, Maryland location. In 2016, we added a Baltimore Market President to the bank and a Director to the bank and holding company board of directors who is active in investment banking, capital raising and financial advisory services. Lending activities are

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~~broader,~~where ~~including~~these ~~the~~filings ~~entire~~are ~~State~~also ofavailable ~~Maryland,~~through ~~and,~~the toSEC’s aEDGAR ~~limited~~system. There ~~extent,~~is ~~the~~no ~~surrounding~~charge ~~states. All~~for ofaccess ~~our~~to ~~revenue~~these isfilings ~~generated~~through ~~within~~either our site or the ~~United~~SEC’s ~~States~~site.

MARKET AREA

COMPETITION

Our principal competitors for deposits are other financial institutions, including other savings institutions, commercial banks, credit unions, and local banks and branches or affiliates of other larger banks located in our primary market area. Competition among these institutions is based primarily on interest rates and other terms offered, service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes from mutual funds, U.S. Government securities, insurance companies and private issuers of debt obligations and suppliers of other investment alternatives for depositors such as securities firms. Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.

Current federal law allows the acquisition of banks by bank holding companies nationwide. Further, federal and Maryland law permit interstate banking. Recent legislation has broadened the extent to which financial services companies, such as investment banks and insurance companies, may control commercial banks. As a consequence of these developments, competition in our principal market may increase, and a further consolidation of financial institutions in Maryland may occur.

STRATEGY

We operate on the premise that the consolidation activities in the banking industry have created an opportunity for a well-capitalized community bank to satisfy banking needs that are no longer being adequately met in the local market. Large national and regional banks are catering to larger customers and provide an impersonal experience, and typical community banks, because of their limited capacity, are unable to meet the needs of many small-to-medium-sized businesses. Specifically, as a result of bank mergers in the 1990s, many banks in the Baltimore metropolitan area became local branches of large regional and national banks. Although size gave the larger banks some advantages in competing for business from large corporations, including economies of scale and higher lending limits, we believe that these larger, national banks remain focused on a mass market approach which de-emphasizes personal contact and service. We also believe that the centralization of decision-making power at these large institutions has resulted in a lack of customer service. At many of these institutions, determinations are made at the out-of-state “home office" by individuals who lack personal contact with customers as well as an understanding of the customers' needs and scope of the relationship with the institution. We believe that this trend is ongoing, and continues to be particularly frustrating to owners of small and medium-sized businesses, business professionals and individual consumers who traditionally have been accustomed to dealing directly with a bank executive who had an understanding of their banking needs with the ability to deliver a prompt response.

We attempt to differentiate ourselves from the competition through personalized service, flexibility in meeting the needs of customers, prompt decision making and the availability of senior management to meet with customers and prospective customers.

PRODUCTS AND SERVICES

General

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~~lending~~ PRODUCTS ~~for~~AND both owner occupied and investor properties, residential mortgage lending and consumer lending, both secured and unsecured. A substantial portion of our loan portfolio consists of loans to businesses secured by real estate and/or other business assets.SERVICES

General

Our primary market focus is on making loans to and gathering deposits from small and medium-sized businesses and their owners, professionals and executives, real estate investors and individual consumers in our primary market area. We lend to customers throughout Maryland, with our core market being the Baltimore Metropolitan Statistical Area and along the Baltimore-Washington corridor. To a limited extent, we lend to customers in neighboring states. Our lending activities consist generally of short to medium term commercial lending, commercial mortgage lending for both owner occupied and investor properties, residential mortgage lending and consumer lending, both secured and unsecured. A substantial portion of our loan portfolio consists of loans to businesses secured by real estate and/or other business assets.

Lending Activities

Credit Policies and Administration

We have adopted a comprehensive lending policy, which includes stringent underwriting standards for all types of loans. Our lending staff follows pricing guidelines established periodically by our management team. All loan approvals require at least two signatures; no individual commercial loan authority is given to Recommending Officers (“RO”). Loans up to $1,500,000 must be approved by the RO, Line Executive (“LE”) and Credit Administration (“CA”). CA includes the Chief Credit Officer (“CCO”) and/or a senior vice president (“SVP”) of CA. LEs include Baltimore Area President, Corridor Area President and Head of Real Estate. Loans between $1,500,001 and $3,000,000 must be approved by the Chief Executive Officer (“CEO”) or LE and CCO. Loans between $3,000,001 and $5,000,000 must be approved by the Credit Risk Management Committee (“CRMC”) which consists of the CEO, LEs, CCO and SVP CA. Loans greater than $5,000,001 must be approved by the Board Loan and Risk Committee with the prior approval of the CRMC. Under the leadership of our executive management team, we believe that we employ experienced lending officers, secure appropriate collateral and carefully monitor the financial conditions of our borrowers and the concentration of loans in our portfolio.

All loans by the Bank to our directors and executive officers and their affiliates require pre-approval by the Bank’s Board of Directors to ensure, among other things, compliance with Section 23A and Section 23B of the Federal Reserve Act and Regulation O promulgated thereunder. It is the Bank’s policy that all approved loans must be made on substantially the same terms as loans made to persons who are unrelated to the Bank.

In addition to the normal repayment risks, all loans in the portfolio are subject to the state of the economy and the related effects on the borrower and/or the real estate market. Generally, longer-term loans have periodic interest rate adjustments and/or call provisions. Senior management monitors the loan portfolio closely to ensure that we minimize past due loans and that we swiftly deal with potential problem loans.

The Bank also retains an outside, independent firm to review the loan portfolio. This firm performs a detailed annual review. We use the results of the firm’s report primarily to validate the risk ratings applied to loans in the portfolio and identify any systemic weaknesses in underwriting, documentation or management of the portfolio. Results of the annual review are presented to executive management, the audit committee of the board and the full board of directors and are available to and used by regulatory examiners when they review the Bank’s asset quality.

The Bank maintains the normal checks and balances on the loan portfolio not only through the underwriting process but through the utilization of an internal credit administration group that both assists in the underwriting and serves as an additional reviewer of underwriting. The separately managed loan administration group also has oversight for documentation, compliance and timeliness of collection activities. Our outsourced internal audit firm also reviews documentation, compliance and file management.

Commercial Lending

Our commercial lending consists of lines of credit, revolving credit facilities, accounts receivable and inventory financing, term loans, equipment loans, small business administration (SBA) loans, stand-by letters of credit and unsecured loans. We originate commercial loans for any business purpose, including the financing of leasehold improvements and equipment, the carrying of accounts receivable, general working capital, contract administration and acquisition activities. These loans typically have maturities of seven years or less. We have a diverse client base and we do not have a concentration of these types of loans in any specific industry segment. We generally secure commercial business loans with accounts receivable and inventory, equipment, indemnity deeds of trust and other collateral such as marketable securities, cash value of life insurance, and time deposits at the Bank. Commercial business loans have a higher degree of risk than residential mortgage loans because the availability of funds for repayment generally depends

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on Commercial the success of the business. To help manage this risk, we establish parameters/covenants at the inception of the loan to provide early warning signals before payment default. We normally seek to obtain appropriate collateral and personal guarantees from the borrower’s principal owners. We are able, given our business model, to proactively monitor the financial condition of the business.Lending

Commercial Real Estate Lending

We finance commercial real estate for our clients, for both owner-occupied properties and investor properties (including residential properties). We generally will finance owner-occupied and investor commercial real estate at a maximum loan-to-value ratio of 80%. Our underwriting policies and processes focus on the underlying credit of the owner-occupied real estate and on the rental income stream (including rent terms and strength of tenants) for investor commercial real estate as well as an assessment of the underlying real estate. Risks inherent in managing a commercial real estate portfolio relate to vacancy rates/absorption rates for surrounding properties, sudden or gradual drops in property values as well as changes in the economic climate. We attempt to mitigate these risks by carefully underwriting loans of this type as well as by following appropriate loan-to-value standards. We are cash flow lenders and never rely solely on property valuations in reaching a lending decision. Personal guarantees are often required for commercial real estate loans as they are for other commercial loans. Most of our real estate loans carry fixed interest rates and amortize over 20 – 25 years with five- to 10-year maturities. Properties securing our commercial real estate loans primarily include office buildings, office condominiums, distribution facilities, retail properties, manufacturing plants and apartment projects. Substantially all of our commercial real estate loans are secured by properties located in our primary market area.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Commercial real estate loans, however, entail significant additional risks as compared with residential mortgage lending, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.

Construction Lending

Construction lending can cover funding for land acquisition, land development and/or construction of residential or commercial structures. Our construction loans generally bear a variable rate of interest and have terms of one to two years. Funds are advanced on a percentage-of-completion basis. These loans are generally repaid at the end of the development or construction phase, although loans for commercial construction will often convert into a permanent commercial real estate loans at the end of the term of the loan. Loan-to-value parameters range from 65% of the value of raw land to 75% for developed land and 80% for commercial or multifamily construction and residential construction. These loan-to-value ratios represent the upper limit of advance rates to remain in compliance with Bank policy. Typically, loan-to-value ratios should be somewhat lower than these upper limits, requiring the borrower to provide significant equity at the inception of the loan. Our underwriting looks not only at the value of the property but the expected cash flows to be generated by sale of the parcels or leasing of the completed construction. The borrower must have solid experience in this type of construction and personal guarantees are required.

Construction lending entails significant risks compared with residential mortgage lending. These risks involve larger loan balances concentrated with single borrowers with funds advanced upon the security of the land or the project under construction. The value of the project is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. If the estimate of construction or development cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. To mitigate these risks, in addition to the underwriting considerations noted above, we maintain

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anthe ~~in-house~~expected ~~construction~~cash ~~monitoring~~flows ~~unit~~to ~~that~~be ~~has~~generated ~~oversight~~by ~~for~~sale of the ~~projects~~parcels ~~and~~or weleasing ~~require~~of ~~both~~the ~~site~~completed ~~visits~~construction. The ~~and~~borrower ~~frequent~~must ~~reporting~~have ~~before~~solid ~~funds~~experience in this type of construction and personal guarantees are ~~advanced~~required.

Residential Real Estate Lending

We originate a variety of consumer-oriented residential real estate loans. Residential mortgage loans consist primarily of first mortgage loans to individuals, most of which have a loan-to-value not exceeding 89.9%. The remainder of this portion of our portfolio consists of home equity lines of credit and fixed rate home equity loans. Our residential real estate loans are generally for owner-occupied single family homes. These loans are generally for a primary residence although we will occasionally originate loans for a second home where the borrower has strong credit. Our residential real estate loans are generally either fixed rate loans with thirty-year terms for conventional mortgages, ten-year terms for jumbo mortgages or five-, seven-, and 10-year adjustable rate mortgages with a 30-year amortization.

Our home equity loans and home equity lines of credit are primarily secured by a second mortgage on owner-occupied one-to-four family residences. Our home equity loans are originated at fixed or adjustable interest rates and with terms of between five and twenty years and are fully amortizing. Our home equity lines allow for the borrower to draw against the line for ten years, after which the outstanding balance is amortized over twenty years. Home equity lines of credit carry a variable rate of interest and are interest only during the draw period. Home equity loans and lines of credit are generally underwritten with a maximum combined loan-to-value ratio of 80% although in some instances the combined loan-to-value ratio may reach 89.9%. We require appraisals or valuations on all real estate loans – both commercial and residential. At the time we close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral. Home equity loans and lines of credit greater than $50,000 also require title insurance, and borrowers must obtain hazard insurance, and flood insurance, if applicable.

Home equity loans and lines of credit generally have greater risk than one-to-four family residential mortgage loans. In these cases, we face the risk that collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. In particular, because home equity loans are secured by second mortgages, decreases in real estate values could adversely affect the value of the property serving as collateral for these loans. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans.

Our home equity loan portfolio gives us a diverse client base. Most of these loans are in our primary market area, and the diversity of the individual loans in the portfolio reduces our potential risk.

Consumer Lending

We offer various types of secured and unsecured consumer loans. Generally, our consumer loans are made for personal, family or household purposes as a convenience to our customer base. As a general guideline, a consumer’s total debt service should not exceed 43% of their gross income. The underwriting standards for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of his or her ability to meet existing obligations and payments on the proposed loan.

Consumer loans may present greater credit risk than residential real estate loans because many consumer loans are unsecured or are secured by rapidly depreciating assets. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage, loss or depreciation. Consumer loan collections also depend on the borrower’s continuing financial stability. If a borrower suffers personal financial difficulties, the loan may not be repaid. Also, various federal and state laws, including bankruptcy and insolvency laws, may limit the amount we can recover on such loans.

Loan Originations, Purchases, Sales, Participations and Servicing

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~~rarely,~~not weprovide ~~purchase~~an ~~loan~~adequate ~~participations~~source ~~from~~of ~~correspondent~~repayment ~~banks~~of inthe outstanding loan balance because of the ~~local~~greater ~~market~~likelihood asof ~~well~~damage, loss or depreciation. ~~Those~~Consumer ~~loans~~loan ~~are~~collections ~~underwritten~~also ~~in-house~~depend ~~with~~on the ~~same~~borrower’s ~~standards~~continuing asfinancial ~~loans~~stability. If ~~directly~~a ~~originated~~borrower suffers personal financial difficulties, the loan may not be repaid. ~~Our~~Also, ~~residential~~various ~~real~~federal ~~estate~~and ~~loans~~state ~~originated~~laws, ~~for~~including ~~resale~~bankruptcy ~~are~~and ~~discussed~~insolvency ~~under~~laws, ~~“Mortgage~~may ~~Banking~~limit ~~Activities”~~the ~~below~~amount we can recover on such loans.

Loan Originations, Purchases, Sales, Participations and Servicing

All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines. We originate both fixed and variable rate loans. Our loan origination activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. We occasionally sell participations in commercial loans to correspondent banks if the amount of the loan exceeds our internal limits. More rarely, we purchase loan participations from correspondent banks in the local market as well. Those loans are underwritten in-house with the same standards as loans directly originated. Our residential real estate loans originated for resale are discussed under “Mortgage Banking Activities” below.

Loan Approval Procedures and Authority

Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy of the value of the collateral that will secure the loan, if applicable. To assess a business borrower’s ability to repay, we review and analyze, among other factors: current income, credit history including the Bank’s prior experience with the borrower, cash flow, any secondary sources of repayment, other debt obligations in regards to the equity/net worth of the borrower and collateral available to the Bank to secure the loan.

We require appraisals or valuations of all real property securing one-to-four family residential and commercial real estate loans and home equity loans and lines of credit. All appraisers are state licensed or state certified appraisers, and a list of approved appraisers is maintained and updated on an annual basis.

Deposit Activities

Deposits are the major source of our funding. We offer a broad array of consumer and business deposit products that include demand, money market, and savings accounts, as well as time deposits. We offer through key technology partnerships a competitive array of commercial cash management products, which allow us to attract demand deposits. We believe that we pay competitive rates on our interest-bearing deposits. As a relationship oriented organization, we generally seek to obtain deposit relationships with our loan clients.

We offer Certificate of Deposit Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposits to our customers. These programs allow customers to deposit more than would normally be covered by FDIC insurance. CDARS and ICS are nationwide programs that allow participating banks to “swap” customer deposits so that no customer has greater than the insurable maximum in one bank, while allowing the customer the convenience of maintaining a relationship with only one bank.

Mortgage Banking Activities

InUntil ~~addition~~February ~~to originating residential mortgages to hold in our portfolio~~2018, we ~~also~~originated ~~originate~~ residential mortgage loans for resale in the secondary mortgage market through our mortgage division. We terminated this activity in contemplation of the proposed Merger. These loans ~~are~~were ~~also~~ underwritten pursuant to standard underwriting guidelines. While our intent iswas to sell all loans originated as loans held for sale, rarely, we ~~are~~were unable to sell a loan due to some underwriting defect. These loans ~~are~~were transferred to the loan portfolio at the lower of their cost or fair value asat of the date of transfer. Loans held for sale are sold with servicing rights released; gains or losses are recorded at the sale commitment date.

We originate residential mortgage loans primarily as a correspondent lender. Because the loans are originated within investor guidelines and designated automated underwriting and product specific requirements as part of the loan application, sold loans have limited recourse provisions. Most contracts with investors contain recourse periods. In general, we may be required to repurchase a previously sold mortgage loan, return the service release premium and/or pay an administrative fee if there is non-compliance with defined loan origination or documentation standards. In addition, we may have an obligation to repurchase a loan if the mortgagor has defaulted or paid the loan off early in the loan term. The potential default repurchase period varies by investor but can be up to nine months after sale of the loan to the investor.

We enter 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 - IRLCs). Such IRLCs on mortgage loans to be sold into the secondary market are considered derivatives. To protect against the price risk inherent in residential mortgage loan commitments, we utilizes "best efforts” forward sales contracts in delivering loans to investors. Under a "best efforts"

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contract, we commit to deliver an individual mortgage loan of a specified principal amount and quality to an investor and the investor commits to the price representing a premium on the day the borrower commits to an interest rate that it will pay for the loan it purchases from the Company if the loan to the underlying borrower closes. We protect ourselves from changes in interest rates through the use of forward sales commitments. The market values of IRLCs and forward sales contracts are not readily ascertainable because they are not actively traded. Because of the high correlation between IRLCs and forward sales contracts, we are not generally exposed to gains or losses on loans as a result of changes in interest rates.

Other Banking Products

We offer our customers treasury services products that include wire transfer and ACH services, ~~Checkcards~~Check cards and automated teller machines at most of our full service branch locations, safe deposit boxes at some full service locations and credit cards through a third party processor. In addition to traditional deposit services, we offer telephone banking services, mobile banking, internet banking services and internet bill paying services to our customers. We also offer remote deposit capture to our commercial customers and mobile capture to our business and consumer customers.

EMPLOYEES

AsAt of December 31, ~~2016~~2017, the Bank had ~~127~~121 full-time and ~~four~~10 part-time employees. None of our employees are represented by a union or covered under a collective bargaining agreement. Management considers its employee relations to be excellent.

SUPERVISION AND REGULATION

General

The Company is a savings and loan holding company registered with the ~~Board of Governors of the~~ Federal Reserve ~~System (the “Federal Reserve”)~~ under the Home Owners Loan Act of 1933, as amended (the “HOL Act”), and, as such, is subject to the supervision, examination and reporting requirements of the HOL Act and the regulations of the Federal Reserve. As a publicly traded company whose common stock is registered under Section 12(b) of the Exchange Act and listed on the NASDAQ Capital Market, the Company is also subject to regulation and supervision by the SEC and The NASDAQ Stock Market, LLC (“NASDAQ”).

The Bank is supervised and examined by the Office of the Comptroller of the Currency (“OCC”) and is also subject to examination by the FDIC. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance funds and depositors, and not for the protection of stockholders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The Bank also is a member of and owns stock in the Federal Home Loan Bank of Atlanta (the “FHLB”), which is one of the 12 regional banks in the Federal Home Loan Bank System. The Bank also is regulated to a lesser extent by the Federal Reserve, which governs reserves to be maintained against deposits and other matters. The OCC examines the Bank and prepares reports for the consideration of its board of directors on any operating deficiencies. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s loan documents. In addition to the foregoing, there are a myriad of other federal and state laws and regulations that affect, impact or govern the business of banking, including consumer lending, deposit-taking, and trust operations.

All non-bank subsidiaries of the Company are subject to examination by the Federal Reserve, and, as affiliates of the Bank, are subject to examination by the OCC and the FDIC.

Any change in these laws by Congress or in these regulations by the Federal Reserve, the OCC or the FDIC could have a material adverse impact on the Company, the Bank and their operations.

Certain of the regulatory requirements that are applicable to the Bank and Company are described below. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank, and is qualified in its entirety by reference to the actual statutes and regulations.

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Dodd-Frank Act

The Dodd-Frank Act, which was enacted in July 2010, significantly restructured the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions such as banks and bank holding companies with total consolidated assets of $50 billion or more, it contains numerous other provisions that affect all financial institutions, including the Company and the Bank. The Dodd-Frank Act contains a wide variety of provisions (many of which are not yet effective) affecting the regulation of savings and loan holding companies and depository institutions, including restrictions related to mortgage originations, risk retention requirements as to securitized loans, and the establishment of a financial consumer protection agency, known as the Consumer Financial Protection Bureau (the “CFPB”), that is empowered to promulgate and enforce new consumer protection regulations and revise and enforce existing regulations in many areas of consumer compliance.

Moreover, not only are the states’ attorneys general entitled to enforce consumer protection rules issued by the CFPB, but states are permitted to adopt their own consumer protection laws that are more strict than those created under the Dodd-Frank Act. Recently, U.S. financial regulatory agencies have increasingly used general consumer protection statutes to address unethical or otherwise bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. Prior to the Dodd-Frank Act, there was little formal guidance as to the parameters for compliance with the federal “unfair or deceptive acts or practices” (“UDAP”) laws. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices”, which has been delegated to the CFPB for supervision.

The legislation also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. Lastly, the Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders the opportunity to approve or disapprove, by non-binding advisory votes, executive compensation and, in certain circumstances, so-called “golden parachute” payments. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

During 2013, significant media attention was given to the Dodd-Frank Act’s amendment of the Bank Holding Company Act of 1956 (the “BHC Act”) to require the U.S. financial regulatory agencies to adopt rules that prohibit banking institutions and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. The U.S. financial regulatory agencies adopted final rules implementing the Volcker Rule on December 10, 2013. The Volcker Rule became effective on July 21, 2012 and the final rules initially had an effective date of April 1, ~~2014~~2015, but the U.S. financial regulatory agencies issued an order extending the period during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2015. On December 18, ~~2014~~2015, the Federal Reserve granted an additional one year extension to July 21, 2016, for certain “legacy covered fund” investments and relationships entered into by banking entities prior to December 31, 2013. The Federal Reserve also indicated that it planned to grant an additional one year extension to July 21, 2017, at a later date. We completed our evaluation of the impact of the Volcker Rule and the final rules adopted thereunder and determined that they will not have a material effect on our operations, as we believe that we do not engage in the businesses prohibited by the Volcker Rule. We may incur costs related to the adoption of additional policies and systems to ensure compliance with the Volcker Rule, but we do not expect that such costs would be material.

~~Many~~Several of the Dodd-Frank Act’s provisions ~~are~~remain subject to final rulemaking by the U.S. financial regulatory agencies, and the Dodd-Frank Act’s impact on our business will depend to a large extent on how and when such rules are adopted and implemented by the primary U.S. financial regulatory agencies. We continue to analyze the impact of rules adopted under the Dodd-Frank Act on our business, but the full impact will not be known until the rules and related

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~~adopted and implemented by the primary U.S. financial~~ regulatory ~~agencies. We continue to analyze the impact of rules adopted under the Dodd-Frank Act on our business, but the full impact will not be known until the rules and related regulatory~~ initiatives are finalized and their combined impact can be understood. We do anticipate that the Dodd-Frank Act will increase our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future. In particular, the Dodd-Frank Act will require us to invest significant management attention and resources so that we can evaluate the impact of and ensure compliance with this law and its rules.

Federal Banking Regulation

Business Activities

As an FSB, the Bank derives its lending and investment powers from the HOL Act and the regulations, pronouncements or guidance of the OCC. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and nonresidential real estate, commercial business and consumer loans, certain types of securities and certain other loans and assets. Specifically, the Bank may originate, invest in, sell, or purchase unlimited loans on the security of residential real estate, while loans on nonresidential real estate generally may not, on a combined basis, exceed 400% of the Bank’s total capital. In addition, secured and unsecured commercial loans and certain types of commercial personal property leases may not exceed 20% of the Bank’s assets; however, amounts in excess of 10% of assets may only be used for small business loans. Further, the Bank may generally invest up to 35% of its assets in consumer loans, corporate debt securities and commercial paper on a combined basis, and up to the greater of its capital or 5.0% of its assets in unsecured construction loans. The Bank may invest up to 10% of its assets in tangible personal property, for rental or sale. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank directly, including real estate investment and insurance agency activities. A violation of the lending and investment limitations may be subject to the same enforcement mechanisms of the primary federal regulator as other violations of a law or regulation.

Capital Requirements

Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. These capital requirements were effective January 1, 2015 and are the result of a final rule implementing recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act (the “Basel III Capital Rules”).

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

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In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

At December 31, ~~2016~~2017, the Bank’s capital exceeded all applicable regulatory requirements and the Bank was considered well capitalized. In addition at December 31, 2017, the Bank’s capital exceeded the capital conservation buffer requirements being phased at 1.25% and fully phased in 2.5%.

Loans-to-One Borrower

Generally, an FSB may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily determinable marketable collateral, which generally does not include real estate. AsAt of December 31, ~~2016~~2017, the Bank was in compliance with the loans-to-one-borrower limitations.

Qualified Thrift Lender Test

As an FSB, the Bank is subject to a qualified thrift lender (“QTL”) test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally means the total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the FSB’s business.

“Qualified thrift investments” include various types of loans made for residential and housing purposes, investments related to those purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans. The Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986. At December 31, ~~2016~~2017, the Bank satisfied the QTL test. An FSB that fails the QTL test must operate under specified restrictions, including limits on growth, branching, new investment and dividends. As a result of the Dodd-Frank Act, noncompliance with the QTL test is subject to regulatory enforcement action as a violation of law.

Capital Distributions

OCC regulations govern capital distributions by an FSB, which include cash dividends, stock repurchases and other transactions charged to the FSB’s capital account. An FSB must file an application for approval of a capital distribution if:

the total capital distributions for the applicable calendar year exceed the sum of the FSB’s net income for that year to date plus the FSB’s retained net income for the preceding two years;

the FSB would not be at least adequately capitalized following the distribution;

the distribution would violate any applicable statute, regulation, agreement or OCC imposed condition; or

the FSB is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, every FSB that is a subsidiary of a holding company must still file a notice with the OCC at least 30 days before the board of directors declares a dividend or approves a capital distribution.

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The OCC may disapprove an application or object to a notice of proposed distribution if:

the FSB would be undercapitalized following the distribution;

the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act of 1991 (the “FDI Act”) provides that an insured depository institution shall not make any capital distribution if the institution would be undercapitalized after making such distribution.

Liquidity

An FSB is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. Historically, the regulation and monitoring of liquidity has been addressed as a supervisory matter, without required formulaic measures. The liquidity framework under the Basel III Capital Rules requires banks and their holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source. In October 2013, the federal banking agencies proposed rules implementing the LCR for advanced approaches banking organizations and a modified version of the LCR for savings and loan holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations, neither of which would apply to the Company or the Bank.

Community Reinvestment Act and Fair Lending Laws

All FSBs have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OCC to help meet the credit needs of their communities, including low and moderate income borrowers. In connection with its examination of an FSB, the OCC is required to assess the FSB’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An FSB’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. AsAt of December 31, ~~2016~~2017, the Bank’s CRA rating was “Outstanding.” All FDIC-insured institutions are required to make available to the public their most recent CRA performance evaluation.

Transactions with Related Parties

An FSB’s authority to engage in transactions with its affiliates is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Federal Reserve. An affiliate is generally a company that controls or is under common control with an insured depository institution such as the Bank. The Company is an affiliate of the Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, OCC regulations prohibit an FSB from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low quality assets and be on terms that are at least as favorable to the institution as comparable transactions with non-affiliates. The OCC requires FSBs to maintain detailed records of all transactions with affiliates.

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The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve. Among other things, these provisions require that extensions of credit to insiders:

(i)

be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

(ii)

not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.

Enforcement

The OCC has primary enforcement responsibility over FSBs and has the authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an FSB. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution, and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If action is not taken by the OCC, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Prompt Corrective Action Regulations

Under the Federal Prompt Corrective Action statute, the OCC is required to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital. The previously mentioned final capital rule effective January 1, 2015 revised the prompt corrective action categories to incorporate the revised minimum capital requirements, effective the same date. See the discussion above under the heading, “Capital Requirements.”

Under the revised categories, a savings institution that has total risk-based capital of less than 8%, a leverage ratio that is less than 4%, a Tier 1 risk-based capital ratio that is less than 6%, or a common equity Tier 1 ratio of less than 4.5% is considered to be undercapitalized. A savings institution that has total risk-based capital less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a leverage ratio that is less than 3%, or a common equity Tier 1 ratio of less

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than 3% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized."

Generally, the banking regulator is required to appoint a receiver or conservator for an FSB that is “critically undercapitalized.” The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” A parent holding company for the institution involved must guarantee performance under the capital restoration plan up to the lesser of the institution’s capital deficiency when deemed undercapitalized or 5% of the institution’s assets. In addition, numerous mandatory supervisory actions become immediately applicable to the FSB, including, but not limited to, restrictions on growth, investment activities, capital distributions and affiliate transactions. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized FSBs, including the issuance of a capital directive and individual minimum capital requirements and the replacement of senior executive officers and directors.

At December 31, ~~2016~~2017, the Bank met the criteria for being considered “well-capitalized”.

Insurance of Deposit Accounts

The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008.

Effective April 1, 2011, the FDIC implemented a requirement of the Dodd-Frank Act to revise its assessment system to base it on each institution’s total assets less tangible capital instead of deposits. The FDIC also revised its assessment schedule so that it ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or regulatory condition imposed in writing. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

Prohibitions Against Tying Arrangements

FSBs are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System

The Bank is a member of the FHLB, which is one of 12 regional banks in the Federal Home Loan Bank System. The FHLB System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. The Bank is required to acquire and hold shares of capital stock of the FHLB as a condition of membership. AsAt of December 31, ~~2016~~2017, the Bank was in compliance with this requirement.

Bank Secrecy Act

Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report cash transactions in excess of $10,000 to the United States Treasury. In addition, financial institutions are required to file suspicious activity reports for transactions in excess of $5,000 and which the financial institution knows, suspects, or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose. The USA Patriot Act enacted prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for money laundering and terrorist financing activities. The USA Patriot Act requires banks and other depository institutions, brokers, dealers

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and certain other businesses involved in the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified by the act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers. The USA Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.

Supervision and Regulation of Mortgage Banking Operations

Our mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Administration (“FHA”), the Veterans' Administration (“VA”), and Fannie Mae with respect to originating, processing, selling and servicing mortgage loans. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports on prospective borrowers, and fix maximum loan amounts. Lenders such as us are required annually to submit audited financial statements to Fannie Mae, FHA and VA. Each of these regulatory entities has its own financial requirements. We are also subject to examination by the Federal Reserve, Fannie Mae, FHA and VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate Settlement Procedures Act and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. Our mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private mortgage investors.

In January 2013, the CFPB issued eight final regulations governing mainly consumer mortgage lending. These regulations became effective in January 2014.

One of these rules, effective on January 10, 2014, requires mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. This rule also defines “qualified mortgages.” In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years, where the lender determines that the borrower has the ability to repay, and where the borrower’s points and fees do not exceed 3% of the total loan amount. Qualified mortgages that that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability to repay rules. Qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules.

The CFPB regulations also: (i) require that “higher-priced” mortgages must have escrow accounts for taxes and insurance and similar recurring expenses; (ii) expand the scope of the high-rate, high-cost mortgage provisions by, among other provisions, lowering the rates and fees that lead to coverage and including home equity lines of credit; (iii) revise rules for mortgage loan originator compensation; (iv) add prohibitions against mandatory arbitration provisions and financing single premium credit insurances; and (v) impose a broader requirement for providing borrowers with copies of all appraisals on first-lien dwelling secured loans.

Effective January 10, 2014, the CFPB’s final Truth-in-Lending Act rules relating to mortgage servicing impose new obligations to credit payments and provide payoff statements within certain time periods and provide new notices prior to interest rate and payment adjustments. Effective on that same date, the CFPB’s final Real Estate Settlement Procedures Act rules add new obligations on the servicer when a mortgage loan is in default.

On November 20, 2013, the CFPB issued a final rule on integrated mortgage disclosures under the Truth-in-Lending Act and the Real Estate Settlement Procedures Act, for which compliance was required by October 3, 2015. AsAt of December 31, ~~2016~~2017, we are in compliance with these integrated mortgage disclosure rules.

