10-K 1 a201610-kdocument.htm 10-K Document

As filed with the Securities and Exchange Commission on
March 14, 2017

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K


(Mark One)

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

For the fiscal year ended December 31, 2016

or

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

For the transition period from ____________ to ____________.
           
Commission File Number: 001-35768

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WASHINGTONFIRST BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
 
 
 
VIRGINIA
 
26-4480276
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
11921 Freedom Drive, Suite 250, Reston, Virginia
 
20190
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(703) 840-2410
(Registrant’s telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Exchange on which registered
Common Stock, par value $0.01 per share
 
NASDAQ Capital Market
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
 
Exchange on which registered
None
 
n/a

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes    ¨        No    x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes    ¨        No    x




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

Yes    x        No    ¨

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

Yes    x        No    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. §229.405) 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. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer        ¨                Accelerated filer                x
Non-accelerated filer        ¨                Smaller Reporting Company        ¨

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

Yes    ¨        No    x

The aggregate market value of the common stock held by non-affiliates of the registrant was $217.6 million as of June 30, 2016, based upon the closing price on June 30, 2016, as reported by the NASDAQ Stock Market.

As of March 9, 2017, the registrant had outstanding 12,114,985 shares of voting common stock and 816,835 shares of non-voting common stock.



DOCUMENTS INCORPORATED BY REFERENCE

Certain information called for by Part III is incorporated by reference to certain sections in the registrant’s definitive proxy statement relating to the 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2016.















Table of Contents to 2016 Form 10-K
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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

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Cautionary Note Regarding Forward-Looking Statements
The following discussion and other sections to which the Company has referred you contains management’s comments on the Company’s business strategy and outlook, and such discussions contain forward-looking statements. These forward-looking statements reflect the expectations, beliefs, plans and objectives of management about future financial performance and assumptions underlying management’s judgment concerning the matters discussed, and accordingly, involve estimates, assumptions, judgments and uncertainties. The Company’s actual results could differ materially from those discussed in the forward-looking statements and the discussion below is not necessarily indicative of future results. Factors that could cause or contribute to any differences include, but are not limited to, those discussed in Part II, Item 1A - “Risk Factors.”
This report, as well as other periodic reports filed with the SEC, and written or oral communications made from time to time by or on behalf of the Company, may contain statements relating to future events or future results and their effects that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend,” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may” or the negative of those terms or other variations of them or comparable terminology. Forward-looking statements include statements of the Company’s goals, intentions and expectations; statements regarding its business plans, prospects, growth and operating strategies; statements regarding the quality of its loan and investment portfolios; and estimates of its risks and future costs and benefits.
Forward-looking statements included herein speak only as of the date of this report. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.


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PART I

Item 1. Business
General
The Company was organized in 2009 under the laws of Virginia to operate as a bank holding company and is headquartered in Reston, Virginia. The Company is the holding company for WashingtonFirst Bank, which operates 19 full-service banking offices throughout the Washington, D.C. metropolitan area. The Bank opened for business in April 2004 and is chartered by the Commonwealth of Virginia. Through the end of 2016, the FDIC served as its primary federal regulator. In January 2017, the Bank became a member of the Federal Reserve System and, as such, is subject to regulation and supervision by the Federal Reserve Board going forward. With the acquisition of 1st Portfolio, Inc. in July 2015, the Company provides wealth management services with offices located in Fairfax, Virginia; and mortgage banking services through the Bank's wholly owned subsidiary, WashingtonFirst Mortgage which operates in two locations: Fairfax, Virginia and Rockville, Maryland.  Wealth Advisors operates as a wholly owned subsidiary of the Company and WashingtonFirst Mortgage is a wholly owned subsidiary of the Bank.
WashingtonFirst’s growth strategy is to pursue organic growth as well as acquisition opportunities within its target market area of the Washington, D.C. metropolitan area. The Company has completed two branch acquisitions, two whole-bank acquisitions, an FDIC-assisted acquisition, and the acquisition of a mortgage company and a wealth management company. Additionally, the Company has a demonstrated track record of consistent organic growth in assets and profitability since its inception by hiring and developing skilled personnel, and creating and maintaining a solid infrastructure to support continued business growth on a sound basis.
WashingtonFirst’s business strategy is to provide its customers with highly qualified personal and customized service utilizing effective technology solutions and delivery channels. The Bank’s marketing efforts are directed to prospective clients who value high quality service and who are, or have the potential to become, highly profitable. WashingtonFirst’s view of the financial services market is that community banks must be effective in providing quality, tailored services to their customers rather than competing with large national institutions on a head-to-head basis for broad-based consumer business.
Revenues are primarily derived from interest and fees received in connection with loans, deposits, and investments, as well as mortgage banking and wealth advisory fees. Major expenses include compensation and employee benefits, interest expense on deposits and borrowings, and operating expenses.
Products and Services
The Bank offers a comprehensive range of commercial banking products and services to small-to-medium sized businesses, not-for-profit organizations, professional service firms and individuals in the greater Washington, D.C. metropolitan area. The Mortgage Company provides residential mortgage lending services to customers in the Washington, D.C. metropolitan and greater mid-Atlantic areas. Wealth Advisors specializes in assisting select affluent business owners, executives and families preserve and grow their wealth, providing comprehensive wealth management and business retirement plan services. More information on WashingtonFirst’s services is available on-line at www.wfbi.com.
Business and Consumer Lending
WashingtonFirst’s lending activities include commercial real estate loans, residential real estate loans, commercial and industrial loans, construction and development loans and consumer loans. Loans originated by the Bank are primarily classified as loans held for investment. Loans originated by the Mortgage Company are primarily classified as loans held for sale.
Lending activities are subject to lending limits imposed by federal and state law. While different limits apply in certain circumstances based on the type of loan, the Bank’s lending limit to any one borrower on loans that are not fully secured by readily marketable or other permissible collateral generally is equal to 15 percent of the Bank’s unimpaired capital and surplus. As of December 31, 2016, the Bank’s legal lending limit was $32.2 million. For loan amounts exceeding WashingtonFirst’s legal lending limits or internal lending policies, the Bank has established relationships with various correspondent banks to sell loan participations.
WashingtonFirst has an established credit policy that includes procedures for underwriting each type of loan and lending personnel have been assigned specific loan approval authorities based upon their experience. Loans in excess of an individual loan officer’s authority are presented to the OLC or ELC for approval. The OLC and ELC each meet weekly to facilitate a timely approval process for WashingtonFirst’s clients. Loans are approved based on the borrower’s capacity for credit, collateral and sources of repayment. Loans are actively monitored to detect any potential performance issues. WashingtonFirst manages its loans within the context of a risk grading system developed by management based upon extensive experience in administering loan portfolios in its market. Payment performance is carefully monitored for all loans. When loan repayment is dependent upon an operating business or investment real estate, periodic financial reports, site visits and select asset verification procedures are used to ensure that WashingtonFirst accurately rates the relative risk of its assets. Based upon criteria established by management and the Bank’s board