Supervision and Regulation of Mortgage Brokerage Operations

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Supervision and Regulation of Mortgage Brokerage Operations

Our mortgage brokerage operation is governed by a host of federal laws and regulations. For example, mortgage brokers must comply with: the Real Estate Settlement Procedures Act, the Truth in Lending Act, the Home Ownership and Equity Protection Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act (the “GLB Act”) and the Federal Trade Commission Act (the “FTC Act”), as well as fair lending and fair housing laws. Many of these statutes, coupled with their implementing regulations, provide substantive protection to borrowers who seek mortgage financing. These laws impose disclosure requirements on brokers, define high-cost loans, and contain anti-discrimination provisions.

Additionally, mortgage brokers are under the oversight of HUD and the FTC Act; and to the extent their promulgated laws apply to mortgage brokers, the Federal Reserve Board, the Internal Revenue Service, and the Department of Labor. These agencies ensure that mortgage brokers comply with the aforementioned federal laws, along with the disclosure and reporting requirements associated with advertising, marketing and compensation for services.

Consumer Lending – Military Lending Act

The Military Lending Act (the “MLA”), which was initially implemented in 2007, was amended and its coverage significantly expanded in 2015. The Department of Defense issued a final rule under the MLA that took effect on October 15, 2015, but financial institutions were not required to take action until October 3, 2016. The types of credit covered under the MLA were expanded to include virtually all consumer loan and credit card products (except for loans secured by residential real property and certain purchase-money motor vehicle/personal property secured transactions). Lenders must now provide specific written and oral disclosures concerning the protections of the MLA to active duty members of the military and dependents of active duty members of the military (“covered borrowers”). The rule imposes a 36% “Military Annual Percentage Rate” cap that includes costs associated with credit insurance premiums, fees for ancillary products, finance charges associated with the transactions, and application and participation charges. In addition, loan terms cannot include (i) a mandatory arbitration provision, (ii) a waiver of consumer protection laws, (iii) mandatory allotments from military benefits, or (iv) a prepayment penalty. The revised rule also prohibits “roll-over” or refinances of the same loan unless the new loan provides more favorable terms for the covered borrower. Lenders may verify covered borrower status using a DOD database or information provided by credit bureaus. We believe that we are in compliance with the revised rule.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

Truth in Savings Act; and

· Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

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Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The operations of the Bank also are subject to the:

Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the "USA Patriot Act", which requires FSBs to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

The GLB Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the GLB Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Savings and Loan Holding Company Regulation

General

The Company is a non-diversified savings and loan holding company within the meaning of the HOL Act. As such, the Company is registered with the Federal Reserve and is subject to Federal Reserve regulations, examinations and reporting requirements. In addition, the Federal Reserve has enforcement authority over the Company and its non-insured subsidiaries. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Permissible Activities

Under present law, the business activities of the Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the BHC Act or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c) (8) of the BHC Act, subject to the prior approval of the Federal Reserve, and certain additional activities authorized by Federal Reserve regulations.

Federal law prohibits a savings and loan holding company, including the Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve must consider the

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banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.

The Federal Reserve is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:

(i)

the approval of interstate supervisory acquisitions by savings and loan holding companies; and

(ii)

the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.

The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital

Savings and loan holding companies have not historically been subject to specific regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions. Instruments such as cumulative preferred stock and trust-preferred securities, which were previously includable within Tier 1 capital by bank holding companies, within certain limits, would no longer be includable as Tier 1 capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions applied to savings and loan holding companies asat of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.

Dividends

The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies that it has made applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund a dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of the Company to pay dividends or otherwise engage in capital distributions and stock repurchases.

Source of Strength Doctrine

The “source of strength doctrine” requires bank holding companies to provide financial assistance to their subsidiary depository institutions in the event the subsidiary depository institution experiences financial distress. The Dodd-Frank Act extends the source of strength doctrine to savings and loan holding companies. The Federal Reserve has issued regulations requiring that all bank holding companies and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial distress.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) established a broad range of corporate governance and accounting measures intended to increase corporate responsibility and protect investors by improving the accuracy and reliability of disclosures under federal securities laws. We are subject to Sarbanes-Oxley Act because we are required to file periodic reports with the SEC under the Exchange Act. Among other things, Sarbanes-Oxley Act, its

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and reliability of disclosures under federal securities laws. We are subject to Sarbanes-Oxley Act because we are required to file periodic reports with the SEC under the Exchange Act. Among other things, Sarbanes-Oxley Act, its implementing regulations and related NASDAQ Stock Market Rules have established membership requirements and additional responsibilities for our audit committee, imposed restrictions on the relationship between us and our outside auditors (including restrictions on the types of non-audit services our auditors may provide to us), imposed additional financial statement certification responsibilities for our chief executive officer and chief financial officer, expanded the disclosure requirements for corporate insiders, and required management to evaluate our disclosure controls and procedures and our internal control over financial reporting.

ITEM 1A. RISK FACTORS

We take on a certain amount of risk in every business decision or activity. The challenge of risk management is not to eliminate risk, but to identify and measure our risks and then to effectively manage those risks in order to optimize stockholder value. As a banking institution, our risks fall into five broad categories of risk: credit risk, market risk, liquidity risk, operational risk, and reputational risk. The following discussion highlights the most significant risk factors of which we are aware that could affect us. Additional risks and uncertainties that we either are not aware of or do not believe to be material could also adversely affect us. If any of the following risk factors were to occur, our business, financial condition, or results of operations could be materially and adversely affected. Before making an investment decision, you should carefully consider the potential risks described below together with all of the other information included or incorporated by reference in this report.

RISKS RELATED TO OUR PENDING MERGER WITH OLD LINE BANCSHARES

Completion of the Merger is conditioned upon the satisfaction of customary closing conditions.

Although the Company and Old Line Bancshares have agreed in the Merger Agreement to use reasonable best efforts to consummate the Merger, the Merger is subject to various closing conditions that might not be satisfied. The Merger will not be consummated unless and until all of those closing conditions are either satisfied or waived by the parties. In addition, satisfying the conditions to, and completion of, the Merger may take longer than, and could cost more than, we expect. Any delay in completing the Merger may adversely affect the benefits that the Company and Old Line Bancshares expect to achieve from the Merger and the integration of our businesses. In addition, failure to complete the Merger may adversely affect Old Line Bancshares.

Failure to complete the Merger could materially and adversely impact our stock price and future businesses and financial results. If the Merger is not completed, then our ongoing business may be materially and adversely affected and we will be subject to several risks, including the following:

We may be required, under certain circumstances, to pay Old Line Bancshares a termination fee of $5,076,000 under the Merger Agreement;

We will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisor and printing fees;

Under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger, which may adversely affect our ability to execute certain of our business strategies; and

Matters relating to the Merger have required and may require substantial commitments of time and resources by our management that could otherwise have been devoted to other opportunities that may have been beneficial the Company as an independent company.

In addition, if the Merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation related to any failure to complete the

Merger or to enforcement proceedings commenced against us to perform our obligations under the Merger Agreement.

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If the Merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially and adversely affect our business, financial results and stock price.

The Merger Agreement limits our ability to pursue alternative transactions to the Merger and requires us to pay a termination fee if we do.

The Merger Agreement prohibits the Company and our directors, officers, representatives and agents, subject to narrow exceptions, from initiating, encouraging, soliciting or entering into discussions with any third party regarding alternative acquisition proposals. The prohibition limits our ability to pursue offers from other possible acquirers that may be superior to the pending Merger with Old Line Bancshares from a financial point of view. If we receive an unsolicited proposal from a third party that is superior from a financial point of view to that made by Old Line Bancshares and the Merger Agreement is terminated, we would be required to pay a termination fee of $5,076,000. This fee makes it less likely that a third party will make an alternative acquisition proposal.

If the Merger is completed, then Old Line Bancshares may fail to realize all of the anticipated benefits of the Merger.

Because the consideration to be paid to our stockholders in the Merger in exchange for their shares of the Company’s common stock consists of Old Line Bancshares common stock, realization of the anticipated benefits in the Merger for our stockholders in the Merger will depend, in part, on the combined company’s ability to successfully integrate the businesses and operations of the Company and Old Line Bancshares. The combined company will be required to devote significant management attention and resources to integrating its business practices, operations and support functions.

The success of the Merger will depend, in part, on Old Line Bancshares’ ability to realize the anticipated benefits and cost savings from combining the businesses of Old Line Bancshares and the Company. To realize these anticipated benefits and cost savings, however, Old Line Bancshares must successfully combine the businesses of Old Line Bancshares and the Company. If Old Line Bancshares is unable to achieve these objectives, then the anticipated benefits and cost savings of the Merger may not be realized fully or at all or may take longer to realize than expected.

Old Line Bancshares and the Company have operated and, until the completion of the Merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the loss of key depositors or other bank customers, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect Old Line Bancshares’ and the Company’s ability to maintain their relationships with their respective clients, customers, depositors and employees or to achieve the anticipated benefits of the Merger. Integration efforts between the two companies may, to some extent, also divert management attention and resources. These integration matters could have an adverse effect on each of Old Line Bancshares and the Company during such transition period.

If the Merger is not completed, then we will have incurred substantial expenses without realizing the expected benefits.

We have incurred substantial expenses in connection with the execution of the Merger Agreement and the

Merger. The completion of the Merger depends on the satisfaction of specified conditions, including the approval of the

Merger by stockholders of Old Line Bancshares and the Company. There is no guarantee that these conditions will be satisfied. If the Merger is not completed, then these expenses could have a material and adverse impact on our financial condition and/or results of operations because we would not have realized the expected benefits of the Merger.

Because the aggregate consideration to be received in the Merger is subject to adjustment, our stockholders will not know the value of the consideration that they will receive in the Merger until its effective time.

Upon completion of the Merger, our stockholders will receive, for each share of the Company’s common stock they own, between approximately 0.4047 and 0.4600 shares of Old Line Bancshares common stock, subject to adjustment, provided that cash will be paid in lieu of any fractional shares. The consideration will be adjusted in

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connection with the Company’s recent settlement of certain litigation and its resolution of certain loans. The consideration may also be adjusted if at any time during the five trading days before the effective date of the Merger, the volume-weighted average closing price of Old Line Bancshares common stock during the 20 prior trading days is less than $24.30 and the decrease in such price from $27.00 is more than 15% lower than the change in the average of NASDAQ Bank Index prices for the 20 consecutive trading days ending on the trading day prior to the determination date (the “Final Index Price”) relative to the NASDAQ Bank Index closing price as of September 27, 2017, which allows the Company to terminate the Merger Agreement, and Old Line Bancshares exercises its right to prevent the Company from so terminating by increasing the consideration (by increasing the number of shares, making a cash payment or a combination of both) so that the per share consideration is an amount that equals the lesser of (i) $11.178 or (ii) (a) the Final Index Price divided by the NASDAQ Bank Index closing price as of September 27, 2017, multiplied by (b) 0.3910 and the Old Line Bancshares 20 day volume-weighted average price, divided by (c) the quotient of the Old Line Bancshares 20 day volume-weighted average price divided by $27.00. Therefore, the value of the per share and aggregate consideration to be received in the Merger will depend on the market price of Old Line Bancshares common stock on the closing date of the Merger and the applicability and extent of any adjustments. The impact of these adjustments on the number of Old Line Bancshares common stock issued for each share of the Company’ common stock will vary based on the recent trading prices of Old Line Bancshares common stock as of the effective date of the Merger. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in the businesses, operations and prospects of Old Line Bancshares and regulatory considerations. Many of these factors are beyond Old Line Bancshares’ control.

As noted above, the Company has the option, but is not required, to terminate the Merger Agreement if the

average price of the Old Line Bancshares common stock falls below certain thresholds, although the Company would not have this option if Old Line Bancshares, in its sole discretion, were to exercise its right to prevent the Company from so terminating by increasing the consideration. We cannot predict at this time whether our board of directors would exercise its right to terminate the Merger Agreement if these conditions were met. The Merger Agreement does not provide for a resolicitation of the Company’s stockholders in the event that the conditions are met following the approval of the Merger by the Company’s stockholders and our board nevertheless chooses to complete the transaction. Our board of directors has made no decision as to whether it would exercise its right to terminate the Merger Agreement. In considering whether to exercise its right to terminate the Merger Agreement, our board of directors would take into account all of the relevant facts and circumstances that exist at the time and would consult with our financial advisors and legal counsel.

Pending litigation related to the Merger may delay or prevent the Merger and could cause Old Line Bancshares and the Company to incur significant costs and expenses.

On December 14, 2017, Adam Franchi, both individually and on behalf of a putative class of the Company’s stockholders, filed a complaint in the United States District Court for the District of Maryland against Bay Bancorp and its directors as well as Old Line Bancshares (the “Litigation”). The complaint alleges that the version of the joint proxy statement/prospectus that was filed with the SEC on November 22, 2017 omitted certain material information in violation of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and asks the court to, among other things, enjoin the parties from proceeding with the Merger unless and until they revise the joint proxy statement/prospectus so that it includes the information that is alleged to have been omitted therefrom. In the event that the parties fail to do so and nevertheless proceed with the merger, the complaint asks the court to set aside the Merger or award rescissory damages. On February 14, 2018, without admitting any violation of law, Old Line Bancshares filed an amended joint proxy statement/prospectus with the SEC, and Mr. Franchi thereafter agreed to dismiss with prejudice all of his claims, but only as to himself and without prejudice to any other member of the putative class of stockholders. On March 28, 2018, the parties to the Litigation entered into a Stipulation and Proposed Order of Dismissal (the “Stipulation”) that, if approved by the court, will resolve all issues raised in the Litigation except for a claim for attorneys’ fees. No assurance can be given that the court will approve the Stipulation. If the court does not approve the Stipulation, then the Litigation could delay or even prevent the merger and would likely cause the Company and Old Line Bancshares to incur significant legal fees and other costs to defend the claims, which could adversely impact the financial condition and results of operations of the Company and Old Line Bancshares, both before and after the Merger. No assurance can be given that Old Line Bancshares, the Company or the Company’s directors would be successful in the defense of these claims if they are not dismissed.

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RISKS RELATING TO THE COMPANY AND ITS AFFILIATES

The Company’s future success depends on the successful growth of its subsidiaries.

The Company’s primary business activity for the foreseeable future will be to act as the holding company of the Bank and its other direct and indirect subsidiaries. Therefore, the Company’s future profitability will depend on the success and growth of these subsidiaries. In the future, part of our growth may come from buying other depository institutions and buying or establishing other companies. Such entities may not be profitable after they are purchased or established, and they may lose money, particularly at first. A new bank or company may bring with it unexpected liabilities, bad loans, or bad employee relations, or the new bank or company may lose customers.

We could experience significant difficulties and complications in connection with our growth and acquisition strategy.

We grew significantly in 2013, ~~2014~~2015 and 2016 through acquisitions. We intend to continue to grow both organically and by acquiring financial institutions and branches. However, the market for acquisitions is highly competitive. We may not be as successful in identifying financial institutions and branch acquisition candidates, integrating acquired institutions or preventing deposit erosion at acquired institutions or branches as we currently anticipate. Even if we are successful with this strategy, we may not be able to manage this growth adequately and profitably due to unforeseen risks including:

Potential exposure to unknown or contingent liabilities of acquired banks;

Potential exposure to asset quality issues of acquired banks;

Potential disruption to our existing business;

Potential diversion of the time and attention of our management; and

Potential loss of key employees and customers of the banks and other businesses that we acquire.

We may also encounter unforeseen expenses, as well as difficulties and complications in integrating expanded operations and new employees without disruption to our overall operations. Following each acquisition, we must expend substantial resources to integrate the entities. To manage future growth effectively, we will have to maintain and enhance financial and accounting systems and controls, as well as integrate new personnel and manage expanded operations. There can be no assurance that we will be able to effectively manage our expanding operations. If we are unable to manage growth effectively, our business, financial condition, and results of operations could be materially and adversely affected.

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operations. There can be no assurance that we will be able to effectively manage our expanding operations. If we are unable to manage growth effectively, our business, financial condition, and results of operations could be materially and adversely affected.

Finally, we may expend significant cash and other resources in connection with a proposed acquisition that ultimately may not be approved by our regulators or the institution’s stockholders, or may not close due to unforeseen circumstances, such as inaccurate representations and warranties made by a party in the definitive acquisition agreement, a party’s breach of its covenants contained in the definitive acquisition agreement, material changes in conditions, and other situations that may be negotiated and agreed upon by the parties. In addition, we may change our strategies in contemplation of an acquisition and its anticipated effects on our financial condition and/or results of operations. If an acquisition does not close, then these factors could have a material adverse effect on our future financial condition and results of operations and/or could cause our future financial condition and results of operations to differ materially from our expectations. Moreover, a failed acquisition could significantly harm our reputation and cause our investors and customers to lose confidence in us.

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We face intense competition in our target markets.

The financial services industry, including commercial banking, mortgage banking, consumer lending and home equity lending, is highly competitive, and we will continue to encounter strong competition for deposits, loans and other financial services in our target markets in each of our lines of business. Our principal competitors in our target markets are other FSBs, commercial banks and credit unions. However, additional competition is and will continue to be provided by mutual funds, money market funds, finance companies, trust companies, insurers, leasing companies, credit unions and mortgage companies with respect to some of our products and services. Many of our non-bank competitors are not subject to the same degree of regulation as us and thus have advantages over us in providing certain services. Many of our bank and credit union competitors are significantly larger than us and have greater access to capital and other resources, higher lending limits and larger branch networks. These competitive factors may have a material adverse effect on the profitability of our lending and deposit operations.

We may be adversely affected by conditions in the local market where we operate and by the national economy.

Our business activities are concentrated in the greater Baltimore metropolitan area of Maryland, as well as south along the Baltimore-Washington corridor. As a result, our financial condition and results of operations are sensitive to changes in local economic and business conditions. In addition, a significant decline in general economic conditions nationally caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, declines in the housing market, a tightening credit environment or other factors could impact these local economic conditions and, in turn, have an adverse effect on our financial condition and results of operations.

Although economic conditions have improved since the economic recession ended in June 2009, certain sectors, such as real estate and manufacturing, remain weak. Future declines in real estate values, home sales volumes, and financial stress on borrowers as a result of an uncertain economic environment could have an adverse effect on our customers, which could adversely affect our financial condition and results of operations. In addition, local governments and many businesses are still experiencing difficulty due to lower consumer spending. Any deterioration in local economic conditions could drive losses beyond that which is provided for in our allowance for loan losses. We may also face the following risks in connection with these events:

Economic conditions that negatively affect housing prices and the job market have resulted, and could again result, in deterioration in credit quality of our loan portfolios, and such deterioration in credit quality has had, and could continue to have, a negative impact on our business;

Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities; and/or

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The processes we use to estimate the allowance for loan losses and reserves may no longer be reliable because they rely on complex judgments that may no longer be capable of accurate estimation.

Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our loan portfolio is made more complex by deteriorating market and economic conditions. A prolonged national economic recession or deterioration of conditions in our local markets could drive losses beyond that which is provided for in our allowance for credit losses and result in the following consequences:

Increases in loan delinquencies;

Increases in nonperforming assets and foreclosures;

Decreases in demand for our products and services, which could adversely affect our liquidity position; and/or

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Decreases in the value of the collateral securing our loans, especially real estate, which could reduce customers’ borrowing power.

The occurrence of any of the above or similar conditions could have an adverse effect on our borrowers or their customers, which could adversely affect our business, financial condition, results of operations and cash flows.

The activities and financial condition of other financial institutions with which we do business could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, including counterparties in the financial industry, such as commercial banks and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions will expose us to credit risk in the event of default of a counterparty or client. In addition, this credit risk may be exacerbated when the collateral we hold cannot be realized upon liquidation or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.

Our allowance for loan losses may not be sufficient to cover actual loan losses.

To absorb probable, incurred loan losses that we may realize, we recognize an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience, and delinquency trends. However, we cannot estimate loan losses with certainty, and we cannot assure you that charge offs in future periods will not exceed the allowance for loan losses. If charge offs exceed our allowance, our earnings would be adversely affected. In addition, regulatory agencies, as an integral part of their examination process, review our allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination.

A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company and the Bank beginning with our first full fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This standard will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

Because our loan portfolio includes a substantial amount of commercial real estate loans, our earnings will be particularly sensitive to the financial and credit risks associated with these types of loans.

The financial and credit risk associated with commercial real estate loans is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, which is generally larger than consumer-type loans, and the effects of general economic conditions. Any significant failure of our customers to either pay on time or comply with the conditions of their loans would adversely affect our results of operations.

24 Our commercial real estate loan portfolio represented approximately 43% of the total loan portfolio at December 31, 2017. Underwriting and portfolio management activities cannot eliminate all risks related to these loans.

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Our commercial real estate loan portfolio represented approximately 42% of the total loan portfolio as of December 31, 2016. Underwriting and portfolio management activities cannot eliminate all risks related to these loans. Commercial real estate loans will typically be larger than consumer loans and may pose higher risks than other types of loans. This portfolio is bifurcated into “investor” and “owner-occupied” classes, with investor loans representing approximately 6765% of the commercial real estate loan portfolio and 28% of the total loan portfolio. The primary source of repayment for investor commercial real estate loans is through the income stream generated by the property or successful development and sale of their properties. We may incur losses on investor commercial real estate loans due to declines in occupancy rates, rental rates and capitalization rates, which may decrease property values and may potentially decrease the likelihood that a borrower may find permanent financing alternatives.

At December 31, ~~2016~~2017, owner-occupied commercial real estate loans represented approximately 3335% of the commercial real estate loan portfolio and 1415% of the total loan portfolio. The primary source of repayment for owner-occupied real estate loans is the cash flow produced by the related commercial enterprise, and the value of the real estate is a secondary source of repayment of the loan. If we are required to liquidate the collateral securing a loan to satisfy the debt, our earnings and capital could be adversely affected.

The Bank’s lending activities subject the Bank to the risk of environmental liabilities.

A significant portion of the Bank’s loan portfolio is secured by real property. During the ordinary course of business, the Bank may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Bank may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Bank to incur substantial expenses and may materially reduce the affected property’s value or limit the Bank’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Bank’s exposure to environmental liability. Although the Bank has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations.

We may be subject to certain risks related to originating and selling mortgage loans.

When mortgage loans are sold, it is customary for the seller to make representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. The whole loan sale agreements require the repurchase or substitution of mortgage loans in the event we breach any of these representations or warranties. In addition, there may be a requirement to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. We receive a limited number of repurchase and indemnity demands from purchasers as a result of borrower fraud and early payment default of the borrower on mortgage loans. While we have enhanced our underwriting policies and procedures and maintain adequate reserves, these steps may not be effective or reduce the risk associated with loans sold in the past. If repurchase and indemnity demands increase materially, the Company’s results of operations could be adversely affected.

We may not be able to access funding sufficient to support our asset growth.

Our business plan and marketing strategy is based on access to funding from local customer deposits, such as checking and savings accounts and certificates of deposits. Deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, FDIC insurance costs, returns available to customers on alternative investments and general economic conditions. If local customer deposits are not sufficient to fund our asset growth, we will look to outside sources such as advances from the FHLB. Since the FHLB provides secured funding, our ability to access advances from the FHLB will be dependent upon whether and to the extent we can provide collateral. We may also look to brokered deposits or branch acquisitions as a source of liquidity. An inability to obtain alternative funding to supplement our local core deposits or FHLB advances, or a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a negative effect on our business, financial condition and results of operations.

Fluctuations in interest rates could reduce our profitability as we expect to realize income primarily from the difference between interest earned on loans and investments and interest paid on deposits and borrowings.28

Our earnings are significantly dependent on net interest income, as we realize income primarily from the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We will experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” may work against us, negatively affecting our earnings. We are unable to predict fluctuations of market interest rates, which are affected by many factors, including inflation, recession, rise in unemployment, tightening money supply, and disorder and instability in domestic and foreign financial markets. Although our asset-liability management strategy is intended to mitigate risk from

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~~changes~~ Fluctuations in ~~market~~ interest rates, wecould ~~may~~reduce ~~not~~our beprofitability ~~able~~as towe ~~prevent~~expect ~~changes~~to inrealize ~~interest~~income ~~rates~~primarily from ~~having~~the adifference ~~material~~between ~~adverse~~interest ~~effect~~earned on ~~our~~loans ~~results~~and ofinvestments ~~operations~~ and ~~financial~~interest ~~condition.~~paid on deposits and borrowings.

Our investment securities portfolio is subject to credit risk, market risk, and liquidity risk.

The investment securities portfolio has risk factors beyond our control that may significantly influence its fair value. These risk factors include, but are not limited to, rating agency downgrades, issuer defaults, lack of market pricing, and instability in the credit markets. Any changes in these risk factors could negatively affect our accumulated other comprehensive income and stockholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades, defaults or prepayments, including the liquidation of the underlying collateral in certain securities, could result in future classifications as other-than-temporarily impaired. This could have a material impact on our future earnings, although the impact on stockholders’ equity will be offset by any amount already included in other comprehensive income for securities that were temporarily impaired.

Impairment of deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations.

At December 31, ~~2016~~2017, our net deferred tax assets were valued at $41.48 million, which included $0.75 million associated with a federal and state net operating loss carryforward which we expect to be substantially utilized in the current year. A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, both negative and positive, including the recent trend of quarterly earnings, management believes that it is more likely than not that some portion or all of the total deferred tax asset will not be realized. Moreover, our ability to utilize our net operating loss carryforwards to offset future taxable income may be significantly limited if we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”). If an ownership change were to occur, the limitations imposed by Section 382 of the Code could result in a portion of our net operating loss carryforwards expiring unused, thereby impairing their value. Section 382’s provisions are complex, and we cannot predict any circumstances surrounding the future ownership of the common stock. Accordingly, we cannot provide any assurance that we will not experience an ownership change in the future. The impact of such an impairment could have a material adverse effect on our business, results of operations, and financial condition.

We could have a material write down related to our deferred tax asset as a result of a decrease in our corporate tax rate.

Since the 2016 presidential election, there has been a great deal of discussion relating to possible changes to the Code and corporate tax rates. A number of proposals for broad reform of the corporate tax system are under evaluation by various legislative and administrative bodies, but it is not possible to accurately determine the overall impact of such proposals on our tax rate at this time. As of December 31, 2016, the balance of our net deferred tax asset was $4.4 million. Any decrease in our corporate tax rate would result in an immediate decrease in the deferred tax asset and a related charge to earnings that could materially affect our financial results.

We are subject to operational risk.

Like all businesses, we are subject to operational risk, which represents the risk of loss resulting from inadequate or failed internal processes in our systems, human error, and external events. Operational risk also encompasses technology, compliance and legal risk, which is the risk of loss from violations of, or noncompliance with, rules, regulations, prescribed practices or ethical standards, as well as the risk of our noncompliance with contractual and other obligations. We are also exposed to operational risk through our outsourcing arrangements, and the effect that any changes in circumstances or capabilities of these outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business. Although we seek to mitigate operational risks through a system of internal controls which we regularly review and update, no system of controls, however well designed and maintained, is infallible. Control weaknesses or failures or other operational risks could result in charges, increased operational costs, harm to our reputation or foregone business opportunities.

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Failure to maintain effective internal control over financial reporting could impair our ability to prevent fraud or report accurately and timely financial results, resulting in loss of investor confidence and adversely affecting our business and stock price.

We are required by the Sarbanes-Oxley Act to establish and maintain effective disclosure controls and procedures and an effective system of internal control over financial reporting. These control systems are intended to provide reasonable assurance that material information relating to us is made known to management and reported as required by the Exchange Act, to provide reasonable assurance regarding the reliability and preparation of our financial statements, and to provide reasonable assurance that fraud and other unauthorized uses of our assets are detected and prevented. Any failure to maintain an effective internal control environment could impact our ability to report financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact our business and stock price.

We are dependent on key personnel, including our executive officers and directors, and the loss of such persons may adversely affect our operations and financial performance.

We are dependent on the continued services of our executive officers, whose skills and years of industry experience are critical to the successful implementation of our business strategy. Should the services of these key executives become unavailable, there can be no assurance that a suitable successor could be found who would be willing to be employed upon the terms and conditions that we would offer. A failure to replace any of these individuals promptly could have an adverse effect on our results of operations and financial performance. Additionally, the community involvement, diverse backgrounds, and extensive local business relationships of our directors is important to our success. If the composition of our board of directors were to change significantly, our banking business could suffer.

We are, and will continue to be, subject to extensive regulation in the conduct of our business operations, which could adversely affect our financial results.

The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not stockholders. These regulations affect lending practices, capital structure, investment practices, dividend policy and growth, among other things. For example, federal and state consumer protection laws and regulations will limit the manner in which we may offer and extend credit. From time to time, the United States Congress and state legislatures consider changing these laws and may enact new laws or amend existing laws to further regulate the financial services industry. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the laws governing bankruptcy generally favor debtors, making it more expensive or more difficult to collect from customers who have declared bankruptcy.

The full impact of the Dodd-Frank Act is unknown because ~~significant~~some rule making efforts are still required to fully implement all of its requirements, ~~but~~and itthe ~~will~~implementation ~~likely~~of ~~materially~~some ~~increase~~enforcement ~~our~~efforts is just beginning. We anticipate continued increases in regulatory expenses as a result of the Dodd-Frank Act.

The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States and affects the lending, investment, trading and operating activities of all financial institutions. ~~Significantly, the Dodd-Frank Act includes the following provisions that affect the Company and the Bank:~~

· Based Iton ~~established~~ the ~~CFPB,~~text ~~which has rulemaking authority over many~~ of the ~~statutes~~Dodd-Frank ~~governing~~Act ~~products~~ and ~~services~~the ~~offered~~implementing toregulations, ~~Bank~~it ~~customers.~~is ~~The~~anticipated ~~creation~~that of the ~~CFPB~~costs ~~will~~to ~~directly~~banks ~~impact~~may ~~the~~increase ~~scope~~or ~~and~~fee ~~cost~~income ofmay ~~products~~decrease ~~and~~significantly, ~~services~~which ~~offered~~could toadversely ~~consumers~~affect byour ~~the~~results ~~Bank~~of ~~and~~operations, ~~may~~financial ~~have~~condition aand/or ~~significant effect on its financial performance~~liquidity.

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· The ItConsumer ~~revised~~Financial ~~the~~Protection ~~FDIC’s~~Bureau ~~insurance~~may ~~assessment~~continue ~~methodology~~to soreshape ~~that~~the ~~premiums~~consumer ~~are~~financial ~~assessed~~laws ~~based~~through ~~upon~~rulemaking and enforcement of the ~~average~~prohibitions ~~consolidated~~against ~~total~~unfair, ~~assets~~deceptive ofand ~~the~~abusive ~~Bank~~business ~~less~~practices. Compliance ~~tangible~~with ~~equity~~any ~~capital~~such change may impact our business operations.

· The ItCFPB ~~permanently~~has ~~increased~~broad ~~deposit~~rulemaking ~~insurance~~authority ~~coverage~~to administer and carry out the provisions of the Dodd-Frank Act with respect to ~~$250~~financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to adopt rules identifying practices or acts that are unfair,~~000~~ deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is new under the law. The full scope of the impact of this authority has not yet been determined as the CFPB has not yet released significant supervisory guidance.

· As Itdiscussed ~~authorized~~above, the ~~Federal~~CFPB ~~Reserve~~issued several rules in 2013 relating to ~~set~~mortgage ~~debit~~operations ~~interchange~~and ~~fees~~servicing, inincluding ana ~~amount~~rule ~~that~~requiring ismortgage “lenders to make a reasonable and ~~proportional”~~good tofaith ~~the~~determination ~~costs~~based ~~incurred~~on byverified ~~processors~~ and ~~card~~documented ~~issuers.~~information ~~Under~~that ~~the~~a ~~final~~consumer ~~rule~~applying ~~issued~~for bya mortgage loan has a reasonable ability to repay the ~~Federal~~loan ~~Reserve~~according to its terms, ~~there~~or isto aoriginate ~~cap~~“qualified ofmortgages” ~~$0.21~~that ~~per~~meet ~~transaction~~specific (requirements with arespect ~~maximum~~to ofterms, $0pricing and fees.24 ~~per~~These ~~transaction~~new ~~permitted~~rules ifhave ~~certain~~required ~~requirements~~the ~~are~~Bank ~~met).~~to ~~Implementation~~dedicate ofsignificant ~~these~~personnel ~~caps~~resources ~~went~~and ~~into~~could have a material adverse effect on ~~October~~our ~~1, 2011~~operations.