6


of directors, the degree of monitoring is escalated or relaxed for any given borrower based upon WashingtonFirst’s assessment of the future repayment risk.
Acquisition, Development & Construction Loans. These loans generally fall into one of four types: first, loans to construct owner-occupied commercial buildings; second, loans to individuals that are ultimately used to acquire property and construct an owner-occupied residence; third, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and fourth, loans to developers for the purpose of acquiring land to be developed into finished lots for the ultimate construction of residential or commercial buildings. Loans of these types are generally secured by the subject property within limits established by WashingtonFirst’s board of directors based upon an assessment of market conditions and updated from time to time. The loans typically carry recourse to principal borrowers. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category carry construction completion risk. To address this additional risk, loans of this type are subject to additional administrative procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications and time frames.
Commercial Real Estate Loans. These loans generally fall into one of three categories: loans supporting owner-occupied commercial property; loans supporting properties used by non-profit organizations such as trade associations, churches or charter schools where repayment is dependent upon the cash flow of the non-profit organizations; and loans supporting a commercial property leased to third parties for investment. Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards, approved by WashingtonFirst’s board of directors from time to time, set forth, among other considerations, loan to value limits, cash flow coverage ratios, and standards governing the general creditworthiness of the obligors. Loans secured by commercial real estate originated by the Bank are primarily classified as loans held for investment.
Residential Real Estate Loans. Through the Mortgage Company, WashingtonFirst offers a variety of competitive mortgage loan products to homeowners and investors of 1-4 family properties. Mortgage loans originated are generally sold in the secondary market through purchase agreements with institutional investors with servicing released. Loans in these categories are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by management and the board of directors, and includes such considerations as repayment source and capacity, collateral value, credit history, savings pattern, and stability. The Mortgage Company’s activities rely on insurance provided by HUD and the VA. In addition, the Mortgage Company underwrites mortgage loans in accordance with guidelines for programs under Fannie Mae and Freddie Mac that make these loans marketable in the secondary market.
Commercial and Industrial Loans. These loans are to businesses or individuals for business purposes. Typically the loan proceeds are used to support working capital and the acquisition of fixed assets of an operating business or to refinance a loan payable to another financial institution that was originally made for a similar purpose. Each loan is underwritten based upon WashingtonFirst’s assessment of the obligor’s ability to generate operating cash flow in the future necessary to repay the loan. To address the risks associated with the uncertainties of future cash flow, these loans are generally secured by assets owned by the business or its principal shareholders and the principal shareholders are typically required to guarantee the loan.
Consumer Loans. Consumer loans are loans to individuals for a stated purpose such as to finance a car or boat, to refinance debt, or to fund general working capital needs. These loans are generally extended in a single disbursement and repaid over a specified period of time. Most loans are well secured with assets other than real estate, such as marketable securities or automobiles. In general, management discourages unsecured lending. Loans in this category are underwritten to standards within a traditional consumer framework that is periodically reviewed and updated by WashingtonFirst’s management and board of directors, and includes such considerations as repayment source and capacity, collateral value, credit history, savings pattern, and stability.
Deposit Services
Deposits are the primary source of funding for the Bank. The Bank offers an array of traditional banking products and services which are priced competitively. Deposit services include business and personal checking, NOW accounts, tiered savings and money market and time deposit accounts with varying maturity structures and customer options. A complete individual retirement account program is also available. The Bank also participates in the CDARS program which functions to assure full FDIC insurance for participating Bank customers.
Deposit services include cash management services such as electronic banking, sweep accounts, lockbox, account reconciliation services, merchant card depository, safe deposit boxes, remote deposit capture and ACH origination. After hour depository and ATM services are also available. In addition, the Bank offers a full range of on-line banking services for both personal and commercial accounts and has a mobile banking application for both.

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Wealth Management
Through its wholly owned subsidiary, Wealth Advisors, the Company offers fee based investment advisory services to high net worth individuals, business owners and executives, and families to preserve and grow their wealth. In addition, the Company provides financial and retirement planning services. Custodial services are offered through third party contractual arrangements with Pershing Securities and Charles Schwab Securities. Wealth Advisors maintains offices in Fairfax, Virginia.
Employees
At December 31, 2016, WashingtonFirst had 253 employees, of which 178 were employees of the Bank, 69 were employees of the Mortgage Company, and 6 were employees of Wealth Advisors; compared to 220 employees of the Bank as of December 31, 2015. None of WashingtonFirst’s employees is subject to a collective bargaining agreement. Management considers employee relations to be good. The Company provides employees with a comprehensive employee benefit program which includes group life, health and dental insurance, paid time off, sick leave, educational opportunities, a cash incentive plan, an equity award incentive plan for key employees, and a 401(k) plan with discretionary employer match.
Market Area and Competition
WashingtonFirst serves the greater Washington, D.C. metropolitan area. With a population of more than 7 million, the region is the 5th largest market in the U.S. Our market area is economically diverse, well-educated, has one of the highest levels of household income in the nation, and has low unemployment relative to most other regions. Significant business sectors include federal and local government, professional and business services, education, health, leisure and hospitality, as well as non-profit trade associations, universities and major hospital systems. The Company experiences strong competition in all aspects of its business, competing with other banks and non-bank financial institutions (e.g., savings and loan associations, credit unions, small loan companies, finance companies, and mortgage companies) that offer similar services in its market area. Much of this competition comes from larger financial institutions headquartered outside the region, each of which has greater financial and other resources than WashingtonFirst and is able to conduct large advertising campaigns and offer incentives. To attract business in this competitive environment, WashingtonFirst offers a full array of competitively priced, traditional community bank products and services, and relies on personal contact by its officers and directors, local promotional activities, and the ability to provide personally tailored services to small businesses and professionals.
Regulation
Financial institutions and their holding companies are extensively regulated under federal and state law. Consequently, the growth and earnings performance of the Company and its subsidiaries can be affected not only by management decisions and general economic conditions, but also by the statutes administered by, and the regulations and policies of, various governmental regulatory authorities including, but not limited to, the Bureau, the Federal Reserve, the FDIC, the SEC, HUD, certain state securities commissions, U.S. Treasury, as well as federal and state taxing authorities. The effect of such statutes, regulations and policies can be significant, and cannot be predicted with a high degree of certainty.
The following description summarizes some of the laws to which the Company and its subsidiaries are subject. References herein to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of the Company and its subsidiaries.
WashingtonFirst Bankshares, Inc.
The Company is a bank holding company registered under the BHC Act and subject to supervision, regulation and examination by the Federal Reserve. The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The Company is registered in Virginia with the Bureau under the financial institution holding company laws of Virginia and is subject to regulation and supervision by the Bureau. The Company is also subject to the disclosure and regulatory requirements of the Securities Act and the Exchange Act, both as administered by the SEC. As a company with securities listed in the NASDAQ, it is subject to the rules of the NASDAQ for listed companies.
Generally, the Company is prohibited, with certain limited exceptions, from acquiring a direct or indirect interest in or control of more than 5.0 percent of the voting shares of any company which is not a bank or financial or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except the Company may engage in and may own shares of companies engaged in certain activities found by the Federal Reserve to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In approving acquisitions by bank holding companies of companies engaged in banking- related activities or the addition of activities, the Federal Reserve considers a number of factors and weighs the expected benefits to the public (such as greater convenience, increased

8


competition, or gains in efficiency) against the risks of possible adverse effects (such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices).
The GLB Act allows a bank holding company or other company to certify status as a financial holding company, which allows such company to engage in activities that are financial in nature, that are incidental to such activities, or are complementary to such activities. The GLB Act enumerates certain activities that are deemed financial in nature, such as underwriting insurance or acting as an insurance principal, agent or broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking under certain restrictions. It also authorizes the Federal Reserve Board to determine by regulation what other activities are financial in nature, or incidental or complementary thereto. The GLB Act allows a wider array of companies to own banks, which could result in companies with resources substantially in excess of the Company's entering into competition with the Company and the Bank. The Company has not elected financial holding company status.
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve’s Regulation Y, for example, generally requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10.0 percent or more of its consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
The Federal Reserve has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for violation of laws, regulations or orders, for participation in an unsafe or unsound practice or breach of fiduciary duty.
Regulatory Restrictions on Dividends; Source of Strength. The Company is regarded as a legal entity separate and distinct from the Bank. The principal source of the Company’s revenue is dividends received from the Bank. As described in more detail below, both state and federal law place limitations on the amount that banks may pay in dividends, which the Bank must adhere to when paying dividends to the Company. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income earned over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not pay cash dividends at levels that undermine the bank holding company’s ability to serve as a source of strength to its banking subsidiaries. Given the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s overall asset quality, level of current and prospective earnings, and composition, level and quality of capital. The guidance provides that the Company inform and consult with the Federal Reserve prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s capital structure. See Part II, Item 5, “Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities-Dividend Policy.”
Virginia state law also restricts dividends to shareholders of the Company. The Company’s shareholders are entitled to receive dividends if, as and when declared by the Company’s Board of Directors in accordance with Section 13.1-653 of the Code of Virginia. Generally, dividends may be paid out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.
Under Federal Reserve policy, a bank holding company has historically been required to act as a source of financial strength to each of its banking subsidiaries. The Dodd-Frank Act, codifies this policy as a statutory requirement. The Company is required to commit resources to support the Bank, and this obligation may arise at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. As discussed below, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.
In the event of a bank holding company’s bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and will be required to cure immediately any deficit under any commitment by the debtor holding company to any of the federal banking agencies to maintain the capital of the insured depository institution. Any claim for breach of such obligation will generally have priority over most other unsecured claims.
Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to other non-banking services offered by a holding company or its affiliates.
Volcker Rule. The Dodd-Frank Act bars banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain circumstances, pursuant to a provision commonly referred to as the “Volcker Rule.” Under the Dodd-Frank Act, proprietary trading generally means trading by a banking entity or its affiliate for its trading account. The Volcker Rule restrictions apply to the Company and its subsidiaries.

9


Capital Adequacy Requirements. The Federal Reserve has adopted a system using risk-based capital guidelines under a two-tier capital framework to evaluate the capital adequacy of bank holding companies. Tier 1 capital generally consists of common shareholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and non-controlling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles. Tier 2 capital generally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance, and unrealized holding gains on certain equity securities.
Under the guidelines, specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset base. The guidelines require a minimum total risk-based capital ratio of 8.0 percent (of which at least 4.0 percent is required to consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2 capital. In addition to the risk-based capital guidelines, the Federal Reserve uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain highly rated bank holding companies may maintain a minimum leverage ratio of 3.0 percent, but other bank holding companies are required to maintain a leverage ratio of at least 4.0 percent.
Additional information on WashingtonFirst’s capital ratios may be found in Part II, Item 7 - “Management Discussion & Analysis” under the heading “Capital Resources” and in Part II, Item 8 - “Notes to the Consolidated Financial Statements”, and is incorporated herein by reference.
See “WashingtonFirst Bank” below for more specifics on capital requirements.
Basel III Capital Adequacy Requirements. In December 2010, the Basel Committee on Banking Supervision released its final framework for strengthening international capital and liquidity regulation ("Basel III"). The regulations adopted by the U.S. federal bank regulatory agencies, when fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital, with a greater emphasis on common equity. In July 2013, the Federal Reserve and FDIC issued a final rule implementing Basel III capital requirements as well as certain other regulatory capital and other requirements under the Dodd-Frank Act. The rules apply to all insured depository institutions and bank holding companies with consolidated assets over $500 million, such as WashingtonFirst. In broad terms, the regulations increase the required quality and quantity of the capital base, reduce the range of instruments that count as capital and increase the risk-weighted asset assessment for certain types of activities. The Company and the Bank are obligated to maintain higher capital ratios as the new regulatory standards were phased in beginning on January 1, 2015. The Company remains well capitalized under Basel III.
The Company’s $25 million 6% fixed-to-floating subordinated notes due 2025 are intended to qualify for Tier II capital treatment under Basel III.
See “WashingtonFirst Bank” below for more specifics on Basel III.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt corrective action” to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5 percent of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be adequately capitalized. The bank regulators have greater power in situations where an institution becomes significantly or critically undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5 percent of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. Acquisitions by Virginia bank holding companies are also subject to the provisions of Virginia law.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Any entity is required to obtain

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the approval of the Federal Reserve under the BHC Act before acquiring 25 percent (5 percent in the case of an acquirer that is a bank holding company) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over the company or bank. Under a rebuttable presumption established by the regulations of the Federal Reserve, the acquisition of 10 percent or more of a class of voting stock of a bank holding company, would, under the circumstances set forth in the presumption, constitute acquisition of control of a bank holding company. The statute and regulations set forth standards and certain presumptions concerning acquisition of control. Acquisitions of control are also subject to regulation by Virginia law.
In most circumstances, an entity that owns 25 percent or more of the total equity of a banking organization owns enough of the capital resources to have a controlling influence over such banking organization for purposes of the BHC Act. On September 22, 2008, the Federal Reserve issued a policy statement on equity investments in banks and bank holding companies. The key statutory limit restricting a non-controlling investor to 24.9 percent of voting securities for purposes of the BHC Act remains, but the policy statement loosens some restrictions on entities within this limit. The provisions of the policy statement generally allow the Federal Reserve to be able to conclude that an entity is not “controlling” if it does not own in excess of 15 percent of the voting power and 33 percent of the total equity of the bank holding company or bank. Depending on the nature of the overall investment and the capital structure of the banking organization, based on the policy statement the Federal Reserve will permit non-controlling investments in the form of voting and nonvoting shares that represent in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15 percent of any class of voting securities of the organization.
WashingtonFirst Bank
During 2016, as a Virginia state non-member bank, the Bank was principally supervised, examined and regulated by the Bureau and the FDIC. Because the Bank’s deposits are insured by the FDIC, it is also subject to regulation pursuant to the FRA and FDIA. In January 2017, the Bank became a member of the FRB and will be regulated by the FRB going forward as the Bank’s primary federal regulator. The aspects of its business which are regulated under federal law include security requirements, reserve requirements, investments, transactions with affiliates, amounts it may lend to certain borrowers, business activities in which it may engage and minimum capital requirements. It is also subject to applicable provisions of Virginia law insofar as they do not conflict with and are not preempted by federal law, including laws relating to usury, various consumer and commercial loans and the operation of branch offices. Such supervision and regulation is intended primarily for the protection of depositors, the deposit insurance funds of the FDIC and the banking system as a whole, and not for the protection of WashingtonFirst’s shareholders or creditors. The following references to applicable statutes and regulations are brief summaries which do not purport to be complete and which are qualified in their entirety by references to such statutes and regulations.
Equivalence to National Bank Powers. To the extent that the Virginia laws and regulations may have allowed state-chartered banks to engage in a broader range of activities than national banks, the FDICIA has operated to limit this authority. The FDICIA provides that no state bank or subsidiary thereof may engage as principal in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the insurance fund. In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of depository institutions.
Branching. Virginia law provides that a Virginia-chartered bank can establish a branch anywhere in Virginia provided that the branch is approved in advance by The Bureau. The branch must also be approved by the bank’s primary federal regulator. Approval is based on a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of the state where the new branch is to be established would permit the establishment of the branch if it were chartered by such state. Currently, the Bank operates branch offices in Virginia, Maryland and Washington, D.C.
Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its non-banking affiliates, including WashingtonFirst and any of its future non-banking subsidiaries, are subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with that bank. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of WashingtonFirst or its subsidiaries. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other non-affiliated persons. The Federal Reserve has also issued Regulation W, which codifies prior pronouncements under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.