· It imposes proprietary trading restrictions on insured depository institutions and their holding companies that prohibit them from engaging in proprietary trading except in limited circumstances, and prevents them from owning equity interests in excess of three percent (3%) of a bank’s Tier 1 capital in private equity and hedge funds.

Based on the text of the Dodd-Frank Act and the implementing regulations (both effective and yet-to-be-published), it is anticipated that the costs to banks may increase or fee income may decrease significantly, which could adversely affect our results of operations, financial condition and/or liquidity. Moreover, compliance obligations will expose us to additional noncompliance risk and could divert management’s focus from the business of banking.

The Consumer Financial Protection Bureau may reshape the consumer financial laws through rulemaking and enforcement of the prohibitions against unfair, deceptive and abusive business practices. Compliance with any such change may impact our business operations.

The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers. The CFPB has also been directed to adopt rules identifying practices or acts that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The concept of what may be considered to be an “abusive” practice is new under the law. The full scope of the impact of this authority has not yet been determined.

Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock.

The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing common stock. The issuance of additional shares of common stock could dilute existing stockholders.

Rulemaking efforts by the Federal Reserve may negatively impact our noninterest income.

On November 12, 2009, the Federal Reserve announced the final rules amending Regulation E that prohibit financial institutions from charging fees to consumers for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts-in, to the overdraft service for those types of transactions. Compliance with this regulation was effective July 1, 2010 for new consumer accounts and August 15, 2010 for existing consumer accounts. These new rules negatively impacted the Banks’ noninterest income in 2015 and 2016 and may do the same in future periods.

In addition, the Federal Reserve has issued rules pursuant to the Dodd-Frank Act governing debit card interchange fees that apply to institutions with greater than $10 billion in assets. Although we are not subject to these rules, market forces may effectively require the Bank to adopt a debit card interchange fee structure that complies with these rules, in which case our noninterest income for future periods could be materially and adversely affected.

We may be adversely affected by other recent legislation and rule-making efforts.

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The GLB Act repealed restrictions on banks affiliating with securities firms and it also permitted certain bank holding companies to become financial holding companies. Financial holding companies are permitted to engage in a host of financial activities, and activities that are incidental to financial activities, that are not permitted for bank holding companies who have not elected to become financial holding companies, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities. The GLB Act may increase the competition that we face from other financial institutions, which could adversely impact our financial condition and/or results of operations in future periods.

The Sarbanes-Oxley Act requires management of every publicly traded company to perform an annual assessment of the company’s internal control over financial reporting and to report on whether the system is effective asat of the end of the company’s fiscal year. If our management were to discover and report significant deficiencies or material ~~weaknesses in our internal control over financial reporting, then the market value of our securities and shareholder value could decline.~~

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weaknesses in our internal control over financial reporting, then the market value of our securities and shareholder value could decline.

The USA Patriot Act requires certain financial institutions, such as the Bank, to maintain and prepare additional records and reports that are designed to assist the government’s efforts to combat terrorism. This law includes sweeping anti-money laundering and financial transparency laws and required additional regulations, including, among other things, standards for verifying client identification when opening an account and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. If we fail to comply with this law, we could be exposed to adverse publicity as well as fines and penalties assessed by regulatory agencies.

The Bank is a community bank and our ability to maintain our reputation is critical to the success of our business.

The Bank is a community banking institution, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected.

Our business is, and will continue to be, dependent on technology and an inability to invest in technological improvements or obtain reliable technological support may adversely affect our results of operation and financial condition.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our ability to grow and compete will depend in part upon the ability to address the needs of customers by using technology to provide products and services that will satisfy their operational needs, while managing the costs of expanding our technology infrastructure. Many competitors have substantially greater resources to invest in technological improvements and third-party support. There can be no assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. For the foreseeable future, we expect to rely on third-party service providers and on other third parties for services and technical support. If those products and services become unreliable or fail, the adverse impact on customer relationships and operations could be material.

System failure or breaches of our network security could lead to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure that we use could be vulnerable to unforeseen problems. Our operations are dependent in part upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in operations could have an adverse effect on customers. In addition, we must be able to protect the computer systems and network infrastructure utilized by us against physical damage, security breaches and service disruption caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and deter potential customers.

~~We are dependent upon outside third parties for processing and handling of records and data, which subjects us to additional operational risks.~~32

Like most community banks, we outsource substantially all of our data processing to third-party providers. These third-party providers could also expose us to operational and information security risk resulting from breakdowns

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or We ~~failures~~are ofdependent ~~their~~upon ~~own~~outside ~~systems or capacity constraints. If our~~ third~~-party~~ ~~providers~~parties ~~encounter difficulties, or if we have difficulties in communicating with them, our ability to adequately process and account~~ for ~~customer~~processing ~~transactions could be affected,~~ and ~~our~~handling ~~business operations could be adversely impacted and result in a loss~~ of ~~customers~~records and ~~business~~data, ~~subject~~which subjects us to additional ~~regulatory~~operational ~~scrutiny, or expose us to civil litigation and possible financial liability~~risks. ~~Any of these occurrences could have a material adverse effect on our financial condition and results of operations.~~

WeLike ~~may~~most community banks, we outsource substantially all of our data processing to third-party providers. These third-party providers could also expose us to operational and information security risk resulting from breakdowns or failures of their own systems or capacity constraints. If our third-party providers encounter difficulties, or if we have difficulties in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted and result in a loss of customers and business, subject us to ~~certain~~additional ~~risks~~regulatory ~~related~~scrutiny, or expose us to ~~originating~~civil litigation and ~~selling~~possible ~~mortgage~~financial ~~loans~~liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

~~When~~Safeguarding ~~mortgage~~our ~~loans~~business ~~are sold, it is customary for the seller to make representations~~ and ~~warranties~~customer toinformation ~~the~~increases ~~purchaser~~our ~~about~~cost ~~the~~of ~~mortgage loans and the manner in which they were originated~~operations. ~~The~~ ~~whole~~To ~~loan sale agreements require~~ the ~~repurchase~~extent orthat ~~substitution of mortgage loans in the event~~ we, ~~breach any of these representations~~ or ~~warranties. In~~our ~~addition~~third-party vendors, ~~there~~are ~~may~~unable ~~be a requirement~~ to ~~repurchase~~prevent ~~mortgage~~the ~~loans~~theft ~~as a result~~ of ~~borrower fraud~~ or inunauthorized ~~the~~access ~~event~~to ofthis ~~early~~information, payment default of the borrower on a mortgage loan. We receive a limited number of repurchase and indemnity demands from purchasers as a result of borrower fraud and early payment default of the borrower on mortgage loans. While we have enhanced our ~~underwriting~~operations ~~policies~~may ~~and~~become ~~procedures and maintain adequate reserves~~disrupted, ~~these~~we ~~steps~~ may ~~not~~ be ~~effective~~subject orto ~~reduce~~claims, ~~the risk associated with loans sold in the past. If repurchase~~ and ~~indemnity~~our ~~demands~~net ~~increase~~income ~~materially,~~may ~~the Company’s results of operations could~~ be adversely affected.

Our business depends heavily on the use of computer systems, the Internet and other means of electronic communication and recordkeeping. Accordingly, we must protect our computer systems and network from break-ins, security breaches, and other risks that could disrupt our operations or jeopardize the security of our business and customer information. Moreover, we use third party vendors to provide products and services necessary to conduct our day-to-day operations, which exposes us to risk that these vendors will not perform in accordance with the service arrangements, including by failing to protect the confidential information we entrust to them. Any security measures that we or our vendors implement, including encryption and authentication technology that we use to effect secure transmissions of confidential information, may not be effective to prevent the loss or theft of our information or to prevent risks associated with the Internet, such as cyber-fraud. Advances in computer capabilities, new discoveries in the field of cryptography, or other developments could permit unauthorized persons to gain access to our confidential information in spite of the use of security measures that we believe are adequate. Any compromise of our security measures or of the security measures employed by our vendors of our third party could disrupt our business and/or could subject us to claims from our customers, either of which could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to claims and the costs of defensive actions, and such claims and costs could materially and adversely impact our financial condition and results of operations.

Our customers may sue us for losses due to alleged breaches of fiduciary duties, errors and omissions of employees, officers and agents, incomplete documentation, our failure to comply with applicable laws and regulations, or many other reasons. Also, our employees may knowingly or unknowingly violate laws and regulations. Management may not be aware of any violations until after their occurrence. This lack of knowledge may not insulate us from liability. Claims and legal actions will result in legal expenses and could subject us to liabilities that may reduce our profitability and hurt our financial condition.

We depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of our customers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on business and, in turn, results of operation and financial condition.

Consumers and businesses may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. The possibility of eliminating banks as intermediaries could result in the loss of interest and fee income, as well as the loss of customer deposits and the related income generated from those ~~deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our results of operations and financial condition.~~

~~The Company’s largest stockholder is deemed to be a bank holding company, which exposes us to special risks.~~ 33

The Company’s largest stockholder, H Bancorp LLC (“H Bancorp”), beneficially owns approximately 26.5% of the Company’s common stock and is deemed to be a bank holding company under the BHC Act with respect to the Bank. Under Federal Reserve guidelines, every bank holding company must serve as a “source of strength” for each of their bank subsidiaries. In addition, the FDI Act requires that an insured depository institution shall be liable for the loss incurred or anticipated by the FDIC arising from the default of a commonly controlled insured depository institution or any assistance provided by the FDIC to any commonly controlled insured depository institution in danger of default. The position of H Bancorp as a source of strength to other depository institutions may limit its ability to serve as a source

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deposits. The loss of ~~strength~~these ~~for~~revenue usstreams and ~~could~~the ~~adversely~~lower ~~affect~~cost ~~our~~deposits ~~ability~~as toa ~~access~~source ~~resources~~ of Hfunds ~~Bancorp. Federal~~could ~~bank regulatory agencies~~ have ~~additional discretion to require~~ a ~~bank~~material ~~holding~~adverse ~~company~~effect toon ~~divest~~our ~~itself~~results of ~~any~~operations ~~bank~~and ~~or non-bank subsidiary if the agency determines that divestiture may aid the depository institution’s~~ financial condition.

The Company’s largest stockholder is deemed to be a bank holding company, which exposes us to special risks.

A bank for which H Bancorp is deemed to be a bank holding company may be required to indemnify, or cross-guarantee, the FDIC against losses the FDIC incurs with respect to any other bank controlled by H Bancorp. Accordingly, we may be obligated to provide financial assistance to any other financial institution to which H Bancorp is deemed to be a bank holding company. Any financial assistance that we would have to provide could reduce our capital and result in a reduction in the value of our stockholders’ equity.

The Company may need to raise additional capital in the future and, in such case, it may not be able to obtain such capital on favorable terms or at all. In such case, the Company may not be able to execute on its business plans, and its business, financial condition and/or results of operations could be adversely affected.

Banking authorities require the Company and the Bank to maintain adequate levels of capital to support their operations. In addition, the Company may elect to raise additional capital in the future to fund its growth or acquisition activities. Any sale of additional equity or debt securities may result in dilution to the Company’s stockholders. The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside its control. Conditions in the capital markets may be such that traditional sources of capital may not be available to the Company on reasonable terms. Accordingly, the Company may not be able to raise additional capital if needed or on terms that are favorable or otherwise not dilutive to its existing stockholders. Furthermore, the significant amount of common stock that H Bancorp owns may discourage other potential investors from offering to acquire newly issued shares. If the Company is unable to obtain additional capital as and when needed, then it may be required to delay, reduce the scope of, or eliminate its growth and acquisition activities, which could adversely affect its business, financial condition and operating results.

RISKS RELATING TO THE COMPANY’S COMMON STOCK

The shares of common stock are not insured.

The shares of the Company’s common stock are not deposits and are therefore not insured against loss by the FDIC or any other governmental or private agency.

Applicable banking and Maryland laws impose restrictions on the ability of the Company and the Bank to pay dividends and make other distributions on their capital securities, and, in any event, the payment of dividends is at the discretion of the boards of directors of the Company and the Bank.

The Company’s ability to pay cash dividends in the future will be largely dependent upon the receipt of dividends from the Bank, and the Bank’s ability to pay dividends will depend primarily on its future earnings and capital needs. Bank regulatory agencies have the ability to prohibit proposed dividends by a financial institution which would otherwise be permitted under applicable regulations if the regulatory body determines that such distribution would constitute an unsafe or unsound practice. Banks that are considered “troubled institutions” are prohibited by federal law from paying dividends altogether. In addition, FSBs, like the Bank, must either submit an application or prior notice to the OCC before making a distribution to its stockholders, and the OCC has the authority to deny or object to that distribution. In any event, the declaration and payment of dividends and the amounts thereof are at the discretion of the board of directors. Thus, no assurance can be given that the Company or the Bank will declare or pay dividends in any future period.

~~The Bank’s ability to pay dividends to the Company is limited by regulatory agreement.~~34

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unsound practice. Banks that are considered “troubled institutions” are prohibited by federal law from paying dividends altogether. In addition, FSBs, like the Bank, must either submit an application or prior notice to ~~these~~the ~~regulatory~~OCC ~~restrictions~~before making a distribution to its stockholders, itand ~~should~~the beOCC ~~noted~~has the authority to deny or object to that distribution. In any event, the declaration and payment of dividends ~~by the Company~~ and the ~~Bank~~amounts isthereof are at the discretion of ~~their~~the ~~respective~~board ~~Boards~~ of ~~Directors~~directors. Thus, ~~and~~no ~~will~~assurance ~~depend,~~can inbe ~~part,~~given onthat ~~our~~the ~~earnings~~Company ~~and~~or ~~future~~the ~~capital~~Bank ~~needs.~~will declare or pay dividends in any future period.

The Bank’s ability to pay dividends to the Company is limited by regulatory agreement.

The Bank is a party to an Operating Agreement with the OCC (the “Operating Agreement”) that imposes certain minimal capital requirements on the Bank. In the Operating Agreement, the Bank agreed that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including these capital requirements. Due to the Company’s desire to preserve its and the Bank’s capital to fund growth, the Company currently does not anticipate paying cash dividends on its common stock for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends by the Company and the Bank is at the discretion of their respective Boards of Directors and will depend, in part, on our earnings and future capital needs.

The common stock is not heavily traded.

The Company’s common stock is listed on the NASDAQ Capital Market, but shares of the common stock are not heavily traded. Securities that are not heavily traded can be more volatile than stock trading in an active public market. Factors such as our financial results, the introduction of new products and services by us or our competitors, and various factors affecting the banking industry generally may have a significant impact on the market price of the shares the common stock. Management cannot predict the extent to which an active public market for any of the Corporation’s securities will develop or be sustained in the future. Accordingly, holders of the Company’s common stock may not be able to sell their shares at the volumes, prices, or times that they desire.

The Company’s Charter and Bylaws and Maryland law may discourage a corporate takeover.

The Company’s Amended and Restated Articles of Incorporation, as amended (the “Charter”), and its Amended and Restated Bylaws (the “Bylaws”) contain certain provisions designed to enhance the ability of the Board of Directors to deal with attempts to acquire control of the Company. First, the Charter gives the Board the authority to classify and reclassify unissued shares of stock of any class or series of stock by setting, fixing, eliminating, or altering in any one or more respects the preferences, rights, voting powers, restrictions and qualifications of, dividends on, and redemption, conversion, exchange, and other rights of, such securities. The Board could use this authority, along with its authority to authorize the issuance of securities of any class or series, to issue shares having terms favorable to management to a person or persons affiliated with or otherwise friendly to management. Second, the Bylaws require any stockholder who desires to nominate a director to abide by strict notice requirements.

Maryland law also contains anti-takeover provisions that apply to the Company. The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested stockholder” for a period of five years following the most recent date on which the interested stockholder became an interested stockholder. An interested stockholder is defined generally as a person who is the beneficial owner of 10% or more of the voting power of the outstanding voting stock of the corporation after the date on which the corporation had 100 or more beneficial owners of its stock or who is an affiliate or associate of the corporation and was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation at any time within the two-year period immediately prior to the date in question and after the date on which the corporation had 100 or more beneficial owners of its stock. The Maryland Control Share Acquisition Act applies to acquisitions of “control shares”, which, subject to certain exceptions, are shares the acquisition of which entitle the holder, directly or indirectly, to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors within any of the following ranges of voting power: one-tenth or more, but less than one-third of all voting power; one-third or more, but less than a majority of all voting power or a majority or more of all voting power. Control shares have limited voting rights.

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Although these provisions do not preclude a takeover, they may have the effect of discouraging, delaying or deferring a tender offer or takeover attempt that a stockholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock. These provisions could potentially adversely affect the market prices of the Company’s common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

This Item 1B is not applicable because the Company is a “smaller reporting company”.

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ITEM 2. PROPERTIES

Our headquarters are located in Columbia, Maryland. AsAt of December 31, ~~2016~~2017, the Bank operated 11 full-service branches, of which five were owned by the Bank and six were leased. See Note 8 to the Notes to the Consolidated Financial Statements for additional information.

We own the following properties, which had an aggregate book value of $1.43 million at December 31, ~~2016~~2017:

Location		Description
427 Crain Highway		Full service branch with drive-thru
Glen Burnie, MD 21061

531 South Conkling Street		Full service branch with drive-thru
Baltimore, MD 21224

We lease the following facilities at an aggregate annual rental of approximately $1.42 million asat of December 31, ~~2016~~2017:

Location	Description	Lease Expiration Date (1)
4600 Wilkens Avenue, Suite 105	Full service branch	31-July-21
Arbutus, MD 21229
1740 East Joppa Road	Full service branch	31-Dec-21
Towson, MD 21234
9515 Deerco Road, Suites 400 and 408	Mortgage banking offices	28-Feb-17
7151 Columbia Gateway Dr., Ste. A	Executive, administrative, and operational offices,	30-Apr-19
Timonium, MD 21093
Columbia, MD 21046	electronic banking. Full service branch
7151 Columbia Gateway Dr., Ste. A	Executive, administrative, and operational offices as well as	30-Apr-19
Columbia, MD 21046	electronic banking and full service branch offices
2328 West Joppa Road,	Loan offices as well as a full service branch	30-Sep-19
Lutherville, MD 20193
Lutherville, MD 21093
3700 E. Northern Parkway	Full service branch until December 2, 2016	31-Aug-17
Baltimore, MD 21200
344 N. Charles Street	Full service branch	31-Mar-23
Baltimore, MD 21201
602 Hoagie Drive	Full service branch	30-Nov-24
Bel Air, MD 21014 (2)
10301 York Road	Full service branch and loan offices	31-May-26
Cockeysville, MD 21030 (2)
4040 Schroeder Avenue	Full service branch	31-Jan-28
Perry Hall, MD 21128 (2)
1726 Reisterstown Road, Suite 110	Full service branch	30-Sep-18
1726 Reisterstown Road	Full service branch	30-Sep-18
Pikesville, MD 21046
Pikesville, MD 21208

(1)

Expiration date, assuming the Company does not exercise all extension options.

(2)

Represents Ground leases for these facilities that are otherwise owned by the Bank.

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ITEM 3. LEGAL PROCEEDINGS

~~Shortly~~The ~~after~~information ~~the~~set ~~consummation~~forth ~~of the Hopkins Merger, on September 20, 2016, Alvin M. Lapidus, the former Chairman of Hopkins, and Lois F. Lapidus, his wife, filed a lawsuit against Bay Bank~~ in ~~the~~Item ~~United~~1A ~~States District Court, District~~ of ~~Maryland,~~Part inI ~~which they alleged that a former employee~~ of ~~Hopkins~~this ~~Bank~~annual ~~embezzled~~report ~~approximately~~under ~~$1.45~~the ~~million~~heading ~~from~~“Pending ~~their~~litigation ~~deposit~~related ~~accounts at Hopkins Bank prior~~ to the ~~Hopkins~~ Merger~~. The~~ ~~complaint~~may ~~seeks~~delay ~~damages~~or inprevent the ~~amount~~Merger ~~that was allegedly embezzled plus interest, which is still accruing. This former employee was criminally charged in federal court~~ and ~~plead~~could ~~guilty~~cause toOld ~~Wire~~Line ~~Fraud,~~Bancshares ~~in violation of 28 U.S.C. § 1343,~~ and ~~Embezzlement by a Bank Employee, in violation of 28 U.S.C. § 656, and~~ the ~~information~~Company ~~supporting~~to ~~her~~incur ~~plea~~significant ~~agreement~~costs ~~identifies Mr.~~ and ~~Mrs.~~expenses” ~~Lapidus as victims. This former employee~~ is ~~scheduled~~incorporated toby bereference ~~sentenced~~into ~~in May 2017. Bay Bank is vigorously defending~~ this ~~case~~Item ~~and, at this point, cannot assess the likelihood of success of any of its defenses or, thus, the outcome of this litigation~~3. If a judgment were to be entered against Bay Bank, then Bay Bank intends to pursue an indemnity claim against a fidelity bond. Bay Bank believes that its insurance policies will cover a portion of its legal expenses relating to this litigation and has recorded appropriate accruals in the fair value accounting of the assets and liabilities acquired in the Hopkins Merger.

In addition to the foregoing, we are at times, in the ordinary course of business, subject to legal actions. Management, upon the advice of counsel, believes that losses, if any, resulting from current legal actions will not have a material adverse effect on our financial condition or results of operations.37

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We are at times, in the ordinary course of business, subject to legal actions. Management, upon the advice of counsel, believes that losses, if any, resulting from current ordinary course legal actions will not have a material adverse effect on our financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR BAY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET FOR THE COMMON STOCK

Shares of the Company’s common stock are listed on The NASDAQ Capital Market under the symbol “BYBK”. AsAt of March 1826, ~~2017~~2018, there were ~~293~~266 holders of record of the Company’s common stock, which does not include any beneficial owners of common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, or by broker-dealers or other participants who hold or clear shares directly or indirectly through the Depository Trust Company, or its nominee, Cede & Co.

~~TRANSFER~~The ~~AGENT~~high ~~AND~~and ~~REGISTAR~~low closing sales prices for the shares of the Company’s common stock for each quarterly period of 2017 and 2016 as reported on the NASDAQ Capital Market are set forth in the following table:

The transfer agent for the Company’s common stock is American Stock Transfer & Trust Co. LLC, 6201 15th Avenue, Brooklyn, NY 11219.


	High		Low
2017
1st Quarter	$	8.10	$	6.50
2nd Quarter		7.65		6.80
3rd Quarter		11.35		7.20
4th Quarter		12.37		11.35

2016
1st Quarter	$	5.09	$	4.65
2nd Quarter		5.40		4.84
3rd Quarter		5.89		4.92
4th Quarter		6.80		5.26

On March 27, 2018, the closing sales price of the common stock, ticker BYBK, as reported on the NASDAQ Capital Market, was $13.35 per share.

DIVIDENDS

During ~~2016~~2017 and ~~2015~~2016, the Company’s board of directors did not declare any dividends on the common stock.

The Company’s ability to ~~declare and~~ pay dividends is limited by federal banking laws and Maryland corporation laws. Further, because the Company is primarily a holding company for the Bank and its other subsidiaries, the Company’s ability to pay dividends will largely depend on whether the Bank is able to pay dividends to the Company. Banking regulations limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agencies. In addition to these regulations, in connection with the Company’s merger with Jefferson Bancorp, Inc. (“Jefferson”) in April 2013 (the “Jefferson Merger”), the Bank entered into the Operating Agreement. Under the Operating Agreement, the Bank may not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including its minimum capital requirements. Due to the Company’s desire to preserve its and the Bank’s capital to fund growth, the Company currently does not anticipate paying cash dividends on its common stock for

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~~Operating Agreement. Under~~ the Operating Agreement, the Bank may not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including its minimum capital requirements. Due to the Company’s desire to preserve its and the Bank’s capital to fund growth, the Company currently does not anticipate paying cash dividends on its common stock for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends by the Company and the Bank is at the discretion of their respective Boards of Directors and will depend, in part, on our earnings and future capital needs. Accordingly, there can be no assurance that dividends will be declared in any future period.

~~QUARTERLY~~TRANSFER ~~STOCK~~AGENT ~~INFORMATION~~AND REGISTAR

The ~~high~~transfer ~~and~~agent ~~low closing sales prices~~ for the ~~shares of the~~ Company’s common stock ~~for~~is ~~each~~American ~~quarterly~~Stock ~~period~~Transfer of& ~~2016~~Trust ~~and~~Co. ~~2015~~LLC, as6201 ~~reported~~15th onAvenue, ~~the~~Brooklyn, ~~NASDAQ~~NY ~~Capital Market are set forth in the following table:~~11219.

	High		Low
2016
1st Quarter	$	5.09	$	4.65
2nd Quarter		5.40		4.84
3rd Quarter		5.89		4.92
4th Quarter		6.80		5.26
2015
1st Quarter	$	5.21	$	4.31
2nd Quarter		5.48		5.12
3rd Quarter		5.40		4.87
4th Quarter		5.34		5.00

On March 20, 2017, the closing sales price of the common stock, ticker BYBK, as reported on the NASDAQ Capital Market was $8.00 per share.

ISSUER PURCHASES OF COMMON STOCK

OnNeither ~~February 24, 2016,~~ the Company’s ~~Board~~nor ofany ~~Directors approved a stock purchase program that authorizes the Company to repurchase up to 250,000 shares~~ of its ~~common~~affiliates stock over a 12-month period commencing on February 24, 2016. This authorization provided that shares may be repurchased in open market transactions or privately negotiated transactions at times, in amounts and at prices to be determined in the discretion of the Company's CEO President and Chief Executive Officer, provided that the purchase price per share could not be less than the fair market value of a share of common stock (as ofdefined ~~the~~by ~~date~~Rule of10b-18 ~~the~~under ~~purchase and provided further that each proposed repurchase must be consistent with applicable securities laws and~~ the ~~Company’s~~Exchange ~~blackout policy. This program was publicly announced on February 26, 2016. On August 11, 2016, the Company’s Board amended this program to (i~~Act) ~~authorize~~purchased ~~the~~any ~~repurchase of an additional 250,000~~ shares of the Company'’s common stock, ~~(ii)~~during ~~extend~~ the ~~repurchase~~fourth ~~period~~quarter ~~through August 31, 2017, and (iii) in the case~~ of ~~a privately-negotiated repurchase transaction, permit the Company to repurchase shares at a price that is less than the fair market value of a share of common stock at the time of repurchase~~2017. ~~The amended program was publicly announced on August 11, 2016.~~

During the fourth quarter of 2016, neither the Company nor any of its affiliates (as defined by Rule 10b-18 under the Exchange Act) purchased any shares of the Company’s common stock.

EQUITY COMPENSATION PLAN INFORMATION

Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information regarding Bay’s equity compensation plans required by this Item pursuant to Item 201(d) of Regulation S-K is located in Item 12 of Part III of this Annual Report and is incorporated herein by reference.

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ITEM 6. SELECTED FINANCIAL DATA

	2016			2015			2014			2013(1)			2012
	2017			2016			2015			2014			2013(1)
Consolidated Income Statement Data:
Interest income	$	2327,~~027~~887,~~431~~020		$	23,~~209~~027,~~506~~431		$	2423,~~115~~209,~~000~~506		$	1924,~~019~~115,~~543~~000		$	919,~~825~~019,~~529~~543
Interest expense		12,~~850~~339,~~134~~220			1,~~834~~850,~~883~~134			1,~~257~~834,~~199~~883			1,~~261~~257,~~969~~199			~~572~~1,~~127~~261,969
Net interest income		2125,~~177~~547,~~297~~800			21,~~374~~177,~~623~~297			2221,~~857~~374,~~801~~623			1722,~~757~~857,~~574~~801			917,~~253~~757,~~402~~574
Provision for loan losses		1,~~389~~656,~~533~~983			1,~~142~~389,~~522~~533			~~801~~1,~~688~~142,522			~~842~~801,~~207~~688			~~733~~842,~~817~~207
Net interest income after provision for loan losses		1923,~~787~~890,~~764~~817			2019,~~232~~787,~~101~~764			2220,~~056~~232,~~113~~101			1622,~~915~~056,~~367~~113			816,~~519~~915,~~585~~367
Bargain purchase gain		~~893,127~~—			—893,127			~~524,432~~—			2524,~~860,199~~432			—2,860,199
Other noninterest income		56,~~100~~590,~~469~~464			5,~~373~~100,~~969~~469			75,~~181~~373,~~749~~969			67,~~084~~181,~~779~~749			~~412~~6,~~682~~084,779
Merger related expense		1439,~~758,337~~055			221,~~097~~758,337			122,~~028,239~~097			21,~~041~~028,~~756~~239			~~916~~2,~~174~~041,756
Other noninterest expenses		21,~~428~~200,~~071~~161			2221,~~518~~428,~~543~~071			2622,~~428~~518,~~132~~543			2026,~~073~~428,~~365~~132			720,~~313~~073,~~090~~365
Income before income taxes		28,~~594~~842,~~952~~065			32,~~065~~594,~~430~~952			23,~~305~~065,~~923~~430			32,~~745~~305,~~224~~923			~~703~~3,~~003~~745,224
Income taxes (benefit)		14,~~001~~000,~~596~~579			1,~~134~~001,~~665~~596			~~(726~~1,~~785)~~134,665			~~504~~(726,~~090~~785)			~~645~~504,~~450~~090
Net income from continuing operations, net of taxes	$	14,~~593~~841,~~356~~486		$	1,~~930~~593,~~765~~356		$	31,~~032~~930,~~708~~765		$	3,~~241~~032,~~134~~708		$	573,~~553~~241,134
Net income from discontinued operations, net of taxes		~~366,034~~—			—366,034			—			—			—
Net income from discontinued operations attributable to
Net income from discontinued operations attributable tonon-controlling interest		—			199,491			—			—			—
non-controlling interest		199,491			—			—			—			—
Net income available to common stockholders	$	4,841,486		$	1,759,899		$	1,930,765		$	3,032,708		$	3,241,134
Net income available to common stockholders	$	1,759,899		$	1,930,765		$	3,032,708		$	3,241,134		$	57,553
Shares outstanding and per share data:
Average shares outstanding		10,734,748			11,040,159			10,370,795			8,322,811			5,829,140
Average shares outstanding - basic		10,607,217			10,734,748			11,040,159			10,370,795			8,322,811
Diluted average shares outstanding		10,860,152			11,178,133			10,565,336			8,342,646			5,829,140
Average shares outstanding - diluted		10,740,982			10,860,153			11,178,133			10,565,336			8,342,646
Number of shares outstanding, at year-end		10,~~456~~667,~~098~~227			1110,~~062~~456,~~932~~098			11,~~014~~062,~~517~~932			911,~~379~~014,~~753~~517			59,~~831~~379,~~963~~753
Net income - basic per share	$	0.1646		$	0.1716		$	0.2917		$	0.3929		$	0.0139
Net income - diluted per share		0.1645			0.1716			0.2917			0.3929			0.0139
Book value per share at period end		6.2974			6.1229			6.0512			56.8205			5.4682
Financial Condition data:
Assets	$	~~620~~658,~~303~~972,~~594~~924		$	~~491~~620,~~161~~303,~~838~~594		$	~~479~~491,~~942~~161,~~985~~838		$	~~419~~479,~~089~~942,~~303~~985		$	~~133~~419,~~243~~089,~~868~~303
Investment Securities		6158,~~390~~189,~~965~~618			3463,~~925~~214,~~398~~160			3639,~~665~~789,~~607~~742			36,~~586~~665,~~669~~607			936,~~716~~586,~~626~~669
Loans (net of deferred fees and costs)		~~487~~542,~~103~~250,~~713~~292			~~393~~487,~~240~~103,~~567~~713			393,~~051~~240,~~192~~567			~~320~~393,~~680~~051,~~332~~192			~~101~~320,~~736~~680,~~172~~332
Allowance for loan losses		24,~~823~~156,~~153~~425			12,~~773~~823,~~009~~153			1,~~294~~773,~~976~~009			~~851~~1,~~000~~294,976			~~655~~851,~~942~~000
Deposits		~~526~~572,~~458~~754,~~394~~560			~~367~~526,~~415~~458,~~938~~394			~~387~~367,~~830~~415,~~132~~938			~~360~~387,~~933~~830,~~471~~132			~~100~~360,~~672~~933,~~130~~471
Borrowings		2010,000,000			5220,~~300~~000,000			2252,~~150~~300,000			—22,150,000			—
Equity attributable to non-controlling interest		~~199,491~~—			—199,491			—			—			—
Equity attributable to common shareholders		6571,~~727~~876,~~735~~129			6765,~~682~~727,~~489~~735			6667,~~643~~682,~~286~~489			5466,~~554~~643,~~268~~286			3154,~~824~~554,~~416~~268
Average Balances:
Assets	$	~~536~~632,~~333~~726,~~860~~301		$	~~481~~536,~~145~~333,~~938~~860		$	~~459~~481,~~782~~145,~~360~~938		$	~~358~~459,~~397~~782,~~210~~360		$	~~127~~358,~~786~~397,~~614~~210
Investment Securities		4064,~~537~~331,~~934~~571			3642,~~649~~154,~~655~~769			36,~~561~~649,~~271~~655			2436,~~427~~561,~~877~~271			1124,~~486~~427,~~249~~877
Loans		~~436~~507,~~793~~166,~~412~~275			~~389~~436,~~684~~793,~~221~~412			~~364~~389,~~511~~684,~~290~~221			~~259~~364,~~698~~511,~~504~~290			97259,~~871~~698,~~329~~504
Interest-bearing Deposits		~~343~~413,~~229~~365,~~087~~793			~~290~~343,~~969~~229,~~449~~087			~~292~~290,~~056~~969,~~338~~449			~~231~~292,~~245~~056,~~789~~338			73231,~~365~~245,~~709~~789
Borrowings		2629,~~493~~728,~~284~~293			2326,~~188~~493,~~219~~284			923,~~269~~188,~~231~~219			929,~~328~~269,231			1892,~~306~~328
Stockholders’ equity		66,146,705			65,747,418			61,530,969			48,537,003			30,016,583
Stockholders' equity		66,781,799			66,146,705			65,747,418			61,530,969			48,537,003
Selected performance ratios:
Return on average assets		0.3777	%		0.4037	%		0.6640	%		0.9066	%		0.0590	%
Return on average equity		27.9625	%		2.9496	%		42.9394	%		64.6893	%		06.1968	%
Yield on average interest-earning assets		4.5062	%		54.1050	%		5.6010	%		5.7160	%		75.8971	%
Rate on average interest-bearing liabilities		0.5053	%		0.5850	%		0.4258	%		0.5542	%		0.7855	%
Net interest spread		4.0009	%		4.5100	%		54.1851	%		5.1618	%		75.1116	%
Net interest margin		4.1423	%		4.7014	%		54.3170	%		5.3331	%		75.4333	%
Asset Quality ratios:
Allowance for loan losses to loans		0.5877	%		0.4558	%		0.3345	%		0.2733	%		0.6427	%
Nonperforming loans to average loans		3.02	%		2.26	%		3.41	%		2.59	%		5.30	%
Nonperforming loans to total loans		2.08	%		3.02	%		2.26	%		3.41	%		2.59	%
Nonperforming assets to total assets		21.5583	%		2.1055	%		32.10	%		23.2910	%		42.9129	%
Net charge-offs to average loans		—0.21	%		~~0.03~~—	%		0.1003	%		0.2510	%		0.9225	%
Capital ratios:
Leverage ratio (2)		10.4554	%		1310.7545	%		1213.9475	%		1112.4194	%		2211.2341	%
Tier 1 risk-based capital ratio (2)		12.3111	%		1612.1432	%		16.3114	%		1416.4231	%		2714.1642	%
Total risk-based capital ratio (2)		12.8685	%		1612.5887	%		16.6658	%		1416.6866	%		2714.7668	%
Average equity to average assets		12.3311	%		1312.6632	%		13.3866	%		13.5438	%		2313.4954	%

(1)

On April 19, 2013, Jefferson completed its acquisition of Carrollton Bancorp. All transactions since the acquisition date are included in our consolidated financial statements.

(2)

Capital ratios reported for Bay Bank, FSB.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The mergers and acquisitions completed over the last several years have strengthened our market position geographically and enhanced our delivery channels, allowing us to provide extraordinary customer service while delivering a fuller range of products and services and lessened our dependence on net interest income by adding fee-based sources of revenue including a mortgage origination division, ~~payment sponsorship division~~ and ~~with the Hopkins Merger~~ a ~~reverse~~payment ~~mortgage~~sponsorship ~~broker~~ division. Our sales organization was restructured from a chief lending officer and head of commercial real estate to market presidents for two regions and business lines. In addition, we launched industry groups (dental, cyber and transportation) and product lines (asset-back, investor owned residential real estate and small business administration lending) to drive loan origination and deposit growth. Amid the growth, our focus is on a high quality balance sheet, expense efficiency and improved profitability. ~~With the completion of the Hopkins Merger, we are poised to increase scale, profitability and leverage that should together lead to improved returns on our strong capital base.~~

The Bank’s ~~relationship~~loan ~~management~~origination activities resulted in $~~68.9~~55 million in net new loan growth in the Bank’s originated portfolio which represented aan ~~34.6~~11% annualized pace for ~~2016~~2017. ~~The~~In ~~Bank resumed its focus on organic growth in~~ the ~~fourth~~third quarter of 2016, ~~after~~following ~~completion of~~ the Hopkins Merger, ~~in the third quarter. Planned declines in certificate of deposit balances prior to~~ and incontinuing ~~anticipation~~throughout of2017, the ~~Hopkins~~Bank ~~Merger~~resumed ~~led~~its tofocus anon ~~attractive~~organic 0growth.~~39% cost of funds for the year.~~ The Bank has a ~~very~~ strong capital position and capacity for future growth with total regulatory capital to risk weighted assets of 12.985% asat of December 31, ~~2016~~2017. The Bank has a proven record of success in acquisitions and acquired problem asset resolutions and, ~~at December 31, 2016,~~ had $86.25 million in remaining net purchase discounts on acquired loan portfolios at December 31, 2017.

At December 31, ~~2016~~2017, the Bank remained above all “well-capitalized” regulatory requirement levels. The Bank’s tier 1 risk-based capital ratio was 12.3111% at December 31, ~~2016~~2017 as compared to 1612.1432% at December 31, ~~2015~~2016. Our liquidity position remained strong due to available cash and cash equivalents, borrowing lines with the FHLB of Atlanta, the Federal Reserve and correspondent banks, and the size and composition of the investment portfolio.

During 2015, the Company purchased 170,492 shares of its common stock at an average price of $5.03 per share pursuant to a stock purchase program (the “2015 Repurchase Program”) that the Board of Directors approved on July 30, 2015. The 2015 Repurchase Program authorized the Company to purchase up to 250,000 shares of its common stock over a 12-month period in open market and/or through privately negotiated transactions, at the Company’s discretion. On February 24, 2016, the Company’s Board of Directors approved an additional stock purchase program (the “2016 Repurchase Program”) that authorizes the Company to purchase up to an additional 250,000 shares of its common stock over a 12-month period in open market and/or through privately negotiated transactions. On August 11, 2016, the Board of Directors amended the 2016 Repurchase Program to authorize the repurchase of an additional 250,000 shares of the Company’s common stock and extend the repurchase period through August 31, 2017. During the quarter ended March 31, 2016, the Company purchased 175,000 shares of its common stock at an average price of $4.93 per share, which consisted of the 79,508 shares remaining for purchase under the 2015 Repurchase Program and 95,492 shares pursuant to the 2016 Repurchase Program. During the third quarter of 2016, the Company purchased 150,000 shares at an average price of $5.10 per share along with a purchase of 418,436 shares through a privately negotiated transaction at an average price of $5.18 per share. As of September 30, 2016, the Company has 254,508 shares remaining under the 2016 Repurchase Program. The Board may modify, suspend or discontinue the program at any time.

On July 8, 2016, in connection with the Hopkins Merger, the Company paid aggregate merger consideration, in the form of cash, to the stockholders of Hopkins in the amount of $23,855,14, or $98.7578 per outstanding share of Hopkins common stock

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Balance Sheet Review

Total assets were $~~620~~659 million at December 31, ~~2016~~2017, an increase of $~~129~~39 million, or ~~26.3~~6%, when compared to December 31, ~~2015~~2016. The increase was due mainly to the $~~231~~55 million ofincrease ~~assets acquired~~ in ~~the Hopkins Merger. Investment securities increased by $26.5 million or 75.8% for the year ended December 31, 2016, while~~ loans held for investment ~~increased~~offset ~~by $93.9 million, or 23.9%, which was~~ primarily ~~driven~~ by ~~the~~ $585 million ~~acquired~~ in ~~the~~lower ~~Hopkins~~investment ~~Merger. Loans~~securities ~~held~~and ~~for sale decreased by~~ $~~3.3~~8 million, orin ~~66.8%. Cash~~lower cash and interest-bearing deposits with banks ~~increased $5~~.~~6 million, or 16.3%, for the year ended December 31, 2016.~~

Total deposits were $~~526~~573 million at December 31, ~~2016~~2017, an increase of $~~159~~46 million, or ~~43.3~~9%, when compared to December 31, ~~2015~~2016. The increase was due to ~~the~~a $~~202~~23 million increase in non-interest bearing deposits ~~acquired~~and asa ~~part~~$23 ofmillion ~~the~~increase ~~Hopkins~~in ~~Merger~~interest asbearing ~~well~~deposits as(which included a ~~managed~~$20 ~~decline~~million intemporary ~~certificates~~escrow ofdeposit ~~deposits~~that inwas ~~anticipation~~returned ofin ~~the~~January ~~Hopkins Merger~~2018). Short term borrowings were $2010 million at December 31, ~~2016~~2017, a decrease of $3210 million, ~~or 61.8%,~~ when compared to $20 million at December 31, ~~2015~~2016.

Stockholders’ equity ~~decreased~~increased to $~~65.7~~72 million at December 31, ~~2016~~2017, ~~when~~ compared to $~~67.7~~66 million at December 31, ~~2015~~2016. The $~~2.0~~6 million, or 2.9%, ~~decrease~~increase for the year ended December 31, ~~2016~~2017 resulted primarily from the $~~3.8~~5 million ~~repurchase~~ of ~~common~~corporate ~~stock~~earnings ~~pursuant to the Company’s stock purchase programs approved by the Board of Directors~~ and ~~the~~ $~~0.5~~1 million ~~decrease~~in ~~of accumulated other income for unrealized losses of investment securities and defined benefit pension plan, offset by~~ the ~~$1.8~~issuance ~~million retention~~ of ~~corporate~~common ~~earnings~~stock and ~~$0.5~~stock ~~million~~compensation ~~issuance~~expense ~~of common stock~~ under the Company’s stock option plans.

Return on average assets and return on average equity are key measures of our performance. Return on average assets, the quotient of net income divided by average total assets, measures how effectively we utilize our assets to produce income. Our return on average assets for the years ended December 31, ~~2016~~2017 and ~~2015~~2016 was 0.3777% and 0.4037%, respectively. Return on average equity, the quotient of net income divided by average equity, measures how effectively we invest our capital to produce income. Return on average equity for the years ended December 31, ~~2016~~2017 and ~~2015~~2016 was 27.9625% and 2.9496%, respectively.

Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, or “TDRs”, accruing loans past due 90 days or more, and real estate acquired through foreclosure, ~~increased~~decreased to $~~15.8~~12 million at December 31, ~~2016~~2017 from $~~10.3~~16 million at December 31, ~~2015~~2016. The ~~increase~~decrease of $~~5.5~~4 million was primarily driven by ~~increases in nonaccrual loans of~~ $~~5.8~~1 million ~~offset by decreases~~ in ~~TDRs~~net excluding those in nonaccrual status and real estate acquired through foreclosure of $0.1 million and $0.2 million, respectively. Nonperforming assets represented 2.55% of total assets at December 31, 2016, compared to 2.10% at December 31, 2015.

At December 31, 2016, the Bank maintained capital in excess of all “well-capitalized” regulatory requirements. The Bank’s tier 1 risk-based capital ratio was 12.33% at December 31, 2016 as compared to 16.14% at December 31, 2015. Liquidity remained strong due to managed cash and cash equivalents, borrowing lines with the FHLB of Atlanta, the Federal Reserve and correspondent banks, and the size and composition of the investment portfolio.41

Review of Financial Results

Net income for the year ended December 31, 2016 was $1.96 million, compared to $1.93 million for the same period of 2015. While the results for 2016 were comparable to 2015, the increase in net income was primarily the result the $0.89 million bargain purchase gain attributable to the Hopkins Merger, $0.68 million gain on securities sold resulting from increased sales and redemption of available for sale securities, $0.37 million of income from discontinued operations as a result of the planned sale of the reverse mortgage brokerage business acquired in the Hopkins Merger and a reduction of noninterest expenses of $1.21 million. Offsetting decreases include a $0.88 million reduction in mortgage banking fees and gains resulting from a decreased number of loans originated and sold and Hopkin Merger related expenses of $1.74 million.

Net interest income decreased to $21.2 million for the year ended December 31, 2016, when compared to $21.4 million for the same period of 2015. The decrease of $0.20 million resulted from a $1.90 million decline in net discount accretion on purchased loans, deferred costs and deferred fees, offset by a $1.70 million increase in interest income on

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~~interest~~decreases ~~earning~~in ~~assets~~nonaccrual ~~primarily~~loans ~~due~~and to $~~56.38~~2 million ofin ~~net~~lower ~~growth~~PCI inloans ~~average~~past ~~interest-earning~~due 90 days or more. Nonperforming assets ~~driven~~represented ~~primarily~~2% byof ~~the~~total assets ~~acquired~~at inDecember ~~the~~31, ~~Hopkins~~2017, ~~Merger~~compared ~~and~~to ~~new~~3% ~~loan~~at ~~originations~~December 31, 2016.

~~The~~At ~~net~~December ~~interest~~31, ~~margin~~2017, ~~for~~ the ~~year~~Bank ~~ended~~maintained ~~December~~capital ~~31,~~in ~~2016~~excess ~~decreased~~of toall 4“well-capitalized” regulatory requirements.~~14%, when~~ The ~~compared~~Bank’s totier ~~4.70%~~1 ~~for~~risk-based ~~2015~~capital ~~due~~ratio towas ~~the~~12.11% ~~decline~~at inDecember ~~discount~~31, ~~accretion~~2017 onas ~~loans~~compared ~~and~~to ~~deposits~~12. As32% ofat December 31, 2016. Liquidity remained strong due to managed cash and cash equivalents, ~~the~~borrowing ~~remaining~~lines ~~net~~with ~~loan~~the ~~discounts~~FHLB onof Atlanta, the ~~Bank’s~~Federal ~~acquired~~Reserve ~~loan~~and ~~portfolio~~correspondent banks, ~~including~~and ~~loans~~the ~~acquired~~size inand ~~the~~composition ~~Hopkins~~of ~~Merger,~~the ~~totaled~~investment $8portfolio.~~17 million.~~

~~Noninterest~~Review ~~income for the year ended December 31, 2016 was $5.99 million, compared to $5.37 million for the same period~~ of ~~2015. This~~Financial increase was primarily the result of the $0.89 million bargain purchase gain resulting from the Hopkins Merger, increases in payment sponsorship fees $0.12 million, other income of $0.12 million and gain on securities sold resulting from increased sales and redemption of available for sale securities of $0.39 million. Offsetting decreases of $0.88 million in mortgage banking fees and gains resulting from a decreased number of loans originated and sold.Results

~~Noninterest~~Net ~~expense~~income for the year ended December 31, ~~2016~~2017 was $234.198 million, compared to $222.540 million for ~~2015,~~the ansame ~~increase~~period of $02016.~~65 million.~~ The ~~primary~~increase ~~contributors~~in tonet income was primarily the result of our organic loan growth resulting in an increase ~~were~~of $14.743 million in ~~merger~~net ~~and~~interest ~~acquisition~~income. ~~related~~In ~~expenses~~2017, ~~offset~~noninterest byincome ~~decreases~~increased as a result of a $1.4 million insurance income gain and a $0.365 million increase in ~~salary~~sponsorship ~~and~~fees ~~employee~~which ~~benefits,~~offset last year’s $01.226 million ofin ~~occupancy~~a net bargain purchase gain attributable to the Hopkins Merger and ~~equipment~~gains on securities sold resulting from increased sales and redemption of available for sale securities. Noninterest expenses, decreased by $01.286 million ofprimarily ~~legal,~~from ~~accounting~~lower ~~and~~merger ~~other~~related ~~professional~~expenses ~~fees,~~to the Hopkin Merger in 2016. These net increases were offset by $03.160 million in higher income tax expenses partially due to the revaluation of ~~data~~our ~~processing~~deferred tax assets and ~~item~~liabilities ~~processing~~at ~~services~~a ~~and~~lower ~~$0.24~~federal ~~million~~income tax rate of ~~loan~~21% ~~collection~~in ~~costs~~light of the enactment of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017.

Net interest income increased to $25.5 million for the year ended December 31, 2017, compared to $21.2 million for the same period of 2016. The increase of $4.3 million resulted from a net growth in interest earning assets of $91.7 million, driven primarily by new loan originations and the assets acquired in the Hopkins Merger.

The net interest margin for the year ended December 31, 2017 increased to 4.23%, compared to 4.14% for 2016 due to a slightly higher yield on average earning assets.

Noninterest income for the year ended December 31, 2017 was $6.6 million, compared to $6.0 million for the same period of 2016. This increase was primarily the result of a $1.4 million insurance income gain related to the settlement of litigation and $0.5 million in higher sponsorship fees, offset by the absence of the $0.9 million bargain purchase gain resulting from the Hopkins Merger in 2016, and a $0.7 million gain on securities sold resulting from increased sales and redemption of available for sale securities in 2016. Other noninterest income increases of $0.4 million, primarily related to earnings on policies of bank owned life insurance (“BOLI”), were offset by decreases of $0.3 million in mortgage banking fees.

Noninterest expense for the year ended December 31, 2017 was $21.6 million compared to $23.2 million for 2016, a decrease of $1.6 million. The primary contributors to the decrease were $1.8 million in merger and acquisition related expenses in 2016 related to the Hopkins Merger offset by $0.2 million in merger expenses related to the Hopkins Merger in 2017 and $0.3 million in merger expenses in 2017 related to the proposed Merger with Old Line Bancshares. Additional decreases in noninterest expenses were related to $0.5 million in lower occupancy and equipment expenses, $0.4 million in lower legal, accounting and professional fees, $0.3 million in lower foreclosure property expenses, and $0.2 million in lower FDIC insurance costs, offset by increases of $1.1 million in higher salary and employee benefits related to higher incentive and health insurance costs and $0.2 million in higher data and item processing costs.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany transactions are eliminated in consolidation and certain reclassifications are made when necessary in order to conform the previous year’s financial statements to the current year’s presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities asat of the dates of the balance sheets and revenues and expenditures for the periods presented. Therefore, actual results could differ from these estimates. Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policies applied relate to treatment of the allowance for loan losses, accounting for acquired loans, valuation of the securities portfolio, and accounting for income taxes.

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applying accounting policies in areas that are subjective in nature, management must use its best judgment to arrive at the carrying value of certain assets. The most critical accounting policies applied relate to treatment of the allowance for loan losses, accounting for acquired loans, valuation of the securities portfolio, and accounting for income taxes.

Allowance for Loan Losses

The allowance involves a higher degree of judgment and complexity than other significant accounting policies. The allowance is calculated with the objective of maintaining a reserve level believed by us to be sufficient to absorb estimated probable loan losses. Our determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, expected loan commitment usage, the amounts and timing of expected future cash flows on impaired and purchase credit impaired (“PCI”) loans, value of collateral, estimated losses on consumer loans and residential mortgages and general amounts for historical loss experience. The process also considers economic conditions and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from our estimates, an additional provision for loan losses may be required that would adversely impact earnings in future periods. See the section of this document titled, “Allowance for Loan Losses and Credit Risk Management.”

Accounting for Acquired Loans

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration asat of the purchase date may include information such as past due and nonaccrual status, borrower credit scores and recent loan to value percentages. PCI loans are initially measured at fair value, which considers estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance related to these loans is not carried over and recorded at the acquisition date. We monitor actual loan cash flows to determine any improvement or deterioration from those forecasted at the acquisition date. Our acquired loans with specific credit deterioration are accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit related deterioration subsequent to origination is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on PCI loans is based on a reasonable expectation about the timing and amount of cash flows to be collected.

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scores and recent loan to value percentages. PCI loans are initially measured at fair value, which considers estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance related to these loans is not carried over and recorded at the acquisition date. We monitor actual loan cash flows to determine any improvement or deterioration from those forecasted as of the acquisition date. Our acquired loans with specific credit deterioration are accounted for in accordance with Financial Accounting Standards Board Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Certain acquired loans, those for which specific credit related deterioration subsequent to origination is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on PCI loans is based on a reasonable expectation about the timing and amount of cash flows to be collected.

Valuation of the Securities Portfolio

Securities are evaluated periodically to determine whether a decline in their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of an investment. We review other criteria such as magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

Accounting for Income Taxes

We use the liability method of accounting for 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 differences) and are measured at the enacted rates in effect when these differences reverse. ~~Deferred~~The ~~tax~~recently ~~assets~~enacted ~~are~~Tax ~~reduced~~Act byreduces athe ~~valuation~~maximum ~~allowance~~U.S. ~~when,~~federal incorporate ~~the~~tax ~~opinion~~rate offrom ~~management,~~35% itto is21% ~~more~~and ~~likely~~the ~~than~~Company ~~not~~completed ~~that~~its ~~some~~accounting ~~portion~~for orthe ~~all~~tax effects of the ~~deferred~~enactment ~~tax~~and ~~assets~~has ~~will~~made ~~not~~a bereasonable ~~realized. We~~estimate ~~exercise~~of ~~significant~~the ~~judgment~~effects inon ~~the~~our ~~evaluation~~existing deferred tax balances as of ~~the~~December ~~amount~~31, ~~and~~2017. ~~timing~~The ofCompany ~~the~~revalued ~~recognition~~all of ~~the~~its ~~resulting~~deferred tax assets and liabilities~~. The~~ ~~judgments~~based ~~and~~on ~~estimates~~the ~~required~~rates ~~for~~at ~~the~~which ~~evaluation~~they are ~~updated~~expected ~~based~~to ~~upon~~reverse ~~changes~~ in ~~business factors and~~ the ~~tax laws~~future. If ~~actual~~Deferred ~~results~~tax ~~differ~~assets ~~from~~are ~~the~~reduced ~~assumptions~~by ~~and~~a ~~other~~valuation ~~considerations~~allowance ~~used~~when, in ~~estimating~~ the ~~amount~~opinion ~~and timing~~ of ~~tax recognized~~management, ~~there~~it ~~can~~is bemore nolikely ~~assurance~~than ~~that additional expenses will~~ not bethat ~~required~~some inportion ~~future~~or ~~periods. Realization~~all of the deferred tax assets iswill ~~dependent~~not onbe ~~generating~~realized. We ~~sufficient~~exercise ~~taxable~~significant ~~income~~judgment in the ~~future.~~ evaluation of the amount and

Table of Contents

timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.

Other significant accounting policies are presented in Note 1 to the consolidated financial statements that appear elsewhere in this Annual Report. We have not substantively changed any aspect of our overall approach in the application of the foregoing policies.

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RESULTS OF OPERATIONS

Net Interest Income

The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the amount of interest income and interest expense and the resulting yields on average interest-earning assets and rates paid on average interest-bearing liabilities. No tax equivalent yield adjustments were made, as the effect thereof was not material.

	2016						2015						2014
	Year Ended December 31, 2017						Year Ended December 31, 2016						Year Ended December 31, 2015
	Average						Average						Average
	Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate
ASSETS
Interest-earning assets:
Interest bearing deposits with banks and federal funds sold	$	2930,~~235~~676,~~495~~989	$	~~208~~375,~~981~~735	01.7122	%	$	1829,~~200~~235,~~042~~495	$	37208,~~297~~981	0.2071	%	$	2118,~~901~~200,~~452~~042	$	4937,~~811~~297	0.2320	%
Investment securities available for sale		3961,~~333~~363,~~535~~054		~~909~~1,~~153~~387,270	2.3126	%		3539,~~370~~333,~~228~~535		~~821~~909,~~969~~153	2.3231	%		3635,~~050~~370,~~260~~228		~~928~~821,~~974~~969	2.5832	%
Investment securities held to maturity		1,~~204~~121,~~399~~548		3225,~~782~~834	2.7230	%		1,~~279~~204,~~427~~399		32,~~779~~782	2.5672	%		~~511~~1,~~011~~279,427		1032,~~792~~779	2.1156	%
Restricted equity securities		1,~~616~~846,~~835~~969		8778,~~444~~899	54.4127	%		1,~~453~~616,~~728~~835		5887,~~763~~444	45.0441	%		~~979~~1,~~969~~453,728		3058,~~611~~763	34.1204	%
Total interest-bearing deposits with banks, fed funds sold, and investments		7195,~~390~~008,~~264~~560		1,~~238~~867,~~360~~738	1.7397	%		5671,~~303~~390,~~425~~264		~~950~~1,~~808~~238,360	1.6973	%		5956,~~442~~303,~~692~~425		1950,~~020,188~~808	1.7269	%
Loans held for sale		31,~~456~~123,~~844~~299		~~120~~43,~~997~~358	3.5086	%		93,~~268~~456,~~964~~844		~~350~~120,~~833~~997	3.7950	%		69,~~873~~268,~~298~~964		~~246~~350,~~212~~833	3.5879	%
Loans, net
Commercial & Industrial		5672,~~060~~415,~~718~~132		23,~~654~~484,~~860~~170	4.7481	%		3556,~~800~~060,~~127~~718		12,~~888~~654,~~496~~860	54.2874	%		4335,~~734~~800,~~768~~127		21,~~977~~888,~~357~~496	65.8128	%
Commercial Real Estate		~~186~~224,~~954~~356,~~260~~725		911,~~431~~371,~~078~~849	5.0407	%		~~162~~186,~~950~~954,~~066~~260		9,~~131~~431,~~583~~078	5.6004	%		~~158~~162,~~091~~950,~~703~~066		9,~~885~~131,~~986~~583	65.2560	%
Residential Real Estate		~~137~~147,~~510~~016,~~914~~700		7,~~042~~732,~~723~~536	5.1226	%		~~131~~137,~~931~~510,~~315~~914		7,~~756~~042,~~119~~723	5.8812	%		~~107~~131,~~485~~931,~~763~~315		67,~~467~~756,~~857~~119	65.0288	%
HELOC		3332,~~103~~759,~~754~~222		1,~~459~~587,~~779~~851	4.4185	%		33,~~674~~103,~~244~~754		1,~~653~~459,~~351~~779	4.9141	%		3533,~~851~~674,~~459~~244		1,~~979~~653,~~302~~351	54.5291	%
Construction		1623,~~200~~359,~~572~~760		~~811~~1,~~515~~211,700	5.0119	%		1816,~~741~~200,~~548~~572		1811,~~101,524~~515	5.8801	%		1518,~~652~~741,~~957~~548		1,~~251~~101,~~447~~524	75.9988	%
Land		54,~~378~~719,~~023~~739		~~155~~424,~~056~~105	28.8899	%		5,~~439~~378,~~531~~023		~~263~~155,~~058~~056	42.8488	%		25,~~482~~439,~~128~~531		~~186~~263,~~754~~058	74.5284	%
Consumer & Other		12,~~585~~538,~~171~~997		~~113~~163,~~063~~713	76.1345	%		1,~~147~~585,~~390~~171		113,~~734~~063	97.9113	%		1,~~212~~147,~~512~~390		99113,~~897~~734	89.2491	%
Total loans, net (1)		~~436~~507,~~793~~166,~~412~~275		2125,~~668~~975,~~074~~924	45.9612	%		~~389~~436,~~684~~793,~~221~~412		21,~~907~~668,~~865~~074	54.6296	%		~~364~~389,~~511~~684,~~290~~221		2221,~~848~~907,~~600~~865	65.2762	%
Total earning assets		~~511~~603,~~640~~298,~~520~~134	$	2327,~~027~~887,~~431~~020	4.5062	%		~~455~~511,~~256~~640,~~610~~520	$	23,~~209~~027,~~506~~431	54.1050	%		~~430~~455,~~827~~256,~~280~~610	$	2423,~~115~~209,~~000~~506	5.6010	%
Cash		6,~~679~~671,~~212~~442						36,~~955~~679,~~371~~212						43,~~082~~955,~~953~~371
Allowance for loan losses		(23,~~137~~522,~~016~~074)						(12,~~291~~137,~~307~~016)						(1,~~132~~291,~~374~~307)
Market valuation		~~627~~87,~~296~~417						~~538~~627,~~025~~296						~~231~~538,~~775~~025
Other assets		1926,~~523~~191,~~848~~382						2219,~~687~~523,~~239~~848						2522,~~772~~687,~~726~~239
Total non-earning assets		2429,~~693~~428,~~340~~167						2524,~~889~~693,~~328~~340						2825,~~955~~889,~~080~~328
Total Assets	$	~~536~~632,~~333~~726,~~860~~301					$	~~481~~536,~~145~~333,~~938~~860					$	~~459~~481,~~782~~145,~~360~~938
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing checking and savings	$	~~129~~174,~~299~~005,~~405~~586	$	~~322~~481,~~233~~738	0.2528	%	$	84129,~~326~~299,~~839~~405	$	94322,~~597~~233	0.1125	%	$	8084,~~030~~326,~~537~~839	$	9094,~~741~~597	0.11	%
Money market		98121,~~303~~221,~~236~~482		~~264~~492,~~108~~063	0.2741	%		9198,~~545~~303,~~248~~236		~~263~~264,~~821~~108	0.2927	%		8391,~~404~~545,~~571~~248		~~305~~263,~~217~~821	0.3729	%
Time deposits		~~115~~118,~~626~~138,~~446~~725		1,~~072~~045,~~357~~328	0.9388	%		115,~~097~~626,~~362~~446		1,~~403~~072,~~481~~357	10.2293	%		~~128~~115,~~621~~097,~~230~~362		~~835~~1,~~685~~403,481	01.6522	%
Total interest-bearing deposits		~~343~~413,~~229~~365,~~087~~793		12,~~658~~019,~~698~~129	0.4849	%		~~290~~343,~~969~~229,~~449~~087		1,~~761~~658,~~899~~698	0.6148	%		~~292~~290,~~056~~969,~~338~~449		1,~~231~~761,~~643~~899	0.4261	%
Borrowed funds:
Federal funds purchased		26,~~985~~437		28132	02.9305	%		652,~~753~~985		~~604~~28	0.9294	%		—65,753		—604	—0.92	%
FHLB advances and other borrowed funds		2629,~~490~~721,~~299~~856		~~191~~319,~~408~~959	01.7208	%		2326,~~188~~490,~~219~~299		72191,~~380~~408	0.3172	%		923,~~269~~188,~~231~~219		2572,~~556~~380	0.2831	%
Total borrowed funds		2629,~~493~~728,~~284~~293		~~191~~320,~~436~~091	01.7208	%		2326,~~253~~493,~~972~~284		72191,~~984~~436	0.3172	%		923,~~269~~253,~~231~~972		2572,~~556~~984	0.2831	%
Total interest-bearing funds		~~369~~443,~~722~~094,~~371~~086		12,~~850~~339,~~134~~220	0.5053	%		~~314~~369,~~223~~722,~~421~~371		1,~~834~~850,~~883~~134	0.5850	%		~~301~~314,~~325~~223,~~569~~421		1,~~257~~834,~~199~~883	0.4258	%
Noninterest-bearing deposits		99117,~~915~~709,~~024~~317		—				9799,~~275~~915,~~956~~024		—				9397,~~643~~275,~~953~~956		—
Total cost of funds		~~469~~560,~~637~~803,~~395~~403	$	12,~~850~~339,~~134~~220	0.3942	%		~~411~~469,~~499~~637,~~377~~395	$	1,~~834~~850,~~883~~134	0.4539	%		~~394~~411,~~969~~499,~~522~~377	$	1,~~257~~834,~~199~~883	0.3245	%
Other liabilities and accrued expenses		~~549~~5,~~760~~141,099						3549,~~899,143~~760						3,~~281~~899,~~869~~143
Total Liabilities		~~470~~565,~~187~~944,~~155~~502						~~415~~470,~~398~~187,~~520~~155						415,398,~~251,391~~520
Stockholders' Equity		66,~~146~~781,~~705~~799						6566,~~747~~146,~~418~~705						6165,~~530~~747,~~969~~418
Total Liabilities and Stockholders' Equity	$	~~536~~632,~~333~~726,~~860~~301					$	~~481~~536,~~145~~333,~~938~~860					$	~~459~~481,~~782~~145,~~360~~938
Net interest income and spread (2)			$	21,177,297	4.00	%			$	21,374,623	4.51	%			$	22,857,801	5.18	%
Net interest income and spread(2)			$	25,547,800	4.09	%			$	21,177,297	4.00	%			$	21,374,623	4.51	%
Net interest margin (3)					4.14	%					4.70	%					5.31	%
Net interest margin(3)					4.23	%					4.14	%					4.70	%

(1)

Non-accrual loans are included in average loan balances.