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The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to in this section as “insiders”) contained in the FRA and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. In the aggregate, these loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. The Dodd-Frank Act adds new requirements to bank transactions with insiders by requiring that credit exposure to derivatives and certain other transactions be treated as loans for the insider loan and general lending limits.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. The Bank’s payment of dividends is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. Dividends paid by the Bank have provided a substantial part of the Company’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to the Company will continue to be the Company’s principal source of operating funds. The Bank’s ability to pay dividends is subject to the restrictions previously described for the Company. In addition, capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after paying the dividend, the Bank will be “undercapitalized.” The FDIC may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend.
Because the Company is a legal entity separate and distinct from its subsidiaries, its right to participate in the distribution of assets of any subsidiary upon the subsidiary’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository institution holding company (such as WashingtonFirst) or any shareholder or creditor thereof.
Examinations. The Bank is subject to annual examinations by its primary federal regulator. These examinations review areas such as capital adequacy, reserves, loan portfolio quality and management, consumer and other compliance issues, investments and management practices. Based upon such an evaluation, bank regulators may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between the regulator-determined value and the book value of such assets. The Bureau also conducts examinations of state banks but may accept the results of a federal examination in lieu of conducting an independent examination. In addition, federal and state regulators may elect to conduct a joint examination.
In addition to these regular exams, an insured bank is required to furnish quarterly and annual reports to its primary federal regulator. Regulators may exercise cease and desist or other supervisory powers over an insured bank if its actions represent unsafe or unsound practices or violations of law. Further, any proposed addition of any individual to the board of directors of the Bank or the employment of any individual as a senior executive officer of the Bank, or the change in responsibility of such an officer, will be subject to 90 days prior written notice to its federal regulator if the Bank is not in compliance with the applicable minimum capital requirements, is otherwise a troubled institution or the regulators determines that such prior notice is appropriate for the Bank. The regulators then has the opportunity to disapprove any such appointment.
Audit Reports. Pursuant to Part 363 of the FDIC rules and regulations, insured institutions with total assets of $500.0 million or more must submit annual audit reports prepared by independent auditors to federal and state regulators. In some instances, the audit report of the institution’s holding company can be used to satisfy this requirement. Auditors must receive examination reports, supervisory agreements and reports of enforcement actions. For institutions with total assets of $1.0 billion or more, financial statements prepared in accordance with generally accepted accounting principles, management’s certifications concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the Bank’s primary federal regulator, and an attestation by the auditor relating to the internal controls must be submitted. For institutions with total assets of more than $3.0 billion, independent auditors may be required to review quarterly financial statements. FDICIA requires that independent audit committees be formed, consisting of outside directors only. The committees of such institutions must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large customers.
Change in Control. The Change in Bank Control Act and regulations promulgated by the FDIC require that, depending on the particular circumstances, notice must be furnished to the FDIC and not disapproved prior to any person or group of persons acquiring “control” of an insured bank, subject to exemptions for certain transactions. For purposes of the Change in Bank Control Act, control is conclusively presumed to exist if a person acquires the power to vote, directly or indirectly, 25 percent or more of any class of voting securities of the bank. In addition, the term includes the power to direct the management and policies of the bank. Control is rebuttably presumed to exist if a person acquires 10 percent or more but less than 25 percent of any class of voting securities and either the bank has registered securities under Section 12 of the Exchange Act, or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenging the rebuttable control presumption. Acquisitions of control are also subject to the provisions of Virginia law.

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Capital Adequacy Requirements. Similar to the Federal Reserve’s requirements for bank holding companies, the FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured banks. The FDIC’s risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Regulatory guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
The FDIC’s regulations require insured banks to have and maintain a “Tier 1 risk-based capital” ratio of at least 4.0 percent and a “total risk-based capital” ratio of at least 8.0 percent of total risk-adjusted assets. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from zero percent (requiring no risk-based capital) for assets such as cash, to 100 percent for the bulk of assets which are typically held by a bank holding company, including certain multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Residential first mortgage loans on one to four family residential real estate and certain seasoned multi-family residential real estate loans, which are not 90 days or more past due or nonperforming and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics. Total risk-based capital represents the sum of Tier 1 capital and Tier 2 capital, as those terms are defined in the regulations.
The FDIC also requires insured banks to meet a minimum “leverage ratio” of Tier 1 capital to total assets of not less than 3.0 percent for a bank that is not anticipating or experiencing significant growth and is highly rated (i.e., has a composite rating of 1 on a scale of 1 to 5). Banks that the FDIC determines are anticipating or experiencing significant growth or that are not highly rated must meet a minimum leverage ratio of 4.0 percent.
Basel III Capital Requirements. Basel III became applicable to the Company and the Bank on January 1, 2015. The Basel III final capital framework, among other things, (i) introduced as a new capital measure "CET1", (ii) specified that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the adjustments as compared to existing regulations.
When fully phased in by January 1, 2019, Basel III will require banks to maintain: (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a "capital conservation buffer" of 2.5%; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%; (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0% plus the capital conservation buffer, or 10.5%; and (iv) as a newly adopted international standard, a minimum leverage ratio of 3.0%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
Basel III also provides for a "countercyclical capital buffer," generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on their ability to pay dividends, effect equity repurchases and pay discretionary bonuses to executive officers, which constraints vary based on the amount of the shortfall. The capital conservation buffer requirement was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, and will increase each year until fully implemented at 2.5% on January 1, 2019.
The Basel III framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
As part of the definition of CET1 capital, Basel III includes a requirement that banking institutions include the amount of AOCI (consisting primarily of unrealized gains and losses on available for sale securities, which are not required to be treated as other-than-temporary impairment, net of tax) in calculating regulatory capital, unless the institution makes a one-time opt-out election from this provision in connection with the filing of its first regulatory reports after applicability of Basel III to that institution. Basel III also proposes a 4% minimum leverage ratio. The Company and Bank elected to exclude AOCI in calculating regulatory capital.
Basel III also makes changes to the manner of calculating risk-weighted assets. New methodologies for determining risk-weighted assets in the general capital rules are included, including revisions to recognition of credit risk mitigation, and a greater recognition of financial collateral and a wider range of eligible guarantors. These also include risk-weighting of equity exposures and past due loans; and higher (greater than 100%) risk-weighting for certain commercial real estate exposures that have higher credit risk profiles,

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including higher loan to value and equity components. In particular, loans categorized as loans HVCRE loans are required to be assigned a 150% risk-weighting, and require additional capital support. HVCRE loans are defined to include any credit facility that finances or has financed the acquisition, development or construction of real property, unless it finances 1-4 family residential properties; certain community development investments; agricultural land used or usable for, and whose value is based on, agricultural use; or commercial real estate projects in which: (i) the LTV is less than the applicable maximum supervisory LTV ratio established by the bank regulatory agencies; (ii) the borrower has contributed cash or unencumbered readily marketable assets, or has paid development expenses out of pocket, equal to at least 15% of the appraised "as completed" value; (iii) the borrower contributes its 15% before the bank advances any funds; and (iv) the capital contributed by the borrower, and any funds internally generated by the project, are contractually required to remain in the project until the facility is converted to permanent financing, sold or paid in full.
Overall, the Company believes that implementation of Basel III has not had a material adverse effect on the Company's or the Bank's capital ratios, earnings, shareholder's equity, or its ability to pay dividends, effect stock repurchases or pay discretionary bonuses to executive officers. See Part II, Item 7., “Capital Resources.”
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The federal banking agencies have promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA. Basel III integrates the new capital requirements into the prompt corrective action category definitions. The following capital requirements apply to the Company for purposes of Section 38.
Capital Category
Total Risk-Based
Capital Ratio
Tier 1 Risk-Based
Capital Ratio
Common Equity
Tier 1 Capital Ratio
Leverage Ratio
Tangible Equity to Assets
Supplemental Leverage Ratio
Well Capitalized
10% or greater
8% or greater
6.5% or greater
5% or greater
n/a
n/a
Adequately Capitalized
8% or greater
6% or greater
4.5% or greater
4% or greater
n/a
3% or greater
Undercapitalized
Less than 8%
Less than 6%
Less than 4.5%
Less than 4%
n/a
Less than 3%
Significantly Undercapitalized
Less than 6%
Less than 4%
Less than 3%
Less than 3%
n/a
n/a
Critically Undercapitalized
n/a
n/a
n/a
n/a
Less than 2%
n/a