(2)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(3)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

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Net interest income, the amount by which interest income on interest-earning assets exceeds interest expense on interest-bearing liabilities, is the most significant component of our earnings. Net interest income is a function of several factors, including the volume and mix of interest-earning assets and funding sources, as well as the relative level of market interest rates. While management’s policies influence some of these factors, external forces, including customer needs and demands, competition, the economic policies of the federal government and the monetary policies of the Federal Reserve also affect net interest income.

Net interest income ~~decreased~~increased to $2125.185 million for the year ended December 31, ~~2016~~2017, compared to $21.372 million for the same period of ~~2015~~2016. The ~~decrease~~increase of 0$4.203 million resulted from a $14.909 million ~~decline~~increase in ~~net~~total ~~discount~~interest ~~accretion on purchased loans~~income, ~~deferred costs and deferred fees,~~ offset by arelated ~~$1.70 million increase in~~ interest ~~income~~expense ~~on interest earning assets,~~ primarily due to $5691.387 million of net growth in average interest-earning assets driven primarily by ~~the~~new loan originations and assets acquired in the Hopkins Merger ~~and new loan originations~~.

Total interest income ~~decreased~~increased by ~~$0.18 million, or 0.78~~21%, for the year ended December 31, ~~2016,~~2017 when compared to the same period of ~~2015~~2016. Interest income on loans ~~decreased~~increased by $04.243 million, or ~~1.09~~20%, and loans held for sale decreased $0.231 million, or ~~65.51~~64%, for the year ended December 31, ~~2016,~~2017 when compared to the same period of ~~2015~~2016. Interest income on investment securities and interest-bearing deposits in banks and federal funds sold increased by $0.296 million for the year ended December 31, ~~2016,~~2017 when compared to the same period of ~~2015~~2016. The decrease in total interest income was due primarily to a $1.90 million decline in net discount accretion on purchased loans, deferred costs and deferred fees, offset by a $1.70 million increase in interest income on interest earning assets primarily due to $56.38 million of net growth in average interest-earning assets driven primarily by the assets acquired in the Hopkins Merger and new loan originations.

Total interest expense ~~decreased~~increased by $0.025 million, or ~~0.92~~26%, for the year ended December 31, ~~2016,~~2017 when compared to the same period of ~~2015. The total cost of interest-bearing liabilities decreased to 0.50% for the year ended December 31,~~ 2016~~, when compared to 0~~.~~58% for the same period of 2015.~~ The increase in interest expense was primarily related to a $0.054 million ~~decline~~increase in ~~the~~interest ~~amortization of mark to market adjustments~~ on deposits and ~~an increase of $0.12 million in borrowings, offset by~~ a $0.061 million ~~decline~~increase in interest on ~~deposits~~borrowings. Average ~~noninterest~~interest-bearing deposits increased $270.61 million in ~~2016,~~2017 when compared to the same period of ~~2015~~2016, while the percentage of average noninterest-bearing deposits to total deposits was 22~~.55~~% for ~~2016~~2017 and ~~25.06~~23% for ~~2015~~2016.

Effect of Volume and Rate Changes on Net Interest Income

The following table presents the effect of volume and rate changes on net interest income for the periods indicated:

	2016 Versus 2015						2015 Versus 2014
	2017 versus 2016						2016 versus 2015
	Increase (Decrease) Due to Change In						Increase (Decrease) Due to Change In
	Increase (decrease) due to change in						Increase (decrease) due to change in
	Average Volume		Average Rate		Total		Average Volume		Average Rate		Total
	Average volume		Average rate		Total		Average volume		Average rate		Total
Interest Income:
Interest income:
Loans	$	23,~~425~~604,~~969~~341	$	(2703,~~665,761)~~509	$	~~(239~~4,~~792)~~307,850	$	12,~~510~~425,~~232~~970	$	(2,~~450~~665,~~967~~761)	$	(~~940~~239,~~735~~791)
Total interest-bearing deposits with banks, fed funds sold, and investments		~~130~~464,~~439~~303		~~157~~165,~~113~~075		~~287~~629,~~552~~378		11130,~~623~~439		~~(81~~157,~~004)~~113		~~(69~~287,~~381)~~552
Loans held for sale		(~~205~~90,~~211~~072)		~~(24~~12,~~625)~~433		(~~229~~77,~~836~~639)		89(205,~~997~~211)		14(24,~~624~~625)		~~104~~(229,~~621~~836)
Total Interest Income		2,351,197		(2,533,273)		(182,076)		1,611,852		(2,517,347)		(905,495)
Total interest income		3,978,572		881,017		4,859,589		2,351,198		(2,533,273)		(182,075)
Interest Expense:
Interest expense:
Time deposits		622,~~422~~229		(~~337~~49,~~546~~258)		(~~331~~27,~~124~~029)		~~(96~~6,~~118)~~422		~~663~~(337,~~913~~546)		~~567~~(331,~~795~~124)
Other interest-bearing deposits		87216,~~966~~800		~~139~~170,~~955~~660		~~227~~387,~~921~~460		3287,~~626~~968		~~(70~~139,~~165)~~955		~~(37~~227,~~539)~~923
Borrowings		1134,~~047~~832		~~107~~93,~~405~~823		~~118~~128,~~452~~655		4311,~~641~~047		3107,~~787~~405		47118,~~428~~452
Total Interest Expense		105,435		(90,186)		15,249		(19,851)		597,535		577,684
Total interest expense		273,861		215,225		489,086		105,437		(90,186)		15,251
(Decrease)/Increase in Net Interest Income	$	2,245,762	$	(2,443,087)	$	(197,325)	$	1,631,703	$	(3,114,882)	$	(1,483,179)
Increase (decrease) in net interest income	$	3,704,711	$	665,792	$	4,370,503	$	2,245,761	$	(2,443,087)	$	(197,326)

Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances based on their respective relative amounts.

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Provision for Loan Losses

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. On a monthly basis, management reviews all loan portfolios to determine trends and monitor asset quality. For consumer loan portfolios, this review generally consists of reviewing delinquency levels on an aggregate basis with timely follow-up on accounts that become delinquent. In commercial loan portfolios, delinquency information is monitored and periodic reviews of business and property leasing operations are performed on an individual loan basis to determine potential collection and repayment problems. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.

We recorded a provision for loan losses of $1~~,389,533~~.7 million and $1~~,142,522~~.4 million for the years ended December 31, ~~2016~~2017 and ~~2015~~2016, respectively. As a result, the allowance for loan losses was $24.822 million at December 31, ~~2016~~2017, representing 0.5877% of total loans, compared to $12.778 million, or 0.4558% of total loans, at December 31, ~~2015~~2016. Management expects both the allowance for losses and the related provision for loan losses to increase in the future due to the continued runoff of the acquired loan portfolio and growth in new loan originations.

Noninterest Income

The following table reflects the amounts and changes in noninterest income for the years ended December 31, ~~2016~~2017 and December 31, ~~2015~~2016:

	Year Ended December 31:				2016 vs 2015
	Year Ended December 31,				2017 vs 2016
	2016		2015		$ Change		% Change
	2017		2016		$ Change		% Change
Payment sponsorship fees	$	23,~~524~~039,~~101~~162	$	2,~~402~~524,~~589~~101	$	~~121~~515,~~512~~061	520	%
Mortgage banking fees and gains		~~832~~527,~~990~~947		1832,~~708,779~~990		(~~875~~305,~~789~~043)	(5137)	%
Service charges on deposit accounts		~~278~~337,~~949~~012		~~313~~278,~~697~~949		~~(34~~58,~~748)~~063	~~(11)~~21	%
Bargain purchase gain		~~893,127~~—		—893,127		(893,127)	—(100)	%
Gain on securities sold		680,982		289,912		391,070	135	%
(Loss) gain on securities		(59,377)		680,982		(740,359)	(109)	%
Other income		783,447		658,992		124,455	19	%
Other noninterest income		2,745,720		783,447		1,962,273	250	%
Total Noninterest Income	$	5,993,596	$	5,373,969	$	619,627	12	%
Total noninterest Income	$	6,590,464	$	5,993,596	$	596,868	10	%

Noninterest income for the year ended December 31, ~~2016~~2017 was $56.996 million, compared to $56.370 million for the same period of ~~2015~~2016. The increase in ~~2016~~2017 was primarily the result of a $01.894 million ~~bargain~~insurance ~~purchase~~income gain ~~resulting~~related ~~from~~to the ~~Hopkins~~settlement ~~Merger~~of litigation and ~~increases~~$0.5 million in ~~payment~~higher sponsorship fees, offset by the absence of the $0.129 million, ~~other~~bargain ~~income~~purchase ofgain resulting from the Hopkins Merger in 2016, and a $0.127 million ~~and~~ gain on securities sold resulting from increased sales and redemption of available for sale securities ofin $02016.39 Other ~~million,~~noninterest ~~offset~~income byincreases ~~decreased~~ of $0.94 million, inprimarily ~~mortgage~~related ~~banking~~to ~~fees~~BOLI ~~and~~earnings, ~~gains~~were ~~resulting~~offset ~~from~~by adecreases ~~decreased~~of ~~number~~$0.3 ofmillion ~~loans~~in ~~originated~~mortgage ~~and~~banking ~~sold~~fees.

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Noninterest Expenses

The following table reflects the amounts and changes in noninterest expense for the years ended December 31, ~~2016~~2017 and ~~2015~~2016:

	Year Ended December 31:				2016 vs 2015
	Year Ended December 31,				2017 vs 2016
	2016		2015		$ Change		% Change
	2017		2016		$ Change		% Change
Salary and employee benefits	$	11,301,774	$	11,666,515	$	(364,741)	(3)	%
Salary and benefits	$	12,413,164	$	11,301,774	$	1,111,390	10	%
Occupancy and equipment expenses		32,~~341~~832,~~221~~945		3,~~559~~341,~~576~~221		(~~218~~508,~~355~~276)	~~(6)~~-15	%
Legal, accounting and other professional fees		1,082,206		1,361,907		(279,701)	(21)	%
Data processing and item processing services		1,390,458		1,212,471		177,987	15	%
Data processing and item processing services		1,212,471		1,372,688		(160,217)	(12)	%
Legal, accounting and other professional fees		716,358		1,082,206		(365,848)	-34	%
FDIC insurance costs		464,616		403,502		61,114	15	%
Advertising and marketing related expenses		408,147		378,924		29,223	8	%
Advertising and marketing related expenses		378,924		377,906		1,018	0	%
FDIC insurance costs		311,063		464,616		(153,553)	-33	%
Foreclosed property expenses		~~474~~200,~~652~~596		~~463~~474,~~949~~652		10(274,~~703~~056)	2-58	%
Loan collection costs		~~106~~78,~~361~~547		~~343~~106,~~521~~361		(~~237~~27,~~160~~814)	~~(69)~~-26	%
Core deposit intangible amortization		~~790~~789,~~876~~182		~~854~~790,~~098~~876		(631,~~222~~694)	~~(7)~~0	%
Merger related expenses		1439,~~758,337~~055		221,~~097~~758,337		(1,~~736~~319,~~240~~282)	~~7,857~~-75	%
Other expenses		2,~~274~~059,~~970~~701		2,~~114~~274,~~881~~970		~~160~~(215,~~089~~269)	8-9	%
Total Noninterest Expenses	$	2321,~~186~~639,~~408~~216	$	2223,~~540~~186,~~640~~408	$	~~645~~(1,~~768~~547,192)	3-7	%

Noninterest expense for the year ended December 31, ~~2016~~2017 was $2321.196 million compared to $2223.542 million for ~~2015~~2016, ana ~~increase~~decrease of $01.65 6 million. The ~~increase~~primary ~~was~~contributors ~~driven~~to ~~primarily~~the bydecrease anwere ~~increase of~~ $1.748 million in merger and acquisition related expenses in 2016 related to the Hopkins Merger, offset by ~~decreases of~~ $0.372 million in ~~salary~~merger expenses related to the Hopkins Merger in 2017 and ~~employee~~$0.3 ~~benefits,~~million in merger expenses in 2017 related to the proposed Merger with Old Line Bancshares. Additional decreases in noninterest expenses were related to $0.225 million ofin lower occupancy and equipment expenses, $0.284 million ofin lower legal, accounting and ~~other~~ professional fees, $0.163 million in lower foreclosure property expenses, and $0.2 million in lower FDIC insurance costs, offset by increases of ~~data~~$1.1 ~~processing~~million in higher salary and ~~item~~employee ~~processing~~benefits ~~services~~related to higher incentive and health insurance costs and $0.24 2 million ofin ~~loan~~higher ~~collection~~data and item processing costs.

Income Taxes

For the year ended December 31, ~~2016~~2017, the provision for income taxes totaled $14.0 million, or an effective tax rate of 3645.92%, compared to a provision for income taxes of $1.10 million, or an effective tax rate of 3738.06%, for ~~2015~~2016. The increase in the provision for 2017 was primarily related to the increase in net income before taxes and the change in the rate was primarily related to a $0.7 million increase in income taxes expense in 2017 related to the revaluation of our deferred assets and liabilities upon the enactment of the Tax Act signed into law on December 22, 2017.

FINANCIAL CONDITION

Our total assets were $~~620~~659 million at December 31, ~~2016~~2017, an increase of $~~129~~39 million, or ~~26.3~~6%, when compared to the $~~491~~620 million recorded at December 31, ~~2015~~2016. Loans, ~~and~~net ~~investment~~of ~~securities~~deferred ~~increased~~fees byand ~~$93.9 million~~costs, orincreased ~~23.9%,~~by ~~and~~ $~~26.5~~55 million, or ~~75.8~~11%, ~~respectively,~~ as a result of ~~the~~new ~~$58~~loan originations.1 Cash ~~million~~ and ~~$41.5~~cash ~~million~~investments ~~in loans~~ and investment securities, ~~respectively,~~decreased ~~acquired~~by in$13 ~~the~~million ~~Hopkins~~as ~~Merger. In~~a ~~addition,~~result weof ~~increased~~timing ~~our~~and ~~investment~~increased maturities in ~~bank owned life insurance by $10~~2017.1 ~~million, or 180.3%.~~ Total deposits were $~~526~~573 million at December 31, ~~2016~~2017, an increase of $~~159.0~~47 million, or ~~43.3~~9%, when compared to the $~~367~~526 million recorded at December 31, ~~2015~~2016. The increase was due to ~~the~~an ~~$202~~increase ~~million~~ in noninterest-bearing deposits ~~acquired~~of as$23 ~~part~~million ofand ~~the~~a ~~Hopkins~~$23 ~~Merger~~million asincrease ~~well~~in asinterest-bearing adeposits ~~managed~~of ~~decline~~$23 inmillion, ~~certificates~~primarily ofrelated ~~deposits~~to ~~prior~~a to$20 ~~and~~million intemporary ~~anticipation~~escrow ofdeposit ~~the~~returned ~~Hopkins~~in ~~Merger~~January 2018. Short term borrowings were $2010 million at December 31, ~~2016~~2017, a decrease of $3210 million, ~~or 61.8%,~~ when compared to December 31, ~~2015 primarily as a result of the $101 million in cash acquired in the Hopkins Merger which was used to retire outstanding FHLB borrowings~~2016. Stockholders’ equity ~~decreased~~increased to $~~65.7~~72 million at December 31, ~~2016~~2017, compared to $~~67.7~~66 million at December 31, ~~2015~~2016. The $~~2.0~~6 million, or 2.9%, ~~decrease~~increase for the year ended December 31, ~~2016~~2017 resulted primarily from the $~~3.8~~5 million ~~repurchase~~in ofcorporate ~~common~~earnings ~~stock~~and ~~pursuant~~$1 tomillion ~~the~~in ~~Company’s~~ stock ~~purchase~~compensation ~~programs,~~plan ~~offset~~related ~~by the $1~~increases.~~8 million retention of corporate earnings.~~ The book value of the Company’s common stock was $6.2974 at December 31, ~~2016~~2017 and $6.1329 at December 31, ~~2015~~2016.

Investment Securities

Our investment policy authorizes management to invest in traditional securities instruments in order to provide ongoing liquidity, income and a ready source of collateral that can be pledged in order to access other sources of funds. ~~The investment portfolio consists mainly of securities available for sale.~~ ~~Securities available for sale are those securities that we intend to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at~~

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The investment portfolio consists mainly of securities available for sale. Securities available for sale are those securities that we intend to hold for an indefinite period of time but not necessarily until maturity. These securities are carried at fair value and may be sold as part of an asset/liability management strategy, liquidity management, interest rate risk management, regulatory capital management or other similar factors.

The investment portfolio consists primarily of U.S. Government agency securities, U.S. Treasury securities, residential mortgage-backed securities, state and municipal obligations and corporate bonds. The income from state and municipal obligations is exempt from federal income tax. Certain agency securities are exempt from state income taxes. We use the investment portfolio as a source of both liquidity and earnings. Management continues to evaluate investment options that will produce income without assuming significant credit or interest rate risk and to look for opportunities to use liquidity from maturing investments to reduce our use of high cost time deposits and borrowed funds.

Investment securities ~~increased~~decreased $~~26.~~5 million to $~~61.4~~58 million at December 31, ~~2016~~2017 from $~~34.9~~63 at December 31, ~~2015~~2016. This ~~increase~~decrease was primarily driven by ~~the~~ $~~41.5~~7 million of ~~investment securities acquired in the Hopkins Merger and $18.4 million of purchases, offset by $28.3 million of~~ net sales and redemption of investment securities and principal pay downs of $4.9 million offset by $11 million in net purchases.

The composition of investment securities, at carrying value, at December 31, ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015 are presented in the following table:

	2016				2015				2014
	2017				2016				2015
	Amount		%		Amount		%		Amount		%
Available for sale securities
U.S. government agency	$	76,~~773~~821,~~118~~547	1112.42	%	$	37,~~810~~773,~~639~~118	1112.49	%	$	73,~~778~~810,~~271~~639	2111.94	%
U.S. treasury securities		8,~~623~~652,~~259~~660	1715.65	%		58,~~872~~623,~~140~~259	1714.63	%		—5,872,140	017.06	%
Residential mortgage-backed securities		3031,~~813~~397,~~481~~837	4556.03	%		1530,~~023~~813,~~225~~481	4551.02	%		2015,~~870~~023,~~927~~225	5945.0	%
State and municipal bonds		2,~~637~~564,~~280~~647	134.6	%		42,~~531~~637,~~554~~280	134.64	%		4,~~654~~531,~~146~~554	13.26	%
Corporate bonds		106,~~328~~359,~~455~~500	1211.24	%		410,~~058~~328,~~140~~455	1217.21	%		24,~~030~~058,~~000~~140	512.72	%
Total debt securities		6055,~~175~~796,~~593~~191	99100.80	%		3360,~~295~~175,~~698~~593	99.89	%		3533,~~333~~295,~~344~~698	99.8	%
Equity securities		5718,~~134~~025	~~0.2~~—	%		5657,~~535~~134	0.21	%		1656,~~545~~535	0.2	%
Total available for sale	$	6055,~~232~~814,~~727~~216	100.0	%	$	3360,~~352~~232,~~233~~727	100.0	%	$	3533,~~349~~352,~~889~~233	100.0	%
Held to maturity securities
U.S. government agency	$	-	—	%	$	—	—	%	$	334,257	21.2	%
Residential mortgage-backed securities		1,073,107	100.0	%		1,158,238	100.0	%		1,238,908	78.8	%
Total held to maturity	$	1,073,107	100.0	%	$	1,158,238	100.0	%	$	1,573,165	100.0	%
Restricted equity securities, at cost
Stock equity investments	$	1,302,295			$	1,823,195			$	4,864,344

	2016				2015				2014
	Amount		%		Amount		%		Amount		%
Held to maturity securities
U.S. government agency	$	-	0.0	%	$	334,257	21.2	%	$	—	0.0	%
Residential mortgage-backed securities		1,158,238	100.0	%		1,238,908	78.8	%		1,315,718	83.6	%
Total held to maturity	$	1,158,238	100.0	%	$	1,573,165	100.0	%	$	1,573,165	100.0	%

Maturities and weighted average yields for investment securities at December 31, 2016 are presented in the following table:

	2016
	Amortized		Fair		Yield
	Cost		Value		(1), (2)
Maturing - Available for sale
Within one year	$	6,122,743	$	6,100,575	1.57	%
Over one to five years		12,570,846		12,642,657	1.90	%
Over five to ten years		7,765,282		7,627,060	3.37	%
Over ten years		3,028,656		2,991,820	2.98	%
Residential mortgage-backed securities		30,952,601		30,813,481	2.50	%
Total debt securities	$	60,440,128	$	60,175,593

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	2016
	Amortized		Fair		Yield
	Cost		Value		(1), (2)
Maturing - Held to maturity
Within one year	$	—	$	—	0	%
Over one to five years		—		—	0	%
Over five to ten years		—		—	0	%
Over ten years		—		—	0	%
Residential mortgage-backed securities		1,158,238		1,149,342	2.64	%
Total held to maturity	$	1,158,238	$	1,149,342

Maturities and weighted average yields for investment securities at December 31, 2017 are presented in the following table:


	2017
	Amortized		Fair		Yield
	Cost		Value		(1), (2)
Maturing - Available for sale
Within one year	$	5,543,158	$	5,537,907	1.24	%
Over one to five years		7,971,926		8,027,149	2.72	%
Over five to ten years		10,834,180		10,833,298	3.24	%
Residential mortgage-backed securities		31,581,368		31,397,837	2.43	%
Total debt securities	$	55,930,632	$	55,796,191

Maturing - Held to maturity
Residential mortgage-backed securities		1,073,107		1,060,406	2.45	%
Total held to maturity	$	1,073,107	$	1,060,406

(1)

Yields are stated as book yields which are adjusted for amortization and accretion of purchase premiums and discounts, respectively.

(2)

Yields on tax-exempt obligations have been computed on a tax-equivalent basis.

Restricted Equity Securities

Restricted equity securities decreased $10.15 million, ~~or 38.6%,~~ to $1.83 million at December 31, ~~2016~~2017, from $31.08 million at December 31, ~~2015~~2016. This decrease resulted primarily from the net purchase and redemption of FHLB stock required as a result of increases and decreases in borrowings from the FHLB.

Loans Held for Sale

Loans held for sale were $1.61 million at December 31, ~~2016~~2017, compared to $41.96 million at December 31, ~~2015~~2016. The decrease in loans held for sale for ~~2016~~2017 was due to lower originations and loan sales due to a fewer number of loan originators during ~~the year ended 2016~~2017. ~~Loans~~ ~~originated for sale to third-party investors generally remain on our balance sheet for an average of 45 days.~~

Loans

A comparison of the loan portfolio for the years indicated is presented in the following table:

	2016				2015				2014				2013				2012
	2017				2016				2015				2014				2013
	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Commercial & Industrial	$	6779,~~234~~776,~~642~~508	1415	%	$	4667,~~464~~234,~~340~~642	1214	%	$	3346,~~454~~464,~~280~~340	912	%	$	3433,~~278~~454,~~539~~280	119	%	$	2034,~~601~~278,~~207~~539	2011	%
Commercial Real Estate		~~205~~234,~~495~~097,~~337~~013	43	%		~~168~~205,~~569~~495,~~159~~337	4342	%		~~158~~168,~~714~~569,~~554~~159	4043	%		~~157~~158,~~450~~714,~~876~~554	4940	%		39157,~~906~~450,~~055~~876	3949	%
Residential Real Estate		~~153~~145,~~368~~568,~~115~~138	3127	%		~~124~~153,~~810~~368,~~853~~115	32	%		~~140~~124,~~374~~810,~~035~~853	3632	%		73140,~~323~~374,~~554~~035	2336	%		2273,~~229~~323,~~445~~554	2223	%
Home Equity Line of Credit		33,~~256~~810,~~012~~692	76	%		33,~~722~~256,~~696~~012	97	%		3533,~~717~~722,~~982~~696	9	%		3335,~~257~~717,~~822~~982	109	%		1033,~~284~~257,~~221~~822	10	%
Land		5,~~870~~805,~~999~~203	1	%		5,~~229~~870,~~645~~999	1	%		5,~~856~~229,~~875~~645	1	%		15,~~716~~856,~~747~~875	1	%		31,~~098~~716,~~973~~747	31	%
Construction		1940,~~804~~482,~~912~~660	48	%		1319,~~277~~804,~~353~~912	34	%		1813,~~052~~277,~~287~~353	53	%		1918,~~343~~052,~~013~~287	65	%		419,~~704~~343,~~581~~013	56	%
Consumer & Other		2,~~073~~710,~~696~~078	—-	%		12,~~166~~073,~~521~~696	—-	%		~~881~~1,~~179~~166,521	—-	%		1881,~~309,781~~179	—-	%		~~911~~1,~~690~~309,781	1-	%
Total Loans		~~487~~542,~~103~~250,~~713~~292	100	%		~~393~~487,~~240~~103,~~567~~713	100	%		393,~~051~~240,~~192~~567	100	%		~~320~~393,~~680~~051,~~332~~192	100	%		~~101~~320,~~736~~680,~~172~~332	100	%
Less: Allowance for Loan Losses		(24,~~823~~156,~~153~~425)				(12,~~773~~823,~~009~~153)				(1,~~294~~773,~~976~~009)				(~~851~~1,~~000~~294,976)				(~~655~~851,~~942~~000)
Net Loans	$	~~484~~538,~~280~~093,~~560~~867			$	~~391~~484,~~467~~280,~~558~~560			$	391,~~756~~467,~~216~~558			$	~~319~~391,~~829~~756,~~332~~216			$	~~101~~319,~~080~~829,~~230~~332

Loans, net of deferred fees and costs, increased by $~~93.9~~55 million to $~~487.1~~542 million at December 31, ~~2016~~2017 from $~~393.2~~487 million at December 31, ~~2015~~2016, primarily due to ~~the $58.1 million of loans acquired in the Hopkins Merger and $69.1 million in~~ new originations outpacing pay downs ~~and a slowing in the pace of purchased impaired loan resolutions~~.

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The following table summarizes the scheduled repayments of our loan portfolio, both by loan category and by fixed and adjustable rates, at December 31, ~~2016~~2017:

After One Through

One Year or Less

Five Years

After Five Years

Total

By Loan Category:

Commercial & Industrial

2325,~~972~~234,~~838~~277

1721,~~636~~940,~~421~~550

2532,~~625~~601,~~383~~681

6779,~~234~~776,~~642~~508

Commercial Real Estate

1835,~~198~~746,~~918~~958

6973,~~259~~276,~~111~~908

~~118~~125,~~037~~073,~~308~~147

~~205~~234,~~495~~097,~~337~~013

Residential Real Estate

1318,~~398~~148,~~289~~753

21,~~095~~644,~~466~~294

~~118~~105,~~874~~775,~~360~~091

~~153~~145,~~368~~568,~~115~~138

Land

27,709,988

376,676

5,169,348

33,256,012

Home Equity Line of Credit

30,864,840

225,027

2,720,825

33,810,692

Home Equity Line of Credit

3,057,656

168,146

2,645,197

5,870,999

Land

4,893,318

866,274

45,611

5,805,203

Construction

1227,~~473~~874,~~181~~017

21,~~617~~485,~~977~~536

411,~~713~~123,~~754~~107

1940,~~804~~482,~~912~~660

Consumer & Other

~~723~~1,~~406~~660,256

~~459~~314,~~212~~262

~~891~~735,~~078~~560

2,~~073~~710,~~696~~078

Total

99144,~~534~~422,~~276~~419

~~111~~119,~~613~~752,~~009~~851

~~275~~278,~~956~~075,~~428~~022

~~487~~542,~~103~~250,~~713~~292

By Rate Terms:

Fixed rate

1529,~~873~~016,~~817~~199

95109,~~570~~870,~~887~~792

~~235~~240,~~701~~720,~~975~~479

~~347~~379,~~146~~607,~~679~~470

Adjustable rate

83115,~~660~~406,~~459~~220

169,~~042~~882,~~122~~059

4037,~~254~~354,~~453~~543

~~139~~162,~~957~~642,~~034~~822

Total

99144,~~534~~422,~~276~~419

~~111~~119,~~613~~752,~~009~~851

~~275~~278,~~956~~075,~~428~~022

~~487~~542,~~103~~250,~~713~~292

Loans are placed on nonaccrual status when they are past due 90 days as to either principal or interest or when, in the opinion of management, the collection of all interest and/or principal is in doubt. Placing a loan on nonaccrual status means that we no longer accrue interest on such loan and reverse any interest previously accrued but not collected. Management may grant a waiver from nonaccrual status for a 90 day past due loan that is both well secured and in the process of collection. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to make payments in accordance with the terms of the loan and remains current.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the fair value of the collateral for collateral dependent loans and at the present value of expected future cash flows using the loans’ effective interest rates for loans that are not collateral dependent.

At December 31, ~~2016~~2017, we had ~~261~~218 impaired loans totaling $~~36.1~~27 million (including PCI loans of $~~31.0~~21 million). Of this amount, ~~132~~123 impaired loans totaling $11.7 million were classified as nonaccrual loans. At December 31, ~~2016~~2017, TDRs included in impaired loans totaled $10.84 million, ~~nine~~one ~~loans~~loan of which ~~were~~was included in nonaccrual loans having a total balance of $10.31 million. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms. At December 31, ~~2016~~2017, the total valuation allowance for impaired loans was $0.274 million.

At December 31, ~~2015~~2016, we had ~~238~~261 impaired loans totaling $~~34.0~~36 million (including PCI loans of $~~28.6~~31 million). Of this amount, 88132 impaired loans totaling $~~5.9~~12 million were classified as nonaccrual loans. At December 31, ~~2015~~2016, TDRs included in impaired loans totaled $21.08 million, 14nine loans of which were included in nonaccrual loans having a total balance of $1.43 million. Borrowers under all other restructured loans are paying in accordance with the terms of the modified loan agreement and have been placed on accrual status after a period of performance with the restructured terms. At December 31, ~~2015~~2016, the total valuation allowance for impaired loans was $0.063 million.

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The following table presents details of our nonperforming loans and nonperforming assets, as these asset quality metrics are evaluated by management, for the years indicated:

	As of December 31,
	2016		2015		2014		2013		2012
	2017		2016		2015		2014		2013
Nonaccrual loans excluding PCI loans	$	5,~~001~~809,~~338~~391	$	45,~~794~~001,~~377~~338	$	54,~~237~~794,~~356~~377	$	35,~~809~~237,~~000~~356	$	13,~~299~~809,~~252~~000
Nonaccrual PCI loans		64,~~686~~646,~~085~~325		16,~~089~~686,~~461~~085		1,~~620~~089,~~710~~461		~~179~~1,~~114~~620,710		~~656~~179,~~624~~114
TDR loans excluding those in nonaccrual loans		~~500~~352,~~411~~161		~~623~~500,~~912~~411		1623,~~155,508~~912		1,~~633~~155,~~980~~508		1,~~794~~633,~~220~~980
Accruing loans past due 90+ days excluding PCI loans		—		—		—		—		460,354
Accruing PCI loans past due 90+ days		222,281		2,421,735		2,354,891		5,380,847		2,692,572
Accruing PCI loans past due 90+ days		2,421,735		2,354,891		5,380,847		2,692,572		1,186,437
Total nonperforming loans		11,030,158		14,609,569		8,862,641		13,394,421		8,314,666
Total nonperforming loans		14,609,569		8,862,641		13,394,421		8,314,666		5,396,887
Real estate acquired through foreclosure		991,615		1,224,939		1,459,732		1,480,472		1,290,120
Real estate acquired through foreclosure		1,224,939		1,459,732		1,480,472		1,290,120		1,151,256
Total nonperforming assets	$	12,021,773	$	15,834,508	$	10,322,373	$	14,874,893	$	9,604,786
Total nonperforming assets	$	15,834,508	$	10,322,373	$	14,874,893	$	9,604,786	$	6,548,143

Nonperforming assets, which consist of nonaccrual loans, troubled debt restructurings, accruing loans past due 90 days or more, and real estate acquired through foreclosure, ~~increased~~decreased to $~~15.8~~12 million at December 31, ~~2016~~2017 from $~~10.3~~16 million at December 31, ~~2015~~2016. Nonperforming assets represented 21.558% of total assets at December 31, ~~2016~~2017, compared to 2.106% at December 31, ~~2015~~2016. The level of nonperforming assets increased primarily due to increases in nonaccrual loans of $5.8 million offset by decreases in TDRs excluding those in nonaccrual status and real estate acquired through foreclosure of $0.1 million and $0.2 million, respectively. Management has worked diligently to identify borrowers that may be facing difficulties in order to restructure terms where appropriate, secure additional collateral or pursue foreclosure and other secondary sources of repayment.

Potential problem loans consist of loans that are performing under contract but for which credit problems have caused us to place them on our list of criticized loans. These loans have a risk rating of 6 (Special Mention) or higher, and exclude all nonaccrual loans and accruing loans past due 90+ days. AsAt of December 31, ~~2016~~2017, these loans totaled $1210.15 million and consisted primarily of Commercial Real Estate and Residential Real Estate loans which had balances of $41.92 million and $47.8 million, respectively. AsAt of December 31, ~~2015~~2016, these loans totaled $1712.01 million and consisted primarily of Commercial Real Estate and Residential Real Estate loans which had balances of $74.89 million and $64.38 million, respectively. Difficulties in the economy and the accompanying impact on these borrowers, as well as future events, such as regulatory examination assessments, may result in these loans and others being classified as nonperforming assets in the future.

Allowance for Loan Losses and Credit Risk Management

The allowance for loan losses is established to estimate losses that may occur on loans by recording a provision for loan losses that is charged to earnings in the current period. The allowance is evaluated on a quarterly basis by management and is based upon management’s periodic review of the collectability of the loans in light of historic experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Measured impairment and credit losses are charged against the allowance when management believes the loan or a portion of the loan’s balance is not collectable. Subsequent recoveries, if any, are credited to the allowance.

The allowance consists of specific and general components. The specific component relates to individual loans that are classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement and primarily includes nonaccrual, TDRs, and PCI loans where cash flows have deteriorated from those forecasted asat of the acquisition date. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value of the loan. For collateral-dependent impaired loans, any measured impairment is properly charged off against the loan and allowance in the applicable reporting period. The specific component may fluctuate from period to period if changes occur in the nature and volume of impaired loans.

48 The general component covers pools of similar loans, including purchased loans that did not have deteriorated

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~~charged~~credit ~~off~~quality ~~against~~at ~~the~~acquisition and new loan originations, and ~~allowance~~is based upon historical loss experience of the Bank or peer bank group if the Bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the ~~applicable~~Bank’s ~~reporting~~loan ~~period~~portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time as the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The ~~specific~~general component may fluctuate from period to period if changes occur in the ~~nature~~mix ~~and~~of ~~volume~~the ofBank’s ~~impaired~~loan ~~loans~~portfolio, economic conditions, or specific industry conditions.

The general component covers pools of similar loans, including purchased loans that did not have deteriorated credit quality at acquisition and new loan originations, and is based upon historical loss experience of the Bank or peer bank group if the Bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the Bank’s loan portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data. Management will continue to evaluate the appropriateness of the peer group data used with each quarterly allowance analysis until such time as the Bank has sufficient loss experience to provide a foundation for the general reserve requirement. The general component may fluctuate from period to period if changes occur in the mix of the Bank’s loan portfolio, economic conditions, or specific industry conditions.

A test of the adequacy of the allowance, using the methodology outlined above, is performed by management and reported to the Board of Directors on at least a quarterly basis. The complex evaluations involved in such testing require significant estimates. Management uses available data to establish the allowance at a prudent level, recognizing that the determination is inherently subjective, and that future adjustments may be necessary, depending upon many items including a change in economic conditions affecting specific borrowers, or in general economic conditions, and new information that becomes available. However, there are no assurances that the allowance will be sufficient to absorb losses on nonperforming loans, or that the allowance will be sufficient to cover losses on nonperforming loans in the future.

The allowance was $~~2,823,153~~4 million at December 31, ~~2016~~2017, compared to $~~1,773,009~~3 million at December 31, ~~2015~~2016. The allowance as a percentage of total portfolio loans was 0.5877% at December 31, ~~2016~~2017 and 0.4558% at December 31, ~~2015~~2016. Management expects continued gradual increases in our allowance for loan losses due to the gradual runoff of the discount on the acquired loan portfolio and an increase in new loan originations.

For non-impaired loans acquired by the Bank from Bay National Bank on July 10, 2010 without evidence of deteriorated credit quality, there was net unamortized discount of $0.42 million and $0.54 million at December 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, which represented 32.3% and 3.13%, respectively, of the related loan balance. For non-impaired acquired legacy Carrollton Bank portfolio loans without evidence of deteriorated credit quality, there was net unamortized discount of $1.0.9 million and $1.10 million at December 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, which represented 1.23% and 1.12%, respectively, of the related loan balance. For non-impaired acquired legacy Slavie Federal Savings Bank portfolio loans without evidence of deteriorated credit quality, there was net unamortized discount of $1.61 million and $1.86 million at December 31, ~~2016~~2017 and December 31, ~~2015~~2016, respectively, which represented 43.18% and 4.01%, respectively, of the related loan balance. For non-impaired acquired legacy Hopkins Bank portfolio loans without evidence of deteriorated credit quality, there was net unamortized discount of $0.3 million and $0.4 million at December 31, 2017 and December 31, 2016, respectively, which represented 1.1% and 0.8%, respectively, of the related loan balance.

As the total combined remaining net discount exceeded the indicated total required reserve for these loan pools, no additional reserves were recorded.

During the year ended December 31, ~~2016~~2017, we recorded net charge offs of $~~339~~323,~~389~~711, compared to net charge offs of $~~664~~339,~~489~~389 during the year ended December 31, ~~2015~~2016.

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The following table reflects activity in the allowance for loan losses for the periods indicated:

	Year Ended December 31,
	2016			2015			2014			2013			2012
	2017			2016
Balance at beginning of year	$	12,~~773~~823,~~009~~153		$	1,~~294~~773,~~976~~009		$	~~851,000~~		$	~~655,942~~		$	~~824,653~~
Charge offs:
Commercial & Industrial		—			80,869			—			82,860			101,128
Residential Real Estate		(559,369)			(385,069)
Commercial Real Estate		—			45,573			300,214			187,419			1,796
Home Equity Line of Credit		—			(5,203)
Residential Real Estate		385,069			454,356			274,382			441,421			183,765
Construction		(15,593)			—
Home Equity Line of Credit		5,203			64,918			79,492			10,919			647,063
Consumer & Other		(14,999)			(455)
Land		—			—			—			—			36,177
Total charge offs		(589,961)			(390,727)
Construction		—			76,347			—			—			—
Recoveries:
Consumer & Other		455			2,495			934			1,000			—
Commercial & Industrial		375			—
Total charge offs		390,727			724,558			655,022			723,619			969,929
Residential Real Estate		167,350			51,338
Recoveries:
Land		98,091			—
Commercial & Industrial		—			—			30,000			—			30,000
Consumer & Other		434			—
Commercial Real Estate		—			—			137,072			—			1,796
Total recoveries		266,250			51,338
Residential Real Estate		51,338			46,569			109,827			39,135			7,000
Net (charge offs) recoveries		(323,711)			(339,389)
Home Equity Line of Credit		—			13,000			9,844			13,578			28,605
Provision for loan loss		1,656,983			1,389,533
Land		—			—			—			23,026			—
Balance at end of period	$	4,156,425		$	2,823,153
Construction		—			—			—			—			—
Net (charge offs) recoveries as a percentage of average loans		0.09	%		0.10	%
Consumer & Other		—			500			10,567			731			—
Total recoveries		51,338			60,069			297,310			76,470			67,401
Net charge offs		339,389			664,489			357,712			647,149			902,528
Provision for loan loss		1,389,533			1,142,522			801,688			842,207			733,817
Balance at end of year	$	2,823,153		$	1,773,009		$	1,294,976		$	851,000		$	655,942
Allowance as a percentage of total loans at the end of the year		0.58	%		0.45	%		0.33	%		0.27	%		0.64	%
Net charge offs as a percentage of average loans during the year		0.08	%		0.17	%		0.10	%		0.25	%		0.92	%

The following table presents the allowance for loan losses by loan category at the dates indicated below:

	2016					2015					2014					2013					2012
	2017					2016					2015					2014					2013
				Percent					Percent					Percent					Percent					Percent
	Amount		%Loan	%Total		Amount		%Loan	%Total		Amount		%Loan	%Total		Amount		%Loan	%Total		Amount		%Loan	%Total
				of Loans					of Loans					of Loans					of Loans					of Loans
Commercial & Industrial	$	577,702	0.7%	14%		$	369,857	0.6%	13%		$	210,798	0.5%	12%		$	200,510	0.6%	15%		$	167,400	0.5%	20%
				in Each					in Each					in Each					in Each					in Each
Commercial Real Estate		1,658,803	0.7%	40%			1,082,855	0.5%	38%			727,869	0.4%	41%			554,585	0.3%	43%			324,080	0.2%	38%
				Category					Category					Category					Category					Category
Residential Real Estate		1,316,732	0.9%	32%			1,043,778	0.7%	37%			593,084	0.5%	33%			203,413	0.1%	16%			80,239	0.1%	9%
				to Total					to Total					to Total					to Total					to Total
Home Equity Line of Credit		246,161	0.7%	6%			184,296	0.6%	7%			157,043	0.5%	9%			166,733	0.5%	13%			129,203	0.4%	15%
	Amount			Loans		Amount			Loans		Amount			Loans		Amount			Loans		Amount			Loans
Land		40,988	0.7%	1%			19,159	0.3%	1%			15,713	0.3%	1%			8,687	0.1%	1%			6,918	0.4%	1%
Commercial & Industrial	$	369,857		13	%	$	210,798		12	%	$	200,510		9	%	$	167,400		11	%	$	121,759		20	%
Construction		296,133	0.7%	7%			111,503	0.6%	4%			62,967	0.5%	4%			153,089	0.8%	12%			135,416	0.7%	16%
Commercial Real Estate		1,082,855		38	%		727,869		43	%		554,585		40	%		324,080		49	%		131,350		39	%
Consumer & Other		19,906	0.7%	0%			11,705	0.6%	0%			5,535	0.5%	0%			7,959	0.9%	1%			7,744	0.6%	1%
Residential Real Estate		1,043,778		37	%		593,084		32	%		203,413		36	%		80,239		23	%		199,306		22	%
Total Loans	$	4,156,425	0.8%	100%		$	2,823,153	0.6%	100%		$	1,773,009	0.5%	100%		$	1,294,976	0.3%	100%		$	851,000	0.3%	100%
Home Equity Line of Credit		184,296		7	%		157,043		9	%		166,733		9	%		129,203		10	%		81,955		10	%
Land		19,159		1	%		15,713		1	%		8,687		1	%		6,918		1	%		6,400		3	%
Construction		111,503		4	%		62,967		3	%		153,089		5	%		135,416		6	%		109,335		5	%
Consumer & Other		11,705		—	%		5,535		—	%		7,959		—	%		7,744		—	%		5,837		1	%
Total Loans	$	2,823,153		100	%	$	1,773,009		100	%	$	1,294,976		100	%	$	851,000		100	%	$	655,942		100	%

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Deposits

The following deposit table presents the composition of deposits at December 31, ~~2016~~2017 and ~~2015~~2016:

	2016				2015				2016 vs 2015
	December 31, 2017				December 31, 2016				2017 vs 2016
	Amount		% of Total		Amount		% of Total		$ Change		% Change
Noninterest-bearing deposits	$	~~111~~134,~~378~~617,~~694~~261	2124	%	$	~~101~~111,~~838~~378,~~210~~694	2821	%	$	923,~~540~~238,~~484~~567	921	%
Interest-bearing deposits:
Checking		5865,~~482~~077,~~158~~405	11	%		5358,~~992~~482,~~300~~158	1511	%		46,~~489~~595,~~858~~247	811	%
Savings		~~120~~107,~~376~~112,~~229~~529	2319	%		38120,~~086~~376,~~749~~229	1023	%		82(13,~~289~~263,~~480~~700)	~~216~~(11)	%
Money market		~~109~~150,~~550~~534,~~925~~960	2126	%		88109,~~946~~550,~~436~~925	2421	%		2040,~~604~~984,~~489~~035	2337	%
Total interest-bearing checking, savings and money market deposits		~~288~~322,~~409~~724,~~312~~894	5556	%		~~181~~288,~~025~~409,~~485~~312	4955	%		~~107~~34,~~383~~315,~~827~~582	5912	%
Time deposits under $100,000		72,021,712	14	%		41,150,349	11	%		30,871,363	75	%
Time deposits $100,000 and below		60,970,287	11	%		72,021,712	14			(11,051,425)	(15)	%
Time deposits of $100,000 or more		54,648,676	10	%		43,401,894	12	%		11,246,782	26	%
Time deposits above $100,000 and below $250,000		40,537,390	7	%		42,849,544	8	%		(2,312,154)	(5)	%
Total time deposits		126,670,388	24	%		84,552,243	23	%		42,118,145	50	%
Time deposits above $250,000		13,904,728	2	%		11,799,132	2	%		2,105,596	18	%
Total interest bearing deposits		415,079,700	79	%		265,577,728	72	%		149,501,972	56	%
Total time deposits		115,412,405	21	%		126,670,388	24	%		(11,257,983)	(9)	%
Total Deposits	$	526,458,394	100	%	$	367,415,938	100	%	$	159,042,456	43	%
Total interest bearing deposits		438,137,299	76	%		415,079,700	79	%		23,057,599	6	%
Total Deposits	$	572,754,560	100	%	$	526,458,394	100	%	$	46,296,166	9	%

Total deposits were $~~526~~573 million at December 301 ~~2016~~2017, an increase of $~~159.0~~46 million, or 9%, when compared to December 31, ~~2015~~2016. Within the deposit base, ~~interest~~noninterest-bearing deposits increased by $23 million, or 21%, interest-bearing checking account balances increased $~~9.5~~7 million, or 911%, interest -bearing savings account balances ~~increased~~decreased by $~~82.3~~13 million, or ~~216~~11%, money market balances increased $~~20.6~~41 million, or 2337%, and time deposit balances ~~increased~~decreased by $~~42.1~~11 million, or 509%, when compared to the amounts at December 31, ~~2015~~2016. The $159.0 million increase in total deposits was primarily attributable to the $202 million in deposits acquired as part of the Hopkins Merger as well as a managed decline in certificates of deposits.

The ratio of noninterest-bearing deposits to total deposits was 2124% asat of December 31, ~~2016~~2017, a ~~decrease~~an increase of 93% from December 31, ~~2015~~2016. Included in our deposit portfolio are brokered deposits through the Promontory Interfinancial Network. Through this deposit matching network, which ~~includes~~included CDARS and ICS, we obtained the ability to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through CDARS and ICS on behalf of a customer, we typically receive matching deposits through the network’s reciprocal deposit program. At December 31, ~~2016~~2017, we had zero and $1115.10 million in CDARS and ICS deposits through the reciprocal deposit program, respectively, compared to $90.36 million and $10.5 million, respectively, at December 31, ~~2015~~2016. We can also choose to place deposits through this network without receiving matching deposits. At December 31, 2017 and at December 31, 2016, there were no non-reciprocating balances through this network~~, compared to $0~~.~~1 million at December 31, 2015.~~

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Average balances by deposit category and the related average rate paid for the periods indicated are presented in the following table:

	Years Ended December 31,
	2016				2015				2014
	2017				2016				2015
	Average		Average		Average		Average		Average		Average
	Balance		Rate Paid		Balance		Rate Paid		Balance		Rate Paid
Noninterest-bearing deposits	$	99117,~~915~~709,~~024~~317	—0.00	%	$	9799,~~275~~915,~~956~~024	—0.00	%	$	9397,~~643~~275,~~953~~956	—0.00	%
Interest-bearing deposits:
Checking		52,257,137	0.11	%		46,872,288	0.11	%		45,700,865	0.10	%
Checking and savings		174,005,586	0.28	%		129,299,405	0.25	%		84,326,839	0.11	%
Savings		77,042,268	0.34	%		37,454,550	0.12	%		34,329,672	0.12	%
Money market		121,221,482	0.41	%		98,303,236	0.27	%		91,545,248	0.29	%
Money market		98,303,236	0.27	%		91,545,248	0.28	%		83,404,571	0.37	%
Total interest-bearing checking, savings and money market deposits		295,227,068	0.33	%		227,602,641	0.26	%		175,872,087	0.20	%
Total interest-bearing checking, savings and money market deposits		227,602,641	0.26	%		175,872,086	0.20	%		163,435,108	0.24	%
Total time deposits		118,138,725	0.88	%		115,626,446	0.93	%		115,097,362	1.22	%
Total time deposits		115,626,446	0.93	%		115,097,364	1.22	%		128,621,230	0.65	%
Total interest-bearing deposits		413,365,793	0.53	%		343,229,087	0.50	%		290,969,449	0.58	%
Total interest-bearing deposits		343,229,087	0.48	%		290,969,450	0.60	%		292,056,338	0.42	%
Total deposits	$	531,075,110	0.41	%	$	443,144,111	0.39	%	$	388,245,405	0.44	%
Total Deposits	$	443,144,111	0.37	%	$	388,245,406	0.45	%	$	385,700,291	0.32	%

The following table presents the maturity distribution for time deposits of $~~100~~250 thousand or more at December 31, ~~2016~~2017:

	Amount
Three months or less	$	9297,~~150,211~~726
Over three months through six months		7253,~~638,632~~764
Over six months through twelve months		132,~~886~~613,~~076~~262
Over twelve months		2310,~~973~~739,~~758~~976
Total Time Deposits	$	5413,~~648~~904,~~677~~728

Borrowings

Borrowings at December 31, ~~2016~~2017 consist of FHLB overnight borrowings of $~~20.0~~10 million, compared to FHLB overnight borrowings of $~~52.0~~20 million ~~and~~at ~~Atlantic Community Bankers Bank (“ACBB”) advances of $0.3 million, respectively, as of~~ December 31, ~~2015~~2016. The ~~combined~~ $~~32.3~~10 million decrease in FHLB borrowings ~~and~~was ~~ACBB~~primarily ~~advances~~related ~~resulted~~to ~~from~~ the ~~Bank’s~~timing ~~integration~~of ~~with~~an ~~Hopkins~~increase ~~Bank’s~~in ~~deposit~~deposits ~~funded~~in ~~balance~~December ~~sheet~~2017 ~~following~~related ~~the~~to ~~Hopkins~~a ~~Merger~~temporary onescrow ~~July 8, 2016~~deposit.

CAPITAL RESOURCES

Ample capital is necessary to sustain growth, provide a measure of protection against unanticipated declines in asset values and safeguard the funds of depositors. Capital also provides a source of funds to meet loan demand and enables us to manage assets and liabilities effectively.

At December 31, ~~2016~~2017, our total stockholders’ equity ~~decreased~~increased to $~~65.7~~72 million from $~~67.7~~66 million at December 31, ~~2015~~2016, primarily as a result of ~~the~~ $~~3.8~~5 million ~~repurchase~~in ofcorporate ~~common~~earnings ~~stock pursuant to the Company’s stock purchase programs~~ and ~~the~~ $~~0.5~~1 million ~~decrease of accumulated other income~~ for ~~unrealized losses of investment securities and defined benefit pension plan, offset by~~ the ~~$1.8~~issuance ~~million retention~~ of ~~corporate~~common ~~earnings~~stock and ~~$0.5~~stock-based ~~million~~compensation ~~issuance~~expense ~~of common stock~~ under the Company’s stock ~~option~~compensation plans.

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum 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, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

52 In July 2013, federal bank regulatory agencies issued a final rule that revises their risk based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. These Basel III Capital Rules were applicable to the Bank effective January 1, 2015, but they do not apply to the Company since it is a

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In July 2013, federal bank regulatory agencies issued a final rule that revises their risk based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. These Basel III Capital Rules were applicable to the Bank effective January 1, 2015, but they do not apply to the Company since it is a small bank holding company with less than $1.0 billion in total consolidated assets. The Federal Reserve Board raised the threshold for the small bank holding company exclusion from $500 million to $1 billion in April 2015.

The rule imposes higher risk based capital and leverage requirements than those in place at the time the rule was issued. Specifically, the rule imposes the following minimum capital requirements to be considered adequately capitalized:

A new common equity Tier 1 risk based capital ratio of 4.5%;

A Tier 1 risk-based capital ratio of 6% (increased from the previous 4% requirement);

A total risk-based capital ratio of 8% (unchanged from previous requirements); and

A leverage ratio of 4%.

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a transition period. These changes include the phasing out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Certain deferred tax assets over designated percentages of common stock are required to be deducted from capital, subject to a transition period. Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized net gains and losses on available for sale debt and equity securities and all unrealized net gain or loss on defined benefit pension plan), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in determining the Bank’s regulatory capital ratios.

The rule also includes changes in the risk weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisitions, development and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status, a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable, a 250% risk weight (up from 100%) for deferred tax assets that are not deducted from capital and increased risk weights (from 0% to up to 600%) for certain equity exposures.

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% (once fully phased in) of common equity Tier 1 capital to risk weighted assets in addition to the amount necessary to meet its minimum risk based capital requirements.

The final rule became effective on January 1, 2015, and the requirements in the rule will be fully phased-in by January 1, 2019. While the ultimate impact of the fully phased-in capital standards on the Company and the Bank is currently being reviewed, we currently do not believe that compliance with the Basel III Capital Rules will have a material impact once fully implemented.

For regulatory capital purposes asat of March 31, 2015, deferred tax assets that arise from net operating loss and tax credit carryforwards (net of any related valuations allowances and net of deferred tax liabilities) are excluded from regulatory capital, in addition to certain overall limits on net deferred tax assets as a percentage of common equity Tier 1 capital. At December 31, ~~2016~~2017, $0.97 million of the Bank’s net deferred tax asset was excluded from common equity Tier 1, Tier 1 and total regulatory capital. We will continue to evaluate the realizability of our net deferred tax asset on a quarterly basis for both financial reporting and regulatory capital purposes. This evaluation may result in the inclusion of a deferred tax asset in regulatory capital in an amount that is different from the amount determined under GAAP.

In addition, the OCC requires that FSBs, like the Bank, maintain a minimum level of Tier 1 capital to average total assets excluding intangibles. This measure is known as the leverage ratio. The current regulatory minimum for the leverage ratio for institutions to be considered “well capitalized” is 5%, but an individual institution could be required to maintain a higher level. In connection with the merger of Carrollton Bank with and into the Bank, the Bank entered into an Operating Agreement with the OCC (the “Operating Agreement”) pursuant to which the Bank agreed, among other things, to maintain a leverage ratio of 10% for the term of the Operating Agreement. In 2016, the OCC reduced the

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~~leverage ratio for institutions to be considered “well capitalized” is 5%, but an individual institution could be~~ required to maintain a higher level. In connection with the merger of Carrollton Bank with and into the Bank, the Bank entered into an Operating Agreement with the OCC (the “Operating Agreement”) pursuant to which the Bank agreed, among other things, to maintain a leverage ratio ~~of 10%~~ for the ~~term of the Operating Agreement. In 2016, the OCC reduced the required leverage ratio for the~~ Bank to at least 8.5%. The Operating Agreement will remain in effect until it is terminated by the OCC or the Bank ceases to be an FSB.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total, common equity Tier 1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio of Tier 1 capital (as defined) to average tangible assets (as defined). At December 31, ~~2016~~2017 and ~~2015~~2016, the Bank had regulatory capital in excess of that required under each requirement and was classified as “well capitalized”.

Actual capital amounts and ratios for the Bank are presented in the following table (dollars in thousands):

									~~To Be Well~~				To Be Well
									Capitalized Under
									Minimum Capital				Capitalized Under
					To Be Considered				Prompt Corrective
					Minimum				Requirements with				Prompt Corrective
	Actual				~~Adequately~~Capital ~~Capitalized~~Requirements				~~Action~~Conservation ~~Provisions~~Buffer				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2016:
At December 31, 2017:
Common Equity Tier 1 Capital	$	6368,~~162~~579	12.3311	%	$	2325,~~052~~476	4.50	%	$	3332,~~298~~553	65.5075	%	$	36,799	6.50	%
Tier I Risk-Based Capital Ratio	$	6368,~~162~~579	12.3311	%	$	3033,~~736~~968	6.00	%	$	4041,~~982~~045	87.0025	%	$	45,291	8.00	%
Total Risk-Based Capital Ratio	$	6572,~~988~~735	12.8885	%	$	4045,~~982~~291	8.00	%	$	5152,~~227~~367	109.0025	%	$	56,613	10.00	%
Tier 1 Leverage Ratio	$	6368,~~162~~579	10.4754	%	$	2426,~~135~~036	4.00	%	$	3034,~~169~~173	5.0025	%	$	32,546	5.00	%
As of December 31, 2015:
At December 31, 2016:
Common Equity Tier 1 Capital	$	6563,~~465~~057	1612.1432	%	$	1823,~~249~~039	4.50	%	$	26,~~360~~239	65.50125	%	$	33,279	6.50	%
Tier I Risk-Based Capital Ratio	$	6563,~~465~~057	1612.1432	%	$	2430,~~332~~719	6.00	%	$	3233,~~443~~919	86.00625	%	$	40,959	8.00	%
Total Risk-Based Capital Ratio	$	6765,~~238~~883	1612.5887	%	$	3240,~~443~~959	8.00	%	$	4044,~~553~~159	108.00625	%	$	51,199	10.00	%
Tier 1 Leverage Ratio	$	6563,~~465~~057	1310.7545	%	$	1924,~~041~~133	4.00	%	$	2327,~~801~~904	54.00625	%	$	30,166	5.00	%

The OCC is required to take certain supervisory actions against an undercapitalized FSB, the severity of which depends upon the FSB’s degree of capitalization. Failure to maintain an appropriate level of capital could cause the OCC to take any one or more of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Banking regulations also limit the amount of dividends that may be paid without prior approval by an FSB's regulatory agencies. In addition to these regulations, the Bank agreed in the Operating Agreement that it would not declare or pay any dividends or otherwise reduce its capital unless it is in compliance with the Operating Agreement, including the minimum capital requirements. The Bank received regulatory approval to pay a $23.27 million one-time cash dividend to the Company to be used to purchase all of the outstanding shares of Hopkins common stock in the Hopkins Merger. Due to the Bank’s desire to preserve capital to fund its growth, the Company currently does not anticipate paying dividends beyond the foregoing described need for the foreseeable future. In addition to these regulatory restrictions, it should be noted that the declaration of dividends is at the discretion of our Board of Directors and will depend, in part, on our earnings and future capital needs.

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LIQUIDITY

Liquidity describes our ability to meet financial obligations, including lending commitments and contingencies, which arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the Company’s customers, as well as to meet current and planned expenditures. Management monitors the liquidity position daily.

Our liquidity is derived primarily from our deposit base, scheduled amortization and prepayments of loans and investment securities, funds provided by operations and capital. Additionally, liquidity is provided through our portfolios of cash and interest-bearing deposits in other banks, federal funds sold, loans held for sale, and securities available for sale. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by the Bank’s competition.

The borrowing requirements of customers include commitments to extend credit and the unused portion of lines of credit, which totaled $~~101.6~~106 million at December 31, ~~2016~~2017. Management notes that, historically, a small percentage of unused lines of credit are actually drawn down by customers within a 12-month period.

Our most liquid assets are cash and assets that can be readily converted into cash, including interest-bearing deposits with banks and federal funds sold, and investment securities. At December 31, ~~2016~~2017, we had $~~7.6~~9 million in cash and due from banks, $~~32.4~~22 million in interest-bearing deposits with banks and federal funds sold, and $~~60.2~~56 million in investment securities available for sale.

The Bank also has external sources of funds through the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the FHLB, which can be drawn upon when required. The Bank has a line of credit totaling approximately $~~151.4~~163 million with the FHLB of which $~~131.4~~65 million was available to be drawn on December 31, ~~2016~~2017 based on qualifying loans pledged as collateral. In addition, the Bank can pledge securities at the Reserve Bank and the FHLB and, depending on the type of security, may borrow approximately 50% to 97% of the fair market value of the securities. The Bank had $~~27.8~~38 million of securities pledged at the FHLB, $0.1 million of securities pledged at the Reserve Bank, and an additional $~~14.8~~19 million of unpledged securities. Using these securities as collateral, the Bank could borrow approximately $~~42.6~~43 million asat of December 31, ~~2016~~2017.

Additionally, the Bank has unsecured federal funds lines of credit totaling $8.0 million with two institutions and a $4.0 million secured federal funds line of credit with another institution. The secured federal funds line of credit with another institution would require the Bank to transfer securities currently pledged at the FHLB or the Federal Reserve Bank or to pledge unpledged securities to this institution before it could borrow against this line. In March 2016, the Company and the lender under its unsecured revolving line of credit amended that line to increase the available borrowing limit from $1.0 million to $2.5 million, which was renewed in full in November 2016. The proceeds of the Company’s line of credit may be used for general corporate purposes. At December 31, ~~2016~~2017, there were outstanding balances of $~~20.0~~10 million under the Bank’s FHLB line and of $0 under the Company’s other line of credit.

To further aid in managing liquidity, the Bank’s Board of Directors has approved and formed an Asset/Liability Management Committee (“ALCO”) to review and discuss recommendations for the use of available cash and to maintain an investment portfolio. By limiting the maturity of securities and maintaining a conservative investment posture, management can rely on the investment portfolio to help meet any short-term funding needs.

We believe the Bank has adequate cash on hand and available through liquidation of investment securities and available borrowing capacity to meet our liquidity needs. Although we believe sufficient liquidity exists, if economic conditions and consumer confidence deteriorate, this liquidity could be depleted, which would then materially affect our ability to meet operating needs and to raise additional capital.

MARKET RISK AND INTEREST RATE SENSITIVITY

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities in which the Bank engages, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on liabilities. Our interest rate risk represents the level of exposure we have to fluctuations in interest rates and is primarily measured as the change in earnings and the theoretical market

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the interest earned on our assets and the interest paid on liabilities. Our interest rate risk represents the level of exposure we have to fluctuations in interest rates and is primarily measured as the change in earnings and the theoretical market value of equity that results from changes in interest rates. The ALCO oversees our management of interest rate risk. The objective of the management of interest rate risk is to maximize stockholder value, enhance profitability and increase capital, serve customer and community needs, and protect us from any material financial consequences associated with changes in interest rate risk.

Interest rate risk is that risk to earnings or capital arising from movement of interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships across yield curves that affect bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest rate related options embedded in certain bank products (option risk). Changes in interest rates may also affect a bank’s underlying economic value. The value of a bank’s assets, liabilities, and interest-rate related, off-balance sheet contracts is affected by a change in rates because the present value of future cash flows, and in some cases the cash flows themselves, is changed.