Based on the most recent notification from the FDIC, the Bank was classified as “well capitalized” for purposes of the FDIC’s prompt corrective action regulations.
An institution generally must file a written capital restoration plan which meets specified requirements with an appropriate federal banking agency within 45 days of the date the institution receives notice or is deemed to have notice that it is undercapitalized, significantly undercapitalized or critically undercapitalized. A federal banking agency must provide the institution with written notice of approval or disapproval within 60 days after receiving a capital restoration plan, subject to extensions by the applicable agency.
An institution which is required to submit a capital restoration plan must concurrently submit a performance guaranty by each company that controls the institution. Such guaranty shall be limited to the lesser of (i) an amount equal to 5.0% of the institution's total assets at the time the institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount necessary at such time to restore the relevant capital measures of the institution to the levels required for the institution to be classified as adequately capitalized. Such a guaranty shall expire after the federal banking agency notifies the institution that it has remained adequately capitalized for each of four consecutive calendar quarters. An institution which fails to submit a written capital restoration plan within the requisite period, including any required performance guaranty, or fails in any material respect to implement a capital restoration plan, shall be subject to the restrictions in Section 38 of the FDIA which are applicable to significantly undercapitalized institutions.
A "critically undercapitalized institution" is to be placed in conservatorship or receivership within 90 days unless the FDIC formally determines that forbearance from such action would better protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking regulatory agency makes specific further findings and certifies that the institution is viable and is not expected to fail, an institution that remains critically undercapitalized on average during the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after a bank becomes critically undercapitalized unless extremely good cause is shown and an extension is agreed to by the federal regulators. In general, good cause is defined as capital, which has been raised and is imminently available for infusion into the Bank except for certain technical requirements, which may delay the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become subject to the provisions of Section 38 of the FDIA, which (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the

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condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution's assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: requiring the institution to raise additional capital; restricting transactions with affiliates; requiring divestiture of the institution or the sale of the institution to a willing purchaser; and any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed for an institution where: (i) an institution's obligations exceed its assets; (ii) there is substantial dissipation of the institution's assets or earnings as a result of any violation of law or any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition; (iv) there is a willful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in the ordinary course of business; (vi) losses or threatened losses deplete all or substantially all of an institution's capital, and there is no reasonable prospect of becoming "adequately capitalized" without assistance; (vii) there is any violation of law or unsafe or unsound practice or condition that is likely to cause insolvency or substantial dissipation of assets or earnings, weaken the institution's condition, or otherwise seriously prejudice the interests of depositors or the insurance fund; (viii) an institution ceases to be insured; (ix) the institution is undercapitalized and has no reasonable prospect that it will become adequately capitalized, fails to become adequately capitalized when required to do so, or fails to submit or materially implement a capital restoration plan; or (x) the institution is critically undercapitalized or otherwise has substantially insufficient capital.
Deposit Insurance Assessments. The Bank’s deposits are insured by the FDIC through the DIF, to the extent provided by law, and the Bank must pay assessments to the FDIC for such deposit insurance protection. The FDIC maintains the DIF by designating a required reserve ratio. If the reserve ratio falls below the designated level, the FDIC must adopt a restoration plan that provides that the DIF will return to an acceptable level generally within five years. The designated reserve ratio is currently set at 2.0 percent. The FDIC has the discretion to price deposit insurance according to the risk for all insured institutions regardless of the level of the reserve ratio. The DIF reserve ratio is maintained by assessing depository institutions an insurance premium based upon statutory factors. Under its current regulations, the FDIC imposes assessments for deposit insurance according to a depository institution’s ranking in one of four risk categories based upon supervisory and capital evaluations. The assessment rate for an individual institution is determined according to a formula based on a combination of weighted average CAMELS component ratings, financial ratios and, for institutions that have long-term debt ratings, the average ratings of its long-term debt. The assessment base is determined using average consolidated total assets minus average tangible equity rather than using adjusted domestic deposits. Current assessment rates, calculated on the revised assessment base, generally range from 2.5 to 9 basis points for Risk Category I institutions, 9 to 24 basis points for Risk Category II institutions, 18 to 33 basis points for Risk Category III institutions, and 30 to 45 basis points for Risk Category IV institutions. For large institutions (generally those with total assets of $10 billion or more), which does not include the Bank, the initial base assessment rate ranges from 5 to 35 basis points on an annualized basis. After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. Assessment rates for large institutions are calculated using a scorecard that combines CAMELS ratings and certain forward-looking financial measures to assess the risk a large institution poses to the DIF.
Enforcement Powers. The FDIC and the other federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Failure to comply with applicable laws, regulations and supervisory agreements could subject WashingtonFirst or the Bank, as well as officers, directors and other institution-affiliated parties of these organizations, to administrative sanctions and potentially substantial civil money penalties. In addition to the grounds discussed above under “–Corrective Measures for Capital Deficiencies,” the appropriate federal banking agency may appoint the FDIC (or the FDIC may appoint itself, under certain circumstances) as conservator or receiver for a banking institution if any one or more of a number of circumstances exist, including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized, fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to implement an accepted capital restoration plan. The Bureau also has broad enforcement powers over the Bank, including the power to impose orders, remove officers and directors, impose fines and appoint supervisors and conservators.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot accept, renew or roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on the interest rates that can be paid on any deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits. As previously noted, the Bank is categorized as “well capitalized.”
Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100 percent or more of total capital, or (ii) total reported loans secured by multifamily and non-owner occupied, non-farm residential properties and loans for construction, land development, and other land represent 300 percent or more of total capital and

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the bank’s commercial real estate loan portfolio has increased 50 percent or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. The Bank has a high concentration of real estate loans and has implemented heightened risk management practices to monitor and control its exposure. Such risk management practices include but are not limited to: the establishment of an active credit quality process, detailed reporting and analysis, stress testing of the loan portfolio, and a robust credit workout process.
Community Reinvestment Act. The CRA and the corresponding regulations are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to acquire the assets and assume the liabilities of another bank. Federal banking agencies are required to make public a rating of a bank’s performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. As of its most recent exam, the Bank’s compliance with CRA was rated “satisfactory.”
Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act and the Fair Housing Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
Anti-Money Laundering and Anti-Terrorism Legislation. A major focus of governmental policy on financial institutions in recent years has been combating money laundering and terrorist financing. The USA Patriot Act substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The USA Patriot Act requires financial institutions to prohibit correspondent accounts with foreign shell banks, establish an anti-money laundering program that includes employee training and an independent audit, follow minimum standards for identifying customers and maintaining records of the identification information and make regular comparisons of customers against agency lists of suspected terrorists, their organizations and money launderers. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by OFAC. The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Privacy. WashingtonFirst and its subsidiaries are subject to numerous privacy-related laws and their implementing regulations. For example, the GLB Act imposes requirements on financial institutions with respect to customer privacy. The GLB Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually, and are required to comply with state law if it is more protective of customer privacy than the GLB Act.
Dodd-Frank Act. In July 2010, the Dodd-Frank Act regulatory reform legislation became law. This law broadly affects the financial services industry by implementing changes to the financial regulatory landscape aimed at strengthening the sound operation of the financial services sector, including provisions that, among other things, enhance prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Dodd-Frank Act also contains reforms of consumer mortgage lending practices and creates the CFPB which is granted broad authority over consumer financial practices of

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banks and others. WashingtonFirst is not subject to regulation by the CFPB, as it has supervisory authority over depository institutions with total assets of $10.0 billion or greater. Nevertheless, it is unclear whether the CFPB’s focus on consumer regulation and the risks posed by financial products will ultimately impact institutions such as WashingtonFirst.
It is expected as the specific new or incremental requirements applicable to WashingtonFirst become effective that the costs and difficulties of remaining compliant with all such requirements will increase. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. A number of aspects of the Dodd-Frank Act are still subject to rule making and will take effect over several years, making it difficult to anticipate the overall financial impact on WashingtonFirst, its customers or the financial industry more generally.
Incentive Compensation. Federal bank regulators issued comprehensive guidance on incentive compensation policies intended to ensure that the incentive compensation programs of financial institutions do not undermine the safety and soundness of banking organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. On April 14, 2011, federal bank regulators published a proposed interagency rule to implement certain incentive compensation requirements of the Dodd-Frank Act. Under the proposed rule, financial institutions must prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking that are deemed excessive or that may lead to material losses. The agencies recently revised the proposed rule and it has not yet been finalized, however, the interagency guidance remains in place.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as WashingtonFirst, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
WashingtonFirst Mortgage
Mortgage Company activities are subject to the rules and regulations of, and examination by HUD, FHA, VA and various state regulatory authorities with respect to originating, processing and selling mortgage loans.  Those rules and regulations, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers and, in some cases, restrict certain loan features, and fix maximum interest rates and fees.  In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, TILA, Home Mortgage Disclosure Act, RESPA, and Home Ownership Equity Protection Act, and the regulations promulgated under these acts, including the TILA-RESPA Integrated Disclosure rules issued by the CFPB.  These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.
Ability-to-Repay and Qualified Mortgage Rule. Pursuant to the Dodd-Frank Act, the CFPB issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as implemented by the TILA, requiring 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. Mortgage lenders are required to determine consumers' ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history. Alternatively, the mortgage lender can originate "qualified mortgages," which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a "qualified mortgage" is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are "higher-priced" (e.g. sub-prime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not "higher-priced" (e.g. prime loans) are given a safe harbor of compliance.
Mortgage Loan Originator Compensation. Previously existing regulations concerning the compensation of mortgage loan originators have been amended. As a result of these amendments, mortgage loan originators may not receive compensation based on a mortgage

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transaction’s terms or conditions other than the amount of credit extended under the mortgage loan. Further, the new standards limit the total points and fees that a bank and/or a broker may charge on conforming and jumbo loans to 3% of the total loan amount. Mortgage loan originators may receive compensation from a consumer or from a lender, but not both. These rules contain requirements designed to prohibit mortgage loan originators from “steering” consumers to loans that provide mortgage loan originators with greater compensation. In addition, the rules contain other requirements concerning recordkeeping.
Mortgage Loan Servicing. The CFPB implemented servicing rules requiring servicers meet certain benchmarks for loan servicing and customer service in general. Servicers must provide periodic billing statements and certain required notices and acknowledgments, promptly credit borrowers’ accounts for payments received and promptly investigate complaints by borrowers and are required to take additional steps before purchasing insurance to protect the lender’s interest in the property. These servicing rules also call for additional notice, review and timing requirements with respect to delinquent borrowers.
Wealth Advisors
Investment Adviser Regulation. Wealth Advisors is subject to regulation under federal and state securities laws. Wealth Advisors is registered as an investment adviser with the SEC under the Advisers Act. The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, record keeping, operational, and disclosure obligations. Wealth Advisors is also subject to regulation under the securities laws of certain states. The foregoing laws and regulations generally grant the supervisory agencies broad administrative powers, including the power to limit or restrict Wealth Advisors, a subsidiary of the Company, from conducting its business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed in the event of noncompliance include the suspension of individual employees, limitations on business activities for specified periods of time, revocations as an investment adviser and/or other registrations, and other fines.
Internet Access to Corporate Documents
Information about WashingtonFirst can be found on its website at www.wfbi.com. WashingtonFirst posts its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, definitive proxy materials, and any amendments to those reports in the “Investor Relations” section of the website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. All such filings are available free of charge. The information available on WashingtonFirst’s website is not part of this Annual Report on Form 10-K or any other report filed by WashingtonFirst with the SEC.

Item 1A. Risk Factors
An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully read and consider the risk factors described below as well as other information included in this report and other documents we file with the SEC, as the same may be updated from time to time. Any of these risks, if they actually occur, could materially adversely affect our business, financial condition, and results of operation. Additional risks and uncertainties not currently known to us that we currently deem to be immaterial may also materially and adversely affect us. In any such case, you could lose all or a portion of your original investment.
Risks Associated with WashingtonFirst’s Common Stock
Economic and other factors may cause volatility in the price of our common stock.
WashingtonFirst’s common stock trades on the NASDAQ Exchange. In the current economic environment, the prices of publicly traded stocks in the financial services industry have experienced volatility. A variety of factors can affect the market price of WashingtonFirst’s common stock, including its operating and financial performance, strategic actions by our competitors, speculation in the press or investment community, sales of WashingtonFirst common stock by members of the board of directors or management, changes in accounting principles, additions or departures of key management personnel, actions by WashingtonFirst shareholders, general market conditions including fluctuations in interest rates, and legal and regulatory factors unrelated to WashingtonFirst’s performance. These factors can influence both the price of the liquidity of WashingtonFirst’s stock. General market declines or volatility in the future could adversely impact the price of WashingtonFirst’s stock, and the current market price of the stock may not be indicative of future market prices.
WashingtonFirst is an emerging growth company and its reliance on the reduced disclosure requirements applicable to emerging growth companies may make its common stock less attractive to investors.
WashingtonFirst is an “emerging growth company,” as defined in the JOBS Act and it may take advantage of certain exemptions and relief from various reporting requirements that are applicable to other public companies that are not emerging growth companies. In particular, while WashingtonFirst is an emerging growth company it will not be required to comply with the auditor attestation requirements of Section 404(b) of the SOX; it will be subject to reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements; it will not be required to adopt new or revised accounting pronouncements applicable to

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public companies until such pronouncements are made applicable to private companies; and it will not be required to hold non-binding advisory votes on executive compensation or shareholder approval of any golden parachute payments not previously approved. WashingtonFirst may remain an emerging growth company until as late as December 31, 2017, though WashingtonFirst may cease to be an emerging growth company earlier under certain circumstances, including (i) if the market value of its common stock that is held by non-affiliates exceeds $700 million as of any June 30, in which case it would cease to be an emerging growth company as of the following December 31 or (ii) if its gross revenues exceed $1 billion in any fiscal year. Investors may find WashingtonFirst’s common stock less attractive if WashingtonFirst relies on these exemptions and relief. If some investors find WashingtonFirst’s common stock less attractive as a result, there may be a less active trading market for its common stock and its stock price may decline and/or become more volatile.
Restrictions relating to the acquisition of WashingtonFirst’s common stock may discourage acquisition or merger proposals and may adversely affect the market price of WashingtonFirst’s common stock.
Some provisions of WashingtonFirst’s articles of incorporation and bylaws could make it difficult for a third party to acquire control of WashingtonFirst, even if the change in control would be beneficial to and desirable by WashingtonFirst shareholders. These provisions, among others, provide for staggered terms for directors, the ability of the board of directors to issue preferred stock without shareholder approval, limitations on affiliated transactions and control share acquisitions, the inability of shareholders to call special meetings, and the requirement that certain transactions such as a merger, share exchange, sale of all or substantially all of WashingtonFirst’s assets must be approved and recommended by at least two-thirds of the directors then in office or, if not so approved and recommended, by the affirmative vote of the holders of 80% of each voting group entitled to vote on such transaction. In addition, certain provisions of state and federal law may also have the effect of discouraging or prohibiting a future takeover attempt in which our shareholders might otherwise receive a premium for their shares over then-current market prices. To the extent that any of these provisions are perceived to discourage or limit merger or acquisition attempts, they may tend to reduce the market price for WashingtonFirst’s common stock.
Future sales of WashingtonFirst’s common stock in the public market could lower its stock price, and any additional capital raised by WashingtonFirst may dilute the ownership of existing shareholders and/or decrease earnings.
In order to meet applicable regulatory capital requirements, WashingtonFirst may, from time to time take steps in the future to increase its capital, including selling additional shares of common stock in subsequent public or private offerings or otherwise issue additional shares of common stock or securities convertible into or exchangeable for common stock in the future, or offer and sell subordinated debt. Such steps could have a dilutive effect on shareholders, limit WashingtonFirst’s ability to pay dividends or return capital to shareholders, or otherwise cause WashingtonFirst to incur higher costs and result in reduced earnings. WashingtonFirst cannot predict the size of future issuances of its common stock or the effect, if any, that future issuances and sales of shares of its common stock or subordinated debt will have on the market price of its common stock. Sales of substantial amounts of WashingtonFirst’s common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of WashingtonFirst’s common stock.
The concentration of WashingtonFirst’s capital stock ownership will limit your ability to influence corporate matters.
As of March 2, 2017, WashingtonFirst’s directors and executive officers as a group beneficially own approximately 20.70 percent of the Company’s outstanding common stock and options exercisable within sixty days. Consequently, WashingtonFirst’s board of directors has significant influence over all matters that require approval by WashingtonFirst’s shareholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may limit the ability of other shareholders to influence corporate matters.
WashingtonFirst’s ability to pay cash dividends is subject to regulatory restrictions, and it may be unable to pay future cash dividends.
WashingtonFirst’s ability to pay dividends is subject to regulatory, statutory and contractual restrictions and the need to maintain sufficient capital. Its only source of funds with which to pay dividends to its shareholders are dividends received from the Bank, and the Bank’s ability to pay dividends is limited by its own obligations to maintain sufficient capital and regulatory restrictions. If these regulatory requirements are not satisfied, WashingtonFirst will be unable to pay dividends on its common stock.