We believe that accepting some level of interest rate risk is necessary in order to achieve realistic profit goals. Management and the Board have chosen an interest rate risk profile that is consistent with our strategic business plan.

The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by our ALCO. The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates. We measure the potential adverse impacts that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology we employ. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan and deposit products.

We prepare a current base case and up to eight alternative simulations at least once a quarter and report the analysis to the board of directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions or strategy analysis so dictate.

The statement of condition is subject to quarterly testing for up to eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/ - 100, 200, 300, and 400 basis points (“bp”), although we may elect not to use particular scenarios that we determine are impractical in the current rate environment. It is our goal to structure the balance sheet so that net interest-earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

At December 31, ~~2016~~2017, we were in a liability sensitive position over a one year measurement horizon. Management continuously strives to reduce higher costing fixed rate funding instruments, while increasing assets that are more fluid in their repricing. An asset sensitive position, theoretically, is favorable in a rising rate environment since more assets than liabilities will reprice in a given time frame as interest rates rise. Similarly, a liability sensitive position, theoretically, is favorable in a declining interest rate environment since more liabilities than assets will reprice in a given time frame as interest rates decline. Management works to maintain a consistent spread between yields on assets and costs of deposits and borrowings, regardless of the direction of interest rates.

Estimated Changes in Net Interest Income
Change in Interest Rates:	+400	bp	+300	bp	+200	bp	+100	bp	(100)	bp	(200)	bp	(300)	bp	(400)	bp
Policy Limit	(20.0)	%	(15.0)	%	(10.0)	%	(5.0)	%	(5.0)	%	(10.0)	%	(15.0)	%	(20.0)	%
December 31, 2017	(7.5)	%	(5.6)	%	(3.7)	%	(1.7)	%	(1.4)	%	N/A		N/A		N/A
December 31, 2016	(9.9)	%	(7.4)	%	(4.9)	%	(2.4)	%	(4.0)	%	N/A		N/A		N/A
December 31, 2015	(2.2)	%	(1.6)	%	(1.0)	%	(0.4)	%	(3.9)	%	N/A		N/A		N/A

56As shown above, measures of net interest income at risk were slightly more favorable at December 31, 2017 than at December 31, 2016 at all interest rate shock levels over a 12 month modelling period. All measures remained within prescribed policy limits. The primary contributors to the more favorable position were additions and improvements to our asset sensitive balance sheet.

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As shown above, measures of net interest income at risk were slightly less favorable at December 31, 2016 than at December 31, 2015 at all interest rate shock level over a 12 month modelling period. All measures remained within prescribed policy limits. The primary contributor to the less favorable position was the less asset sensitive balance sheet.

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.

Estimated Changes in Economic Value of Equity (EVE)
Change in Interest Rates:	+400	bp	+300	bp	+200	bp	+100	bp	(100)	bp	(200)	bp	(300)	bp	(400)	bp
Policy Limit	(25.0)	%	(20.0)	%	(15.0)	%	(10.0)	%	(10.0)	%	(15.0)	%	(20.0)	%	(25.0)	%
December 31, 2017	7.2	%	6.5	%	5.1	%	3.9	%	(16.0)	%	N/A		N/A		N/A
December 31, 2016	5.1	%	4.8	%	3.9	%	3.2	%	(15.1)	%	N/A		N/A		N/A
December 31, 2015	8.9	%	7.7	%	5.9	%	4.0	%	(12.4)	%	N/A		N/A		N/A

The EVE at risk ~~declined~~increased slightly at December 31, ~~2016~~2017 when compared to December 31, ~~2015~~ 2016 in ~~all~~most interest rate shock levels. We evaluated the slightly below policy decrease at the (100) bp level and in the declining rate scenario shown in the table above. Although we believe the likelihood of this scenario is extremely remote, we will continue to monitor our strategy and measure the impact of our adjustments to ensure they do not ~~exacerbate or~~ create new out-of-policy limit results.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

We have various contractual obligations that may require future cash payments. The following table presents our significant contractual obligations asat of December 31, ~~2016~~2017:

Projected Maturity Date or Payment Period

Total

Less than 1 year

1 - 3 years

3 - 5 years

More than 5 years

Time Deposits (1)

~~126~~115,~~670~~412,~~388~~405

7343,~~737~~191,~~660~~811

3961,~~266~~139,~~200~~334

1310,~~547~~902,~~460~~341

~~119~~178,~~068~~919

Operating lease obligations (2)

710,~~294~~194,~~432~~145

1,~~158~~123,~~632~~057

1,~~995~~562,~~154~~934

1,~~376~~301,~~391~~946

26,~~764~~206,~~255~~208

Purchase obligations (3)

1443,~~486,~~000

1364,~~051,~~000

~~395~~79,000

~~40,000~~—

—

Total

~~135~~126,~~450~~049,~~820~~550

7544,~~947~~678,~~292~~868

4162,~~656~~781,~~354~~268

1412,~~963~~204,~~851~~287

26,~~883~~385,~~323~~127

(1)

In the normal course of business, a substantial portion of these balances rollover into new time deposits.

(2)

The total obligation is estimated based on our normal monthly charges.

(3)

Represents payments required under a contract with our data processing services provider which expires in April 2018 and our financial systems service providers.

We also enter into off-balance sheet arrangements in the normal course of business. These arrangements consist primarily of commitments to extend credit, lines of credit, letters of credit and mortgage loan repurchase obligations. Credit commitments are agreements to lend to a customer as long as there is no violation of any condition to the contract. Loan commitments generally have interest rates fixed at current market amounts, fixed expiration dates, and may require payment of a fee. Lines of credit generally have variable interest rates. Such lines generally do not represent future cash requirements because it is unlikely that all customers will draw upon their lines in full at any time. Letters of credit are commitments issued to guarantee the performance of a customer to a third party. Mortgage loan repurchase obligations arise when loans previously sold by the Bank are required to be repurchased.

The following table presents our outstanding loan commitments, lines and letters of credit and mortgage loan repurchase obligations asat of December 31, ~~2016~~2017:

	December 31, 2016
	December 31, 2017
Loan commitments	$	713,~~729~~643,~~629~~220
Unused lines of credit		9392,~~883~~732,~~713~~676
Standby letters of credit		8,~~424~~510,~~706~~683
Mortgage loan repurchase obligation		71,~~177~~399,~~755~~750

Our exposure to credit loss in the event of nonperformance by the borrower is the contract amount of the commitment. Loan commitments, lines of credit, and letters of credit are made on the same terms, including collateral, as outstanding loans. Management is not aware of any accounting loss that we would incur by funding these commitments. The Company’s contractual obligation for mortgage loan repurchase arises only when the breach of representations and warranties are discovered and repurchase is demanded. The maximum potential future payment

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commitments. The Company’s contractual obligation for mortgage loan repurchase arises only when the breach of representations and warranties are discovered and repurchase is demanded. The maximum potential future payment related to these guarantees is not readily determinable because the Company’s obligation under these agreements depends on the occurrence of future events. The loan balances and other fees subject to repurchase were $71.28 million and $37.62 million at December 31, ~~2016~~2017 and ~~2015~~2016, respectively. Management does not expect losses resulting from repurchase requests to be material to reported financial results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This disclosure is not required, since we are a “smaller reporting company”, but information regarding our market risk is discussed in Item 7 of this Part II under the heading, “Market Risk and Interest Rate Sensitivity”.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

	Page
Report of Independent Registered Public Accounting Firm	63
Consolidated Balance Sheets at December 31, 2017 and 2016	64
Consolidated Statements of Operations for the years ended December 31, 2017 and 2016	65
Consolidated Statement of Changes in Stockholders’ Equity for the years ended December 31, 2017 and 2016	67
Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016	68
Notes to the Consolidated Financial Statements	69

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and Board of Directors ~~and~~of ~~Stockholders~~Bay Bancorp, Inc.

~~Bay~~Opinion ~~Bancorp,~~on ~~Inc.~~the Financial Statements

~~Columbia~~We have audited the accompanying consolidated balance sheets of Bay Bancorp, ~~Maryland~~Inc. and subsidiary (the “Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2017 and 2016, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

WeBasis have audited the accompanying consolidated balance sheets of Bay Bancorp, Inc. and subsidiary (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statement of income, comprehensive income, stockholders’ equity and cash flows for the years ended December 31, 2016 and 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.Opinion

WeThese ~~conducted~~consolidated ~~our~~financial ~~audits~~statements inare ~~accordance with~~ the ~~standards~~responsibility of the ~~Public~~ Company’s ~~Accounting Oversight Board (United States)~~management. ~~Those~~Our ~~standards~~responsibility ~~require~~is ~~that~~to weexpress ~~plan~~an ~~and~~opinion ~~perform~~on the ~~audit~~Company’s toconsolidated ~~obtain reasonable assurance about whether the~~ financial statements ~~are~~based ~~free~~on ofour ~~material misstatement~~audits. ~~The~~We ~~company~~are isa ~~not~~public ~~required~~accounting tofirm ~~have,~~registered ~~nor~~with ~~were~~the wePublic ~~engaged~~Company toAccounting ~~perform,~~Oversight anBoard ~~audit~~(United ofStates) ~~its~~(“PCAOB”) ~~internal~~and ~~control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that~~ are ~~appropriate~~required into ~~the~~be ~~circumstances,~~independent ~~but~~with ~~not~~respect ~~for~~to the ~~purpose~~Company ofin ~~expressing~~accordance anwith ~~opinion on~~ the ~~effectiveness of the company’s internal control over financial reporting~~U. ~~Accordingly, we express no such opinion~~S. Anfederal ~~audit~~securities ~~also~~laws ~~includes~~and ~~examining,~~the onapplicable arules ~~test~~and ~~basis,~~regulations ~~evidence~~of ~~supporting~~ the ~~amounts~~Securities and ~~disclosures~~Exchange inCommission ~~the financial statements, assessing the accounting principles used~~ and ~~significant estimates made by management, as well as evaluating~~ the ~~overall financial statement presentation~~PCAOB. ~~We believe that our audit provide a reasonable basis for our opinion.~~

InWe conducted our ~~opinion,~~audits in accordance with the ~~consolidated~~standards ~~financial~~of ~~statements~~the ~~referred~~PCAOB. toThose ~~above~~standards ~~present~~require ~~fairly,~~that inwe ~~all~~plan ~~material~~and ~~respects,~~perform the audit to obtain reasonable assurance about whether the financial ~~position~~statements are free of ~~Bay~~material ~~Bancorp,~~misstatement ~~Inc~~whether due to error or fraud. ~~and~~The ~~subsidiary~~Company asis ofnot ~~December~~required 31to have, ~~2016~~nor ~~and~~were ~~2015~~we engaged to perform, ~~and~~an ~~the~~audit ~~results~~of its internal control over financial reporting. As part of ~~their~~our ~~operations~~audits ~~and~~we ~~their~~are ~~cash~~required ~~flows~~to obtain an understanding of internal control over financial reporting but not for the ~~years~~purpose ~~then~~of ~~ended,~~expressing inan ~~conformity~~opinion ~~with~~on ~~accounting~~the ~~principles~~effectiveness ~~generally~~of ~~accepted~~the inCompany’s ~~the~~internal ~~United~~control ~~States~~over offinancial ~~America~~reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Dixon Hughes Goodman LLP

We have served as the Company’s auditor since 2015.

Gaithersburg, Maryland

~~April~~March 528, ~~2017~~2018

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BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	December 31,
	2016		2015
	2017		2016
ASSETS
Cash and due from banks	$	79,~~591~~316,~~685~~482	$	87,~~059~~591,~~888~~685
Interest bearing deposits with banks and federal funds sold		3222,~~435~~249,~~771~~796		2632,~~353~~435,~~334~~771
Total Cash and Cash Equivalents		4031,~~027~~566,~~456~~278		3440,~~413~~027,~~222~~456
Investment securities available for sale, at fair value		6055,~~232~~814,~~727~~216		3360,~~352~~232,~~233~~727
Investment securities held to maturity, at amortized cost		1,~~158~~073,~~238~~107		1,~~573~~158,~~165~~238
Restricted equity securities, at cost		1,~~823~~302,~~195~~295		21,~~969~~823,~~595~~195
Loans held for sale		1,~~613~~097,~~497~~160		41,~~864~~613,~~344~~497
Loans, net of deferred fees and costs		~~487~~542,~~103~~250,~~713~~292		~~393~~487,~~240~~103,~~567~~713
Less: Allowance for loan losses		(24,~~823~~156,~~153~~425)		(12,~~773~~823,~~009~~153)
Loans, net		~~484~~538,~~280~~093,~~560~~867		~~391~~484,~~467~~280,~~558~~560
Real estate acquired through foreclosure		1991,~~224,939~~615		1,~~459~~224,~~732~~939
Premises and equipment, net		3,~~882~~306,~~343~~025		53,~~060~~882,~~802~~343
Bank owned life insurance		1516,~~729~~205,~~302~~352		515,~~611~~729,~~352~~302
Core deposit intangibles		32,~~030~~241,~~309~~127		23,~~624~~030,~~184~~309
Deferred tax assets, net		21,~~984~~806,~~718~~352		2,~~723~~984,~~557~~718
Accrued interest receivable		12,~~884~~176,~~945~~359		1,~~271~~884,~~871~~945
Accrued taxes receivable		12,~~153~~469,~~102~~620		21,~~775~~153,~~237~~102
Prepaid expenses		1604,~~001,723~~381		~~691~~1,~~372~~001,723
Other assets		~~276~~225,~~540~~170		~~303~~276,~~614~~540
Total Assets	$	~~620~~658,~~303~~972,~~594~~924	$	~~491~~620,~~161~~303,~~838~~594
LIABILITIES
Noninterest-bearing deposits	$	~~111~~134,~~378~~617,~~694~~261	$	~~101~~111,~~838~~378,~~210~~694
Interest-bearing deposits		~~415~~438,~~079~~137,~~700~~299		~~265~~415,~~577~~079,~~728~~700
Total Deposits		~~526~~572,~~458~~754,~~394~~560		~~367~~526,~~415~~458,~~938~~394
Short-term borrowings		2010,000,000		5220,~~300~~000,000
Defined benefit pension liability		~~994~~612,~~156~~112		~~829~~994,~~237~~156
Accrued expenses and other liabilities		63,~~923~~730,~~818~~123		26,~~934~~923,~~174~~818
Total Liabilities		~~554~~587,~~376~~096,~~368~~795		~~423~~554,~~479~~376,~~349~~368
STOCKHOLDERS’ EQUITY
Common stock - par $1.00 per shares, authorized 20,000,000 shares, issued and outstanding 10,456,098 and 11,062,932 shares as of December 31, 2016 and 2015, respectively.		10,456,098		11,062,932
Common stock - par $1.00 per shares, authorized 20,000,000 shares, issued and outstanding 10,717,889 and 10,626,290 shares at December 31, 2017 and December 31, 2016, respectively.		10,667,227		10,456,098
Additional paid-in capital		4041,~~814~~692,~~285~~751		4340,~~378~~814,~~927~~285
Retained earnings		1419,~~426~~180,~~969~~657		1214,~~667~~426,~~070~~969
Accumulated other comprehensive income		30335,~~383~~494		~~573~~30,~~560~~383
Total controlling interest		6571,~~727~~876,~~735~~129		6765,~~682~~727,~~489~~735
Non-controlling interest		~~199,491~~—		—199,491
Total Stockholders' Equity		6571,~~927~~876,~~226~~129		6765,~~682~~927,~~489~~226
Total Liabilities and Stockholders' Equity	$	~~620~~658,~~303~~972,~~594~~924	$	~~491~~620,~~161~~303,~~838~~594

See accompanying notes to audited consolidated financial statements

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BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2016		2015
	2017		2016
INTEREST INCOME
Interest and fees on loans	$	2125,~~668~~975,~~074~~924	$	21,~~907~~668,~~865~~074
Interest on loans held for sale		~~120~~43,~~997~~358		~~350~~120,~~833~~997
Interest and dividends on securities		1,~~034~~492,~~090~~003		~~913~~1,~~511~~034,090
Interest on deposits with banks and federal funds sold		~~204~~375,~~270~~735		37204,~~297~~270
Total Interest Income		23,027,431		23,209,506
Total interest income		27,887,020		23,027,431
INTEREST EXPENSE
Interest on deposits		12,~~658~~019,~~698~~129		1,~~761~~658,~~899~~698
Interest on fed funds purchased		28		604
Interest on federal funds purchased		132		28
Interest on short-term borrowings		~~191~~319,~~408~~959		72191,~~380~~408
Total Interest Expense		1,850,134		1,834,883
Total interest expense		2,339,220		1,850,134
Net Interest Income		21,177,297		21,374,623
Net interest income		25,547,800		21,177,297
Provision for loan losses		1,~~389~~656,~~533~~983		1,~~142~~389,~~522~~533
Net interest income after provision for loan losses		1923,~~787~~890,~~764~~817		2019,~~232~~787,~~101~~764
NONINTEREST INCOME
Payment sponsorship fees		23,~~524~~039,~~101~~162		2,~~402~~524,~~589~~101
Mortgage banking fees and gains		~~832~~527,~~990~~947		1832,~~708,779~~990
Service charges on deposit accounts		~~278~~337,~~949~~012		~~313~~278,~~697~~949
Bargain purchase gain		~~893,127~~—		—893,127
Gain on securities sold		680,982		289,912
(Loss) gain on securities		(59,377)		680,982
Other income		~~783~~2,~~447~~745,720		~~658~~783,~~992~~447
Total Noninterest Income		5,993,596		5,373,969
Total noninterest Income		6,590,464		5,993,596
NONINTEREST EXPENSES
Salary and employee benefits		11,301,774		11,666,515
Salary and benefits		12,413,164		11,301,774
Occupancy and equipment expenses		32,~~341~~832,~~221~~945		3,~~559~~341,~~576~~221
Legal, accounting and other professional fees		1,082,206		1,361,907
Data processing and item processing services		1,390,458		1,212,471
Data processing and item processing services		1,212,471		1,372,688
Legal, accounting and other professional fees		716,358		1,082,206
FDIC insurance costs		464,616		403,502
Advertising and marketing related expenses		408,147		378,924
Advertising and marketing related expenses		378,924		377,906
FDIC insurance costs		311,063		464,616
Foreclosed property expenses and OREO sales, net		474,652		463,949
Foreclosed property expenses and REO sales, net		200,596		474,652
Loan collection costs		~~106~~78,~~361~~547		~~343~~106,~~521~~361
Core deposit intangible amortization		~~790~~789,~~876~~182		~~854~~790,~~098~~876
Merger related expenses		1439,~~758,337~~055		221,~~097~~758,337
Other expenses		2,~~274~~059,~~970~~701		2,~~114~~274,~~881~~970
Total Noninterest Expenses		23,186,408		22,540,640
Total noninterest expenses		21,639,216		23,186,408
Income before income taxes		28,~~594~~842,~~952~~065		32,~~065~~594,~~430~~952
Income tax expense		14,~~001~~000,~~596~~579		1,~~134~~001,~~665~~596
NET INCOME FROM CONTINUING OPERATIONS, NET OF TAXES	$	1,593,356	$	1,930,765
NET INCOME FROM CONTINUING OPERATIONS		4,841,486		1,593,356
Net income from discontinued operations, net of taxes		366,034		—
Net income from discontinued operations, net of tax		—		366,034
NET INCOME	$	14,~~959~~841,~~390~~486	$	1,~~930~~959,~~765~~390
Net income from discontinued operations attributable to non-controlling interest		~~199,491~~—		—199,491
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	1,759,899	$	1,930,765
Net income available to common stockholders	$	4,841,486	$	1,759,899
Basic net income per common share	$	0.16	$	0.17
Weighted average shares outstanding
Diluted net income per common share	$	0.16	$	0.17
Basic		10,607,217		10,734,748
Diluted		10,740,982		10,860,153
Earnings per share
Basic	$	0.46	$	0.16
Diluted	$	0.45	$	0.16

See accompanying notes to audited consolidated financial statements

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BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended December 31,
	2016		2015
	2017		2016
Net income	$	14,~~959~~841,~~390~~486	$	1,~~930~~959,~~765~~390
Other Comprehensive loss:
Other comprehensive income (loss):
Net unrealized loss on securities available for sale:
Net unrealized gain on securities available for sale:
Net unrealized gain on securities during the period		~~102~~105,~~065~~426		~~219~~102,~~995~~065
Reclassification adjustment for gain on sales of securities included in net income		(680,982)		(289,912)
Reclassification adjustment for loss (gain) on securities included in net income		59,377		(680,982)
Income tax benefit relating to item above		207,841		27,437
Income tax expense relating to items above		(78,783)		207,841
Net effect on other comprehensive income		(371,076)		(42,480)
Net effect on other comprehensive income (loss)		86,020		(371,076)
Unrealized loss on defined benefit pension plan		(284,206)		(1,729,790)
Unrealized gain (loss) on defined benefit pension plan		335,716		(284,206)
Income tax benefit relating to item above		112,105		682,316
Income tax (expense) benefit relating to item above		(116,625)		112,105
Net effect on other comprehensive income		(172,101)		(1,047,474)
Net effect on other comprehensive income (loss)		219,091		(172,101)
Other comprehensive loss		(543,177)		(1,089,954)
Other comprehensive income (loss)		305,111		(543,177)
Comprehensive income		15,~~416~~146,~~213~~597		~~840~~1,~~811~~416,213
Comprehensive income attributable to non-controlling interest		199,491		—
Comprehensive income available to non-controlling interest		—		199,491
Comprehensive income available to common stockholders	$	15,~~216~~146,~~722~~597	$	~~840~~1,~~811~~216,722

See accompanying notes to audited consolidated financial statements

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BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Non-controlling
	Stock		Capital		Earnings		Income (Loss)		Interest		Total
Balance December 31, 2014	$	11,014,517		43,228,950		10,736,305		1,663,514		—	$	66,643,286
Balance December 31, 2015	$	11,062,932	$	43,378,927	$	12,667,070	$	573,560	$	—	$	67,682,489
Net income		—		—		1,930,765		—		—		1,930,765
Other comprehensive loss		—		—		—		(1,089,954)		—		(1,089,954)
Stock-based compensation		—		143,712		—		—		—		143,712
Issuance of restricted
common stock		16,256		(16,256)		—		—		—		—
Issuance of common stock under
stock option plan		202,651		709,603		—		—		—		912,254
Repurchase of common stock		(170,492)		(687,082)		—		—		—		(857,574)
Balance December 31, 2015		11,062,932		43,378,927		12,667,070		573,560		—		67,682,489
Net income		—		—		1,759,899		—		199,491		1,959,390
Other comprehensive loss		—		—		—		(543,177)		—		(543,177)
Other comprehensive income (loss)		—		—		—		(543,177)		—		(543,177)
Stock-based compensation		—		94,607		—		—		—		94,607
Issuance of restricted
Issuance of common stock under stock-based compensation plan and 401K match		136,602		389,313		—		—		—		525,915
common stock		26,962		(26,962)		—		—		—		—
Issuance of common stock for
401K match		14,206		53,983		—		—		—		68,189
Issuance of common stock under
stock option plan		95,434		362,292		—		—		—		457,726
Repurchase of common stock		(743,436)		(3,048,562)		—		—		—		(3,791,998)
Balance December 31, 2016	$	10,456,098	$	40,814,285	$	14,426,969	$	30,383	$	199,491	$	65,927,226
							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive		Non-controlling
	Stock		Capital		Earnings		Income (Loss)		Interest		Total
Balance December 31, 2016	$	10,456,098	$	40,814,285	$	14,426,969	$	30,383	$	199,491	$	65,927,226
Net income		—		—		4,841,486		—		—		4,841,486
Other comprehensive income (loss)		—		—		(87,798)		305,111		—		217,313
Stock-based compensation		—		263,168		—		—		—		263,168
Sale of iReverse		—		—		—		—		(199,491)		(199,491)
Issuance of common stock under stock-based compensation plan		211,129		615,298		—		—		—		826,427
Balance December 31, 2017	$	10,667,227	$	41,692,751	$	19,180,657	$	335,494	$	—	$	71,876,129

See accompanying notes to audited consolidated financial statements

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BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2016		2015
	2017		2016
Cash flows from operating activities:
Net income	$	14,~~959~~841,~~390~~486	$	1,~~930~~959,~~765~~390
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment		~~649~~579,~~878~~012		~~732~~649,~~618~~878
Stock-based compensation		94263,~~607~~168		~~143~~94,~~712~~607
Amortization of investment premiums and discounts, net		~~237~~224,~~298~~415		~~326~~237,~~047~~298
Accretion of net discounts on loans		(12,~~894~~626,~~976~~987)		(31,~~346~~894,~~032~~976)
Amortization of core deposit intangibles		~~790~~789,~~876~~182		~~854~~790,~~098~~876
Amortization of deposit premiums		4,955		53,398
(Accretion) amortization of deposit discounts and premiums		(25,941)		4,955
Provision for loan losses		1,~~389~~656,~~533~~983		1,~~142~~389,~~522~~533
Increase in cash surrender value of bank owned life insurance		(~~117~~476,~~950~~050)		(~~125~~117,~~975~~950)
Bargain purchase gain		~~(893,127)~~—		—(893,127)
Gain on sale and redemption of securities		(680,982)		(289,912)
Loss (gain) on securities		59,377		(680,982)
Loss on disposal of premises and equipment		—		60,041
Loss (gain) on sale and disposal of premises and equipment		97,773		(347,587)
Gain on sale of premises and equipment		(347,587)		—
Write down of real estate acquired through foreclosure		158,842		308,536
Write down of real estate acquired through foreclosure		308,536		270,684
Gain on sale of real estate acquired through foreclosure		(86,587)		(34,940)
Gain on sale of real estate acquired through foreclosure		(34,940)		(45,285)
Origination of loans held for sale		(30,129,383)		(41,825,473)
Origination of loans held for sale		(41,825,473)		(113,989,930)
Proceeds from sales of loans held for sale		31,610,318		45,998,019
Proceeds from sales of loans held for sale		45,998,019		119,273,960
Gains on sales of loans held for sale		(964,598)		(1,232,406)
Gains on sales of loans held for sale		(1,232,406)		(3,143,667)
Deferred income taxes		748,953		58,785
Deferred income taxes		58,785		1,200,294
Net increase in accrued interest receivable		(291,414)		(86,412)
Net increase in accrued taxes receivable		1,622,135		347,648
Net (increase) decrease in accrued taxes receivable		(1,316,518)		1,622,135
Net decrease in accrued pension plan asset		(119,287)		(219,885)
Net decrease (increase) in prepaid expenses and other assets		448,712		(8,981,750)
Net (decrease) increase in prepaid expenses and other assets		(8,981,750)		250,089
Net increase (decrease) in pension plan liability		99,884		(119,287)
Net increase (decrease) in accrued expenses and other liabilities		(441,462)		(385,392)
Net decrease in accrued expenses and other liabilities		(3,393,186)		(355,050)
Net cash (used in) provided by operating activities - continuing operations		(3,455,928)		5,039,798
Net cash provided by (used in) operating activities - continuing operations		2,267,441		(3,455,928)
Net cash provided by operating activities - discontinued operations		~~408,721~~—		—408,721
Net cash (used in) provided by operating activities		(3,047,207)		5,039,798
Net cash provided by (used in) operating activities		2,267,441		(3,047,207)
Cash flows from investing activities:
Acquisition, net of cash acquired		~~103,889,228~~—		—103,889,228
Purchases of investment securities available for sale		(188,~~429~~808,~~993~~580)		(1318,~~816~~429,~~533~~993)
Purchases of investment securities held to maturity		—		(333,939)
Redemptions and maturities of investment securities available for sale		13,104,591		32,853,420
Redemptions and maturities of investment securities available for sale		32,853,420		15,701,802
Redemption and maturities of investment securities held to maturity		88,638		435,566
Redemption and maturities of investment securities held to maturity		435,566		82,829
Net redemption of Federal Home Loan Bank Stock		520,900		1,358,500
Net redemption (purchase) of Federal Home Loan Bank Stock		1,358,500		(1,106,600)
Net increase in loans		(53,538,851)		(34,868,466)
Net (increase) decrease in loans		(34,868,466)		793,838
Proceeds from sale of real estate acquired through foreclosure		856,617		958,058
Proceeds from sale of real estate acquired through foreclosure		958,058		1,722,269
Purchases of premises and equipment		(193,049)		(312,226)
Purchases of premises and equipment		(312,226)		(306,829)
Proceeds from sale of premises and equipment		92,581		1,282,832
Proceeds from sale of premises and equipment		1,282,832		7,325
Net cash (used in) provided by investing activities - continuing operations		(47,877,153)		87,166,919
Net cash provided by investing activities - continuing operations		87,166,919		2,744,162
Net cash provided by investing activities - discontinued operations		—		151,943
Net cash provided by investing activities - discontinued operations		151,943		—
Net cash (used in) provided by investing activities		(47,877,153)		87,318,862
Net cash provided by investing activities		87,318,862		2,744,162
Cash flows from financing activities:
Net decrease in deposits		(43,091,338)		(20,467,592)
Net increase (decrease) in deposits		46,322,107		(43,091,338)
Net (decrease) increase in short-term borrowings		(32,300,000)		30,150,000
Net decrease in short-term borrowings		(10,000,000)		(32,300,000)
Repurchase of common stock		~~(3,791,998)~~—		(~~857~~3,~~574~~791,998)
Issuance of common stock for 401K match		~~68,189~~—		—68,189
Issuance of common stock on stock option exercise		457,726		912,254
Issuance of common stock under stock-based compensation plans		826,427		457,726
Net cash (used in) provided by financing activities		(78,657,421)		9,737,088
Net cash provided by (used in) financing activities		37,148,534		(78,657,421)
Net increase in cash and cash equivalents		5,614,234		17,521,048
Net (decrease) increase in cash and cash equivalents		(8,461,178)		5,614,234
Cash and cash equivalents at beginning of period		3440,~~413~~027,~~222~~456		1634,~~892~~413,~~174~~222
Cash and cash equivalents at end of period (a)	$	40,027,456	$	34,413,222
Cash and cash equivalents at end of period	$	31,566,278	$	40,027,456
Supplemental Disclosures of Cash Flow information:
Interest paid on deposits and borrowings	$	12,~~849~~362,~~933~~896	$	1,~~785~~849,~~674~~933
Net income tax refunds		(552,391)		(408,618)
Net income tax paid (refunded)		4,322,000		(552,391)
Non Cash activities:
Transfer of loans to real estate acquired through foreclosure	$	~~996~~695,~~860~~548	$	1996,~~926,929~~860
Transfer of loans held for sale to loan portfolio		~~310,707~~—		~~228~~310,~~599~~707
(a)Includes cash of our discontinued operations of $1.39 million at December 31, 2016.

See accompanying notes to audited consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Bay Bancorp, Inc. is a savings and loan holding company. Through its subsidiary, Bay Bank, FSB, (the “Bank”), a federal savings bank (an “FSB”), Bay Bancorp, Inc. serves the community with a network of 11 branches strategically located throughout the Baltimore Metropolitan Statistical Area, particularly Baltimore City and the Maryland counties of Baltimore, Anne Arundel, Howard, and Harford, as well as south along the Baltimore-Washington corridor with an expanded focus on Prince George’s and Montgomery counties. The Bank serves local consumers, small and medium size businesses, professionals and other valued customers by offering a broad suite of financial products and services, including on-line and mobile banking, commercial banking, cash management, mortgage lending and retail banking. The Bank funds a variety of loan types including commercial and residential real estate loans, commercial term loans and lines of credit, consumer loans and letters of credit.

As used in these notes, the term “the Company” refers to Bay Bancorp, Inc. and, unless the context clearly requires otherwise, its consolidated subsidiaries.

Basis of Presentation

The consolidated financial statements include the accounts of Bay Bancorp, Inc., the Bank and the Bank’s consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The investment in subsidiary is recorded on Bay Bancorp’s books on the basis of its equity in the net assets of the Bank.

On July 8, 2016, in connection with the Hopkins Merger (defined in Note 2), the Bank acquired a 51% ownership interest in iReverse Home Loans, LLC (“iReverse”), which engages in the business of brokering reverse home loan mortgage loans. The Bank has agreed to sell, effective March 31, 2017, its interest in iReverse for $70,000. See Note 3. The Company reports its non-controlling interest in iReverse separately in the consolidated balance sheet. The Company reports the income of iReverse attributable to the Company on the consolidated statement of income.