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Risks Associated With WashingtonFirst’s Business
WashingtonFirst’s future success will depend on its ability to compete effectively in the highly competitive financial services industry.
WashingtonFirst faces substantial competition in all phases of its operations from a variety of different competitors. In particular, there is very strong competition for financial services in the greater Washington, D.C. metropolitan area in which it conducts its business. WashingtonFirst competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, money market funds and other mutual funds, as well as other kinds of local and community, super-regional, national and international financial institutions and enterprises that operate offices in its primary market areas and elsewhere. WashingtonFirst’s future growth and success will depend on its ability to compete effectively in this highly competitive financial services environment.
Many of WashingtonFirst’s competitors are well-established, larger financial institutions and many offer products and services that it does not. Many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, some operate in less stringent regulatory environments. While WashingtonFirst believes it competes effectively with these other financial institutions in its primary markets, it may face a competitive disadvantage as a result of its smaller size, smaller asset base, lack of geographic diversification and inability to spread its marketing costs across a broader market. If WashingtonFirst has to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, its net interest margin and income could be negatively affected. Failure to compete effectively to attract new or to retain existing clients may reduce or limit WashingtonFirst’s net income and its market share and may adversely affect its results of operations, financial condition and growth.
WashingtonFirst’s profitability depends on interest rates generally, and it may be adversely affected by changes in government monetary policy.
The economy, interest rates, monetary and fiscal policies of the federal government and regulatory policies have a significant influence on WashingtonFirst and the industry as a whole. These policies influence overall growth and distribution of bank loans, investments and deposits on a national basis, and their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve monetary policies and the fiscal policies of the federal government have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. WashingtonFirst cannot predict the nature of future monetary and fiscal policies and the effect of such policies on the future business and earnings of WashingtonFirst or its subsidiaries.
WashingtonFirst’s profitability depends in substantial part on its net interest margin, which is the difference between the rates it receives on loans and investments and the rates it pays for deposits and other sources of funds. Its net interest margin depends on many factors that are partly or completely outside of its control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. If market interest rates change so that the interest it pays on deposits and borrowings increases faster than the interest it earns on loans and investments, our net income could be negatively affected. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse affect on our business, financial condition, and results of operations.
In addition, a substantial portion of our consolidated net revenues (net interest income plus non-interest income) are derived from originating and selling residential mortgages. Residential mortgage lending in general has experienced substantial volatility in recent periods. An increase by the Federal Reserve in interest rates may materially and adversely affect our future loan origination volume, margins, and the value of the collateral securing our outstanding loans, may increase rates of borrower default, and may otherwise adversely affect our business. Additionally, fluctuations in housing inventory could impact the volume of mortgage loans that we originate.  Further, a reduction in housing inventory could result in elevated costs, as a significant amount of loan processing and underwriting that we perform would be to qualifying borrowers for mortgage loan transactions that never materialize.
Changes in interest rates, particularly by the Federal Reserve, which implements national monetary policy in order to mitigate recessionary and inflationary pressures, also affect the value of its loans. In setting its policy, the Federal Reserve may utilize techniques such as: (i) engaging in open market transactions in United States government securities; (ii) setting the discount rate on member bank borrowings; and (iii) changing reserve requirements. These techniques may have an adverse effect on WashingtonFirst’s deposit levels, net interest margin, loan demand or its business and operations. The reduction by the Federal Reserve of its historic levels of securities purchases, or “tapering,” could cause the interest required to be paid by WashingtonFirst on deposits and borrowings to increase leading to a reduction in its net interest margin. In addition, an increase in interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing variable rate loans or reduce their desire to borrow more money. This may lead to an increase in WashingtonFirst’s nonperforming assets, a decrease in loan originations, or a reduction in the value of and income from its loans, any of which could have a material adverse effect on WashingtonFirst’s results of operations. WashingtonFirst tries to minimize its exposure to interest rate risk, but it is unable to completely eliminate this risk. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may have a material adverse effect on WashingtonFirst’s business, financial condition and results of operations.

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WashingtonFirst’s profitability depends significantly on local economic conditions, and may be adversely affected by reductions in Federal spending.
WashingtonFirst’s success is dependent to a significant extent upon general economic conditions in the greater Washington, D.C. metropolitan area which are, in turn, dependent to a large extent on the Federal government, particularly its local employment and spending levels. In addition, the banking industry in the greater Washington, D.C. metropolitan area, similar to other geographic markets, is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond WashingtonFirst’s control. Prolonged continuation of adverse economic and financial conditions or other economic dislocation in the greater Washington, D.C. metropolitan area, including a substantial reduction in the level of employment or local spending by the Federal government, could cause increases in nonperforming assets, thereby causing operating losses, impairing liquidity and eroding capital. WashingtonFirst cannot assure you that future adverse changes in the economy in the greater Washington, D.C. metropolitan area would not have a material adverse effect on the WashingtonFirst’s financial condition, results of operations or cash flows.

Our concentration of loans may create a greater risk of loan defaults and losses.
A significant portion of the Bank’s loan portfolio is secured by real estate collateral. Real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower. While we believe that our loan portfolio is diversified, these concentrations expose us to the risk that a decline in the real estate market or in the economic conditions in the greater Washington, D.C. metropolitan area, could increase the levels of nonperforming loans and charge-offs, decrease the value of collateral and reduce loan demand. In that event, Bank’s earnings and capital could be adversely affected.
Commercial, commercial real estate and construction loans tend to have larger balances than single family mortgage loans and other consumer loans. Because the loan portfolio contains a significant number of commercial and commercial real estate and construction loans, the deterioration of one or a few of these loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans could result in: a loss of earnings from these loans, an increase in the provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact on the results of operations and financial condition.
Further, under guidance adopted by the federal banking regulators, banks that have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. We may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans, which may require us to obtain additional capital sooner than we would otherwise seek it, which may reduce shareholder returns.

WashingtonFirst’s business strategy includes the continuation of its growth plans, and its financial condition and results of operations could be negatively affected if it fails to grow or fails to manage its growth effectively.