Reclassifications

Certain prior year amounts have been reclassified to conform to current period classifications.

In September 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which rescinds the recognition and presentation of changes to the provisional amounts recognized in a business combination. Effective for fiscal years beginning after December 15, 2015, measurement-period adjustments will no longer be accounted for retrospectively. The requirements of this ASU were applied prospectively to the Hopkins Merger (defined below) which closed on July 8, 2016.

Use of Estimates

The preparation of financial statements 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 materially from those estimates.

Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses (the “allowance”); the fair value of financial instruments, such as loans, investment securities, and derivatives; measurement and assessment of intangible assets and other purchase accounting related adjustments; benefit plan obligations and expenses; the valuation of deferred tax assets, real estate acquired through foreclosure, and net assets acquired in the July 8, 2016 merger of Hopkins ~~Merger~~Bancorp, Inc. with and into the Company and the related merger of Hopkins Federal Savings Bank with and into the Bank (~~defined~~collectively, ~~below~~the “Hopkins Merger”); and the estimate of expected cash flows for loans acquired with deteriorated credit quality.

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Segment Information

The Company has one reportable segment, “Community Banking.” All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Bank to fund itself with deposits and other borrowings and manage interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one segment or unit.

Cash and Cash Equivalents

The Company has included cash and due from banks, interest bearing deposits with banks with an original maturity of 90 days or less, and federal funds sold as cash and cash equivalents for the purpose of reporting cash flows.

The Bank is required under regulations promulgated by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to maintain reserves against its transaction accounts. These reserves are generally held in the form of cash or noninterest-earning accounts at the Bank. Based on the nature of our transaction account deposits and the amount of vault cash on hand, the Bank is not required to maintain a reserve balance with the Federal Reserve at December 31, 2016 and 2015. 69

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Investment Securities

Investment securities are accounted for according to their purpose and holding period. Trading securities are those that are bought and held principally for the purpose of selling them in the near future. The Company held no trading securities asat of December 31, ~~2016~~2017 and ~~2015~~2016. Available for sale securities are those that may be sold before maturity due to changes in the Company’s interest rate risk profile or funding needs, and are reported at fair value with unrealized gains and losses, net of taxes, reported as a component of other comprehensive income. Held to maturity investment securities are those that management has the positive intent and ability to hold to maturity and are reported at amortized cost.

Net realized gains and losses on securities available for sale are included in noninterest income ~~(expense)~~ and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income (loss). Gains and losses on sales of securities are determined on a trade date basis using the specific-identification method. Interest and dividends on investment securities are recognized in interest income on an accrual basis. Premiums and discounts are amortized or accreted into interest income using the interest method over the expected lives of the individual securities.

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concern warrants such evaluation. Debt securities with a decline in fair value below their cost that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses to the extent impairment is related to credit losses. The amount of the impairment for debt securities related to other factors is recognized in other comprehensive income (loss). In evaluating other-than-temporary impairment losses, management considers: (i) the length of time and the extent to which the fair value has been less than cost; (ii) the reasons for the decline in value; (iii) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (iv) for fixed maturity securities, whether the Company intends to sell the security, or it is more likely than not that the Company will be required to sell the security before recovery of the cost basis, which may be at maturity.

Restricted Equity Securities, At Cost

The Bank is required to maintain a minimum investment in capital stock of other financial institutions in order to conduct business with these institutions. Since no ready market exists for these stocks and they have no quoted market value, the Bank’s investments in these stocks are carried at cost. Management reviews these securities for impairment based on the ultimate recoverability of the cost basis. The stocks’ values are determined by the ultimate recoverability of the par values rather than by recognizing temporary declines. Management considers such criteria as the significance of a decline in net assets, if any, the length of time the situation has persisted, commitments by the institutions to make payments required by law or regulation, the impact of legislative or regulatory changes on the customer base and the Bank’s liquidity position.

65The Company’s holdings of restricted stock investments consist of the following at December 31, 2017 and 2016:


	2017		2016
Federal Home Loan Bank	$	983,300	$	1,504,200
Visa Inc., Class B		204,195		204,195
Maryland Financial Bank		49,800		49,800
Atlantic Community Bankers Bank		65,000		65,000
Total restricted equity securities	$	1,302,295	$	1,823,195

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The Company’s holdings of restricted stock investments consist of the following at December 31, 2016 and 2015:

	2016		2015
Federal Home Loan Bank	$	1,504,200	$	2,650,600
Visa Inc., Class B		204,195		204,195
Maryland Financial Bank		49,800		49,800
Atlantic Central Bankers Bank		65,000		65,000
Total restricted equity securities	$	1,823,195	$	2,969,595

Loans Held for Sale

The Company engages in sales of residential mortgage loans originated by the Bank. Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an aggregate basis. Loans held for sale include fixed rate single-family residential mortgage loans under contract to be sold in the secondary market. These loans are sold with the mortgage servicing rights released. Under limited circumstances, buyers have recourse to return a purchased loan to the Company. Recourse conditions may include early payment default, breach of representation or warranties, or documentation deficiencies. Fair value is based on outstanding investor commitments or, in absent of such commitments, based on current investor yield requirements based on third party models. Declines in fair value below cost (and subsequent recoveries) are recognized in noninterest income in the Consolidated Statements of Income. Deferred fees and costs related to these loans are not amortized but are recognized as part of the cost basis of the loan at the time it is sold. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Income.

Loans

The accounting methods for loans differ depending on whether the loans are originated or purchased, and if purchased, whether or not the purchased loans reflected credit deterioration since the date of origination such that it is probable on the purchase date that the Company will be unable to collect all contractually required payments.

Originated Loans

Loans are generally stated at the principal amount outstanding net of any deferred fees and costs. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. The accrual of interest is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. Generally, loans are placed on nonaccrual status once they are determined to be impaired or when principal or interest payments are 90 or more days past due. Previously accrued but uncollected interest income on these loans is reversed against interest income. The amortization of loan fees or costs is discontinued when a loan is placed on nonaccrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. Fees charged and costs capitalized for originating certain loans are amortized or accreted by the interest method over the term of the loan.

Loans are considered impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Impaired loans do not include large groups of smaller balance homogeneous credits such as residential real estate and consumer installment loans, which management evaluates collectively for impairment. 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 reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. However, as a practical expedient, management may measure impairment based on a loan’s observable market price or the fair value of the collateral if repayment of the loan is collateral-dependent. For collateral-dependent loans, any measured impairment is charged off in the applicable reporting period.

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Loans Acquired in a Transfer

The loans acquired in the Hopkins Merger ~~(defined~~and ~~below)~~previous ~~(see~~acquisitions ~~Note~~and 2)mergers were recorded at fair value at the acquisition date and no separate valuation allowance was established. The initial fair values were determined by management, with the assistance of an independent valuation specialist, based on estimated expected cash flows discounted at appropriate rates. The discount rates were based on market rates for new originations of comparable loans and did not include a factor for loan losses as that was included in the estimated cash flows.

The Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to loans acquired in a transfer with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. If both conditions exist, the Company determines whether to account for each loan individually or whether such loans will be assembled into pools based on common risk characteristics such as credit score, loan type, and origination date. Based on this evaluation, the Company determined that the loans acquired from Bay National Bank, Slavie Federal Savings Bank, Carrollton Bank, and Hopkins Federal Savings Bank (“Hopkins Bank”) were subject to ASC Topic 310-30 and would be accounted for individually.

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with evidence of deterioration of credit quality for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. If both conditions exist, the Company determines whether to account for each loan individually or whether such loans will be assembled into pools based on common risk characteristics such as credit score, loan type, and origination date. Based on this evaluation, the Company determined that the loans acquired from Bay National Bank, Slavie Federal Savings Bank, Carrollton Bank, and Hopkins Federal Savings Bank (“Hopkins Bank”) were subject to ASC Topic 310-30 and would be accounted for individually.

The Company considered expected prepayments and estimated the total expected cash flows, which included undiscounted expected principal and interest. The excess of that amount over the fair value of the loan is referred to as accretable yield. Accretable yield is recognized as interest income on a constant yield basis over the expected life of the loan. The excess of the contractual cash flows over expected cash flows is referred to as nonaccretable difference and is not accreted into income. Over the life of the loan, the Company continues to estimate expected cash flows. Subsequent decreases in expected cash flows are recognized as impairments in the current period through the allowance for loan losses. Subsequent increases in cash flows to be collected are first used to reverse any existing valuation allowance and any remaining increase are recognized prospectively through an adjustment of the loan’s yield over its remaining life.

ASC Topic 310-20, Nonrefundable Fees and Other Costs, was applied to loans not considered to have deteriorated credit quality at acquisition. Under ASC Topic 310-20, the difference between the loan’s principal balance at the time of purchase and the fair value is recognized as an adjustment of yield over the life of the loan.

Allowance for Loan Losses

The allowance for loan losses is established to estimate losses that may occur on loans by recording a provision for loan losses that is charged to earnings in the current period. Loans are charged off when management believes a loan or any portion thereof is not collectable. Subsequent recoveries, if any, are credited to the allowance.

The allowance is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. 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 and general components. The specific component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price, whichever is appropriate, of the impaired loan is lower than the carrying value of that loan. For impaired loans that are collateral dependent, any measured impairment is charged off against the loan and the allowance in the applicable reporting period. The general component covers loans that are not classified as impaired and primarily include purchased loans not deemed impaired and new loan originations. The general reserve is based on historical loss experience of the Bank or peer bank group if the Bank’s loss experience is deemed by management to be insufficient and several qualitative factors. These qualitative factors address various risk characteristics in the Company’s loan portfolio after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss data.

While management believes it has established the allowance in accordance with U.S. GAAP and has taken into account both the views of the Company’s regulators and the current economic environment, there can be no assurance that the Company’s regulators and/or the economic environment will not require future increases in the allowance.

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Real Estate Acquired Through Foreclosure

The Company records foreclosed real estate assets at fair value less estimated costs to sell at the time of acquisition. Estimated fair value is based upon many subjective factors, including location and condition of the property and current economic conditions. Since the calculation of fair value relies on estimates and judgments relating to inherently uncertain events, actual results may differ materially from the Company’s estimates.

Fair value adjustments at the time of acquisition are made through the allowance. Write-downs for subsequent declines in value and net operating expenses are included in foreclosed property expenses. Gains or losses realized upon disposition are included in noninterest expense.

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Premises and Equipment

Land is carried at cost. Buildings, land improvements, leasehold improvements, furniture and equipment, and software are stated at cost less accumulated depreciation and amortization. The cost basis of premises and equipment acquired through the Hopkins Merger ~~(defined below)~~ is the acquisition date fair value. Depreciation is computed by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or over the estimated useful lives of the assets. Maintenance and normal repairs are charged to operations as incurred, while additions and improvements to buildings, leasehold improvements, and furniture and equipment are capitalized. Gains or losses on disposition of assets are reflected in earnings. The amortization of deferred gains on sale and leaseback transactions are recorded as a reduction to rent expense.

Long-lived assets are evaluated for impairment by management on an on-going basis. Impairment may occur whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Bank Owned Life Insurance

The Company has purchased bank owned life insurance policies on certain current and former employees as a means to generate tax-exempt income which is used to offset a portion of current and future employee benefit costs. Bank owned life insurance is recorded at the cash surrender value of the policies. Changes in the cash surrender value are included in noninterest income.

Core Deposit Intangibles

Core deposit intangibles (the portion of an acquisition purchase price which represents value assigned to the existing deposit base) have finite lives and are amortized by the declining balance method over periods ranging from six to nine years; amortization is recorded in noninterest expenses. The Company reviews intangibles on a periodic basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded in noninterest expense.

Other Comprehensive Income (Loss)

The Company records unrealized gains and losses on available for sale securities and unrecognized actuarial gains and losses, transition obligations and prior service costs on its pension plan in accumulated other comprehensive income, net of taxes. Unrealized gains and losses on available for sale securities are reclassified into earnings as the gains or losses are realized upon sale of the securities. The credit component of unrealized losses on available for sale securities that are determined to be other-than-temporary impaired are reclassified into earnings at the time the determination is made.

Mortgage Banking Derivatives

In connection with the origination of residential mortgage loans, the Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitment). The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 60 days. To protect itself against exposure to various factors and to reduce sensitivity to interest rate movement, the Company hedges these assets with best efforts forward mortgage loan commitments to sell to various investors. Both the mortgage loan commitments and the related sales contracts are considered derivatives and are recorded at fair value with changes in fair value recorded in noninterest income in the Consolidated Statements of Income. The Company determines the fair value of rate lock commitments using the investor’s prices for the underlying loans less cost to originate the loans adjusted for the anticipated funding probability (closing ratio) based on historical experience. Closing ratios derived using the Company’s recent historical data are utilized to estimate the quantity of mortgage loans that will be funded within the terms of the rate lock commitment. Forward mortgage loan sales commitments are valued based on the gain or loss that would occur if the Company were to pair-off the sales transaction with the investor. The cash flows from forward sales agreements are classified as operating activities in the Statements of Cash Flows.

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with changes in fair value recorded in noninterest income in the Consolidated Statements of Income. The Company determines the fair value of rate lock commitments using the investor’s prices for the underlying loans less cost to originate the loans adjusted for the anticipated funding probability (closing ratio) based on historical experience. Closing ratios derived using the Company’s recent historical data are utilized to estimate the quantity of mortgage loans that will be funded within the terms of the rate lock commitment. Forward mortgage loan sales commitments are valued based on the gain or loss that would occur if the Company were to pair-off the sales transaction with the investor. The cash flows from forward sales agreements are classified as operating activities in the Statements of Cash Flows.

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, 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 the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain instances, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.

Advertising Costs

Advertising costs are expensed as incurred and included in noninterest expense.

Income Taxes

The Company uses the liability method of accounting for 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 bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates in effect when these differences reverse.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of deferred tax assets is dependent on generating sufficient taxable income in the future.

When tax returns are filed, management is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while there may be other positions that are subject to uncertainty about their merits or the amounts of the positions that ultimately would be sustained if examined. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Management evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the consolidated financial statements.

It is the Company’s policy to recognize interest and penalties related to unrecognized tax liabilities within income tax expense in the statement of operations.

Stock Based Compensation

Stock based compensation expense is recognized over the employee or director’s service period, which is generally defined as the vesting period, of the stock based grant based on the estimated grant date fair value. A Black-Scholes option pricing model is used to estimate the fair value of stock options granted.

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Earnings per share

Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and unvested restricted stock awards, and are determined using the treasury stock method.

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Recent Accounting Pronouncements and Developments

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific revenue recognition guidance throughout the ASC. The amendments in this update affect any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts, including leases and insurance contracts, are within the scope of other standards. The amendments establish a core principle requiring the recognition of revenue to depict the transfer of goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. The amendments also require expanded disclosures concerning the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. In August ~~2015~~2016, the FASB deferred the effective date by one year from the date in the original guidance. The guidance is effective for fiscal years and interim periods beginning after December 15, ~~2018~~2017. The Company’s adoption of this item is not expected to have a material impact on its results of operations or financial condition.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amended guidance related to recognition and measurement of financial assets and liabilities. The amended guidance requires that equity investments (excluding 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. An entity can elect to measure equity investments that do not have readily determinable fair values at cost less impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The impairment assessment of equity investments without readily determinable fair values is simplified by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates impairment exists, an entity is required to measure the investment at fair value. The guidance eliminates the requirement for public business entities to disclose the method 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. Further, the guidance requires public entities to use the exit price when measuring the fair value of financial instruments for disclosure purposes. The guidance also requires an entity to present separately in other comprehensive income, a change in the instrument-specific credit risk when the entity has elected to measure a liability at fair value in accordance with the fair value option. Separate presentation of financial assets and financial liabilities by measurement category and type of instrument on the balance sheet or accompanying notes to the financial statements is required. The guidance also clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company isdoes ~~currently~~not ~~evaluating~~expect ~~the~~this ~~impact~~ASU ~~that~~to ~~this~~have ~~guidance~~a ~~could~~material ~~have~~impact on ~~its~~the Company’s consolidated financial statements., but does expect a change in the fair value of loans reported in Note 16 – Fair Value.

In February 2016, the FASB issued ASU 2016-02, Leases. From the lessee’s perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record aan 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 lease. If the lessor does not 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 reviewed the impact of the adoption and where the Company is a lessee, primarily for the Company’s ground leases and administrative office leases, the Company will be required to record a lease liability and a right of use asset on its Consolidated Balance Sheets at fair value upon adoption.

70 In June 2016, FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the

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~~with~~reporting ~~certain~~date ~~practical~~based ~~expedients~~on ~~available. While~~historical weexperience, ~~are~~current ~~currently~~conditions, ~~evaluating~~and ~~the~~reasonable ~~impact~~and supportable forecasts. Many of the ~~new~~loss ~~standard~~estimation techniques applied today will still be permitted, wealthough ~~expect~~the aninputs ~~increase~~to those techniques will change to reflect the ~~consolidated~~full ~~balance~~amount ~~sheets~~of ~~for~~expected ~~right-of-~~credit losses. The Company will continue to use ~~assets~~judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and ~~associated~~other ~~lease~~financial ~~liabilities~~statement users better understand significant estimates and judgments used in estimating credit losses, as well as ~~resulting~~the ~~depreciation~~credit ~~expense~~quality ofand ~~the~~underwriting ~~right-~~standards of~~-use~~ ~~assets~~an organization's portfolio. These disclosures include qualitative and ~~interest~~quantitative ~~expense~~requirements ofthat provide additional information about the ~~lease~~amounts ~~liabilities~~recorded in the ~~our~~financial ~~consolidated~~ statements. Additionally, ofthe ~~income~~ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for ~~our~~fiscal ~~agreements previously~~years, ~~accounted~~and interim periods within those fiscal years, beginning after December 15, 2018. The Company’s finance team is reviewing its procedures and researching additional software resources for asmeasuring ~~operating~~credit ~~leases~~losses and the effect of the ASU on its consolidated balance sheets and consolidated statements of operations.

In ~~March~~August 2016, ~~the~~ FASB issued ASU ~~2016-09, Improvements to Employee Share-Based Payment Accounting~~No. ~~ASU~~ 2016-0915, ~~includes~~Statement ~~provisions~~of ~~intended~~Cash toFlows ~~simplify~~(Topic ~~various~~230): ~~aspects~~Classification ~~related~~of toCertain ~~how~~Cash ~~share-based~~Receipts ~~payments are accounted for~~ and ~~presented~~Cash ~~in the financial statements~~Payments. ~~Under~~ This ASU ~~2016-09,~~addresses ~~companies~~the ~~will~~appropriate noclassification ~~longer~~of ~~record~~eight ~~excess~~specific ~~tax~~cash ~~benefits~~flow ~~and~~issues ~~certain~~on ~~tax~~the ~~deficiencies~~cash inflow ~~additional paid-in capital (“APIC”)~~statement. ~~Instead,~~ ~~they~~Debt ~~will~~prepayment ~~record~~costs ~~all~~should ~~excess~~be ~~tax~~classified ~~benefits and tax deficiencies~~ as ~~income~~an ~~tax~~outflow ~~expense~~for orfinancing ~~benefit~~activities. inSettlement ~~the~~of ~~income statement, and APIC pools will be eliminated. ASU 2016~~zero-09coupon ~~also~~debt ~~eliminates~~instruments divides the ~~requirement~~interest ~~that~~portion ~~excess~~as ~~tax~~an ~~benefits~~outflow befor ~~realized~~operating ~~before~~activities ~~companies~~and ~~can recognize them. In addition,~~ the ~~guidance~~principal ~~requires~~portion ~~companies to present excess tax benefits~~ as an ~~operating~~outflow ~~activity~~for onfinancing ~~the~~activities. ~~statement~~Contingent ofconsideration ~~cash~~payments ~~flows~~made ~~rather~~after ~~than as~~ a ~~financing~~business ~~activity;~~combination ~~ASU~~should ~~2016-09~~be ~~increases the~~classified ~~amount~~as anoutflows ~~employer~~for ~~can~~financing ~~withhold to cover income taxes on awards~~ and ~~still~~operating ~~qualify~~activities. ~~for~~Proceeds from the ~~exception~~settlement toof ~~liability~~bank-owned ~~classification~~life ~~for~~insurance ~~shares~~policies ~~used~~should tobe ~~satisfy~~classified ~~the~~as ~~employer’s~~inflows ~~statutory~~from ~~income~~investing ~~tax withholding obligation~~activities. ~~The~~ ~~new~~Other ~~guidance~~specific ~~will~~areas ~~also~~are ~~require~~identified anin ~~employer to classify~~ the ~~cash~~ASU ~~paid~~as to athe ~~tax~~appropriate ~~authority~~classification ~~when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement~~ of ~~cash~~the ~~flows (current guidance did not specify how these~~ cash ~~flows~~inflows ~~should~~or ~~be classified)~~outflows. ~~ASU~~ ~~2016-09~~The ~~permits companies~~amendments toin ~~make~~this anASU ~~accounting~~are ~~policy~~effective ~~election~~ for ~~the~~fiscal ~~impact~~years ofbeginning ~~forfeitures~~after onDecember ~~the recognition of expense for share-based payment awards. Forfeitures can be estimated~~15, ~~as required today~~2017, orincluding ~~recognized when they occur. This guidance is effective for~~ interim ~~and annual reporting~~ periods ~~beginning~~within ~~after~~those ~~December~~fiscal ~~15, 2016~~years. Early adoption is permitted, ~~but~~and ~~all~~must ofbe ~~the~~applied ~~guidance~~using ~~must~~a beretrospective ~~adopted~~transition inmethod ~~the~~to ~~same~~each period presented. The Company's isfinance ~~currently~~team is evaluating the ~~provisions~~impact of ~~ASU~~this ~~2016-09~~pronouncement toand ~~determine~~researching ~~the~~additional ~~potential~~software ~~impact~~resources that ~~these~~could ~~new~~assist ~~standards~~with ~~will have on~~ the ~~Company's consolidated financial statements~~implementation.

In June 2016, FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326). The ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by the Company. The ASU requires the Company to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. 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. The Company will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is in the process of determining the effect of the ASU on its consolidated balance sheets and consolidated statements of operations.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the appropriate classification of eight specific cash flow issues on the cash flow statement. Debt prepayment costs should be classified as an outflow for financing activities. Settlement of zero-coupon debt instruments divides the interest portion as an outflow for operating activities and the principal portion as an outflow for financing activities. Contingent consideration payments made after a business combination should be classified as outflows for financing and operating activities. Proceeds from the settlement of bank-owned life insurance policies should be classified as inflows from investing activities. Other specific areas are identified in the ASU as to the appropriate classification of the cash inflows or outflows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted and must be applied using a retrospective transition method to each period presented. The Company's finance team are in the process of developing an understanding of this pronouncement, evaluating the impact of this pronouncement and researching additional software resources that could assist with the implementation.

In November 2016, FASB issued ASU No. 2016-18, “Statement of Cash Flows – Restricted Cash.” This ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows and is effective for the first quarter of 2018. Earlier application is permitted. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

71In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued 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

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~~NOTE~~guidance 2does –not ~~BUSINESS~~change ~~COMBINATIONS~~the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 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 continues to evaluate the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

~~The~~In ~~Company~~May ~~has~~2017, ~~accounted~~the ~~for~~FASB ~~the~~issued ~~Hopkins~~ASU ~~Merger~~No. ~~(defined~~2017-09, ~~below)~~“Stock ~~under~~Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the ~~acquisition method~~terms of ~~accounting~~conditions inof ~~accordance~~a ~~with~~share-based ~~ASC~~payment ~~Topic~~award ~~805,~~must ~~Business~~be ~~Combinations~~accounted for as modifications. Companies will apply the modification accounting guidance if the value, ~~whereby~~vesting conditions or classification of the ~~acquired~~award ~~net~~changes. ~~assets~~The new guidance should reduce diversity in practice and ~~assumed~~result ~~liabilities~~in ~~were~~fewer ~~recorded~~changes byto the ~~Company~~terms atof ~~their~~an ~~estimated~~award ~~fair~~being ~~values~~accounted for as ofmodifications, ~~their~~as ~~acquisition~~the ~~date. Fair~~guidance ~~value~~will ~~estimates~~allow ~~were~~companies ~~based~~to onmake ~~management’s~~certain ~~assessment~~non-substantive ofchanges ~~the~~to ~~best~~awards ~~information~~without ~~available~~accounting for them as ofmodifications. It does not change the ~~acquisition~~accounting ~~date~~for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

In ~~accordance~~July ~~with~~2017, the ~~framework~~FASB ~~established~~issued byASU ~~ASC~~No. 2017-11, “Earnings Per Share (Topic ~~820,”~~260): ~~Fair~~Distinguishing ~~Value~~Liabilities ~~Measurements~~from ~~and~~Equity ~~Disclosure,~~(Topic 480)” ~~the~~This ~~Company~~ASU ~~used~~addresses anarrow ~~fair~~issues ~~value~~identified ~~hierarchy~~a toresult ~~prioritize~~of the ~~information~~complexity ~~used~~associated towith ~~develop~~applying ~~assumptions~~GAAP tofor ~~calculate~~certain ~~estimates~~financial ininstruments ~~determining~~with ~~fair~~characteristics ~~values~~of liabilities. ~~These~~ ~~fair~~ASU ~~value~~No. ~~hierarchies~~2017-11 ~~are~~is ~~discussed~~effective infor ~~Note~~interim 18and annual reporting periods beginning after December 15, 2018; early adoption is permitted. ASU No. 2017-11 is not expected to have a material impact on the Company’s consolidated financial statements.

~~Hopkins~~In ~~Merger~~August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities” This ASU’s objective is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company will evaluate the provisions of ASU No. 2017-12 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

OnIn ~~July~~February 82018, ~~2016,~~ the ~~Company~~FASB ~~completed~~issued ~~its~~ASU ~~merger~~No. ~~with~~2018-02, ~~Hopkins~~“Income ~~Bancorp,~~Statement ~~Inc.~~- Reporting Comprehensive Income (~~“Hopkins”~~Topic 220): Reclassification of Certain Tax Effects from AOCI,” a revised guidance on the ~~parent~~accounting ~~company~~for certain tax effects stranded in AOCI. U.S. GAAP requires the effects of ~~Hopkins~~changes ~~Bank~~in tax rates and laws on deferred tax balances to be recorded as a component of income tax expense from continuing operations in the period of enactment. For deferred tax assets and liabilities related to items in AOCI, this results in ~~which~~the ~~Hopkins~~tax ~~was~~effects ~~merged~~of ~~into~~such changes being stranded in AOCI. The revised guidance provides an optional reclassification from AOCI to retained earnings for such stranded tax effects resulting from the ~~Company,~~reduction ~~with~~in the ~~Company~~corporate asincome tax rate enacted by the ~~surviving~~Tax ~~corporation~~Act. ~~Immediately~~ ~~following~~The ~~that~~reclassification ~~merger,~~may ~~Hopkins~~also ~~Bank~~include ~~was~~such ~~merged~~stranded ~~into~~tax effects resulting from other income tax effects of the ~~Bank~~Tax Act, ~~with~~such as the ~~Bank~~effect asof the ~~surviving~~federal ~~FSB~~benefit ~~(these~~of ~~merger~~deducting ~~transactions~~state income taxes. Entities are ~~collectively~~provided ~~referred~~the option to asapply the ~~“Hopkins~~guidance ~~Merger”)~~retrospectively or in the period of adoption. The guidance is effective for us on January 1, 2019, with early adoption permitted. The Company continues to evaluate the provisions of ASU No. 2018-02 to determine the potential impact the new standard will have on the Company’s consolidated financial statements.

~~The~~NOTE ~~Hopkins~~2 ~~Merger~~– ~~was~~DISCONTINUED consummated pursuant to an Agreement and Plan of Merger Agreement, dated as of December 18, 2015 and amended on February 1, 2016, among the Company, Hopkins and Alvin M. Lapidus (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, the Company acquired all of the outstanding shares of Hopkins common stock for cash in an amount equal to 105% of Hopkins’ tangible book value at June 30, 2016 (the “Merger Consideration”) after giving effect to (i) Hopkins’ payment of its transaction-related expenses, (ii) $389,808 in cash bonuses that Hopkins paid to certain employees of Hopkins Bank, and (iii) a $16.0 million cash dividend that was paid by Hopkins to its stockholders. Based on the foregoing, the amount of the Merger Consideration was $23,855,141. The Company held no equity interest in Hopkins prior to the Hopkins Merger. OPERATIONS

~~Upon~~From ~~the~~July ~~closing~~8, of2016 ~~the~~until ~~Hopkins~~March ~~Merger~~31, ~~each~~2017, ~~outstanding~~the ~~share~~Bank ofhad ~~Hopkins~~an ~~common~~investment ~~stock~~in ~~was~~a ~~converted~~reverse ~~into~~home ~~the~~loan ~~right~~mortgage tobrokerage ~~receive~~firm ~~cash~~named iniReverse anHome ~~amount~~Loan, ofLLC ~~$98~~(“iReverse”).~~7578,~~ The ~~which~~Bank ~~was~~owned ~~determined~~51% byof ~~dividing~~iReverse and reported its non-controlling interest in iReverse separately in the ~~Merger~~consolidated ~~Consideration~~balance bysheet ~~241~~at December 31,~~552,~~ 2016. The Company reported the ~~number~~income of ~~issued~~iReverse ~~and~~attributable ~~outstanding~~to ~~shares~~the Bank on the consolidated statement of ~~Hopkins~~income ~~common~~for ~~stock~~the year ended December 31, 2016 as ofdiscontinued operations. On March 31, 2017, the ~~closing~~Bank sold this interest to the other owner of iReverse for $70,000. The Company reported no discontinued operations for the ~~Hopkins~~year ~~Merger~~ended December 31, 2017.

ADiscontinued ~~valuation~~operations offor the ~~acquired~~year ~~loans,~~ended ~~deposits~~December ~~and~~31, ~~core~~2016 ~~deposit~~included ~~intangible~~noninterest ~~was~~income ~~performed~~and ~~with~~noninterest ~~the~~expense ~~assistance~~related ofto ~~a third-party consultant~~iReverse. The ~~following~~net ~~table~~income ~~presents~~from ~~the~~discontinued ~~allocation~~operations, net of ~~the~~taxes ~~consideration paid~~ for the ~~acquired~~year ~~assets and assumed liabilities in the Hopkins Merger as of the acquisition date. The allocation resulted in an after-tax bargain purchase gain of $540,789.~~

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Table of Contents

Assets acquired at fair value:
Cash and cash equivalents	$	104,192,609
Time deposits with banks		23,703,703
Investment securities available for sale		41,459,794
Loans		58,125,245
Investments in joint ventures		15,338
Accrued interest receivable		511,324
Restricted equity securities		212,100
Premises and equipment		95,000
Core deposit intangible		1,197,000
Other assets		1,319,192
Total assets acquired	$	230,831,305
Liabilities assumed at fair value:
Deposits	$	202,128,839
Accrued expenses and other liabilities		3,954,198
Total liabilities assumed	$	206,083,037
Net assets acquired at fair value:	$	24,748,268
Transaction cash consideration paid		(23,855,141)
Total estimated bargain purchase gain, before tax		893,127
Tax expense		352,339
Total estimated bargain purchase gain, after tax	$	540,789

ended December, 2016 was $366,034, with $199,491 attributable to non-controlling interest and $166,543 attributable to common stockholders.

InSummarized ~~many~~financial cases, determining the fair value of the acquired assets and assumed liabilities requires the Company to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The Company is still obtaining final information onfor ~~these~~our ~~values~~discontinued ~~and~~operations ~~adjustments could still be made during the measurement period. The most significant of these determinations~~ related to ~~the~~iReverse ~~valuation~~was ofas ~~acquired loans.~~follows:

The following is a summary of the loans acquired in the Hopkins Merger:


	December 31, 2016
ASSETS
Cash and cash equivalents	$ 1,394,265
Other assets	47,760
Total assets	1,442,025

LIABILITIES

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