The Company seeks to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. WashingtonFirst’s ability to grow successfully will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in its market areas and its ability to manage its growth. WashingtonFirst may face risks with respect to future acquisitions, including: the time and costs associated with identifying and evaluating potential acquisitions and merger partners; the time and costs of evaluating new markets, hiring experienced management, opening new offices, and the time lags between these activities and generating of sufficient assets and deposits to support the costs of the expansion; WashingtonFirst’s ability to finance an acquisition and possible ownership or economic dilution to its current shareholders; and the diversion of WashingtonFirst’s management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses.
WashingtonFirst may incur substantial costs to expand, and it can give no assurance such expansion will result in the levels of profits it seeks. There can be no assurance that integration efforts for any future mergers or acquisitions will be successful. Also, there is no assurance that, following any future merger or acquisition, WashingtonFirst’s integration efforts will be successful or that, after giving effect to the acquisition, it will achieve profits comparable to or better than its historical experience.
WashingtonFirst’s recent results may not be indicative of its future results.
WashingtonFirst may not be able to sustain its historical rate of growth or may not even be able to grow its business at all. In the future, WashingtonFirst may not have the benefit of several recently favorable factors, such as a generally stable interest rate environment, an improving real estate market, the ability to find suitable expansion opportunities, or the relative resistance of the greater Washington, D.C. metropolitan area to economic downturns. Various factors, including economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit WashingtonFirst’s ability to expand its market presence. As our asset size and earnings increase, it may become more difficult to achieve high rates of increase in assets and earnings. Additionally, it may become more difficult to achieve continued improvement in our expense levels and efficiency ratio. We may not be able to maintain the relatively low levels of nonperforming assets that we have experienced. Declines in the rate of growth of income or assets or deposits, and increases in operating expenses or nonperforming assets may have an adverse impact on the value of

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the common stock. If WashingtonFirst experiences a significant decrease in its historical rate of growth, its results of operations and financial condition may be adversely affected due to the fixed nature of certain operating costs.
WashingtonFirst’s allowance for loan losses could become inadequate and reduce its earnings and capital.
WashingtonFirst maintains an allowance for loan losses which management believes is adequate for absorbing the estimated future losses inherent in its loan portfolio. Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the allowance for loan losses based upon general market conditions, credit quality of the loan portfolio and performance of WashingtonFirst’s clients relative to their financial obligations with it. The amount of future losses, however, is susceptible to changes in economic and other market conditions, including changes in interest rates and collateral values, which are beyond WashingtonFirst’s control, and these future losses may exceed its current estimates. There can be no assurance that additional provisions for loan losses will not be required in the future, including as a result of changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy on a national basis or in the Bank’s market area, or changes in the circumstances of particular borrowers. Although WashingtonFirst believes the allowance for loan losses is adequate to absorb probable losses in its loan portfolio, WashingtonFirst cannot predict the amount of such losses or guarantee that its allowance will be adequate in the future. Excessive loan losses could have a material adverse effect on WashingtonFirst financial condition and results of operations.
A failure to maintain sufficient capital to meet regulatory requirements could adversely affect our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance.
WashingtonFirst must meet certain regulatory capital requirements and maintain sufficient liquidity. We face significant capital and other regulatory requirements as a financial institution, which were heightened with the implementation of the Basel III rule on January 1, 2015 and the phase-in of capital conservation buffer requirement through January 1, 2019. The application of these more stringent capital requirements for WashingtonFirst could, among other things, result in lower returns on equity, require the raising of additional capital, adversely affect WashingtonFirst’s future growth opportunities, and result in regulatory actions such as a prohibition on the payment of dividends or on the repurchase of shares if it were unable to comply with such requirements.
Liquidity needs could adversely affect WashingtonFirst’s results of operations and financial condition.
WashingtonFirst’s primary source of funds is client deposits in the Bank and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. The deposits from the title and escrow agency customers are expected to continue to be an important component of WashingtonFirst’s deposit base. Because deposits of title and escrow agency customers are directly related to home sales and refinancing activity, any decrease in this activity would adversely impact WashingtonFirst’s deposit levels. Accordingly, WashingtonFirst may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While WashingtonFirst believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if WashingtonFirst continues to grow and experience increasing loan demand. Should such sources not be adequate, WashingtonFirst may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets.
Changes in accounting standards could impact reported earnings.
From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes are difficult to predict and can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Such changes could also require us to incur additional personnel or technology costs.
Changes in federal or state enacted tax rates could impact reported earnings.
The net deferred tax asset reported on the Company’s balance sheet generally represents the tax benefit of future deductions from taxable income for items that have already been recognized for financial reporting purposes. The bulk of these deferred tax assets consists of deferred loan loss deductions, deferred compensation related deductions and net operating loss carryforwards for which the associated tax deduction is deferred until payment and other future triggering event. The net deferred tax asset is measured by applying currently-enacted income tax rates to the accounting period during which the tax benefit is expected to be realized. As of December 31, 2016, the Company’s net deferred tax asset was $8.9 million.


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The President of the United States and some members of Congress have announced plans to introduce legislation that would lower the federal corporate income tax rate from its current level of 35%. If this tax rate reduction is enacted, it will result in an immediate impairment of the recorded net deferred tax asset because the future tax benefit of these deferrals would need to be re-measured for the impact of the lower tax rate. Any such impairment would be recorded as a charge to the Company’s earnings and would be recognized in the quarter during which the lower rate is enacted.
WashingtonFirst is subject to extensive regulation that could limit or restrict its activities and adversely affect its earnings.
WashingtonFirst and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not WashingtonFirst’s shareholders. These regulations affect WashingtonFirst’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Any change in applicable regulations or federal or state legislation could have a substantial impact on WashingtonFirst, the Bank and their respective operations.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Additional legislation and regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could significantly affect WashingtonFirst’s powers, authority and operations, or the powers, authority and operations of the Bank in substantial and unpredictable ways. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties. The exercise of this regulatory discretion and power could have a negative impact on WashingtonFirst. 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 WashingtonFirst’s business, financial condition and results of operations.
WashingtonFirst depends on the services of key personnel, and a loss of any of those personnel could disrupt its operations and result in reduced revenues.
WashingtonFirst’s success depends upon the continued service of its senior management team and upon its ability to attract and retain qualified financial services personnel. Competition for qualified employees is intense. In management’s experience, it can take a significant period of time to identify and hire personnel with the combination of professional skills and personal attributes necessary for the successful implementation of WashingtonFirst’s strategy. If WashingtonFirst loses the services of one or more of its key personnel, including key client relationship personnel, or is unable to attract additional qualified personnel, its business, financial condition, results of operations and cash flows could be materially adversely affected.
WashingtonFirst depends on technology to compete effectively and may be required to make substantial investments in new technology, which could have a negative effect on WashingtonFirst’s operating results and the value of its common stock.
The market for financial services, including banking services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, mobile devices, computers, automation and Internet-based banking. This is particularly true for WashingtonFirst, which relies on technology to compete in its market. WashingtonFirst depends on third party vendors for portions of its data processing services. In addition to WashingtonFirst’s ability to finance the purchase of those services and integrate them into its operations, its ability to offer new technology-based services depends on WashingtonFirst’s vendors’ abilities to provide and support those services. Future advances in technology may require WashingtonFirst to incur substantial expenses that adversely affect its operating results, and WashingtonFirst’s limited capital resources may make it impractical or impossible for it to keep pace with competitors possessing greater capital resources. WashingtonFirst’s ability to compete successfully in its banking markets may depend on the extent to which WashingtonFirst and its vendors are able to offer new technology-based services and on WashingtonFirst’s ability to integrate technological advances into its operations.
Reliance on technology exposes WashingtonFirst to cybersecurity risks.
WashingtonFirst relies on digital technologies to conduct its operations, and those technologies may be compromised by the deliberate attacks by others or unintentional cybersecurity incidents. Deliberate cybersecurity attacks may seek to gain unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Other events may not seek unauthorized access, but may seek to prevent authorized users to be able to access digital systems, referred to as “denial of service” attacks. A cybersecurity incident of this type, could require WashingtonFirst to incur substantial remediation and increased cybersecurity protection costs, such as implementing new technologies, hiring and training new employees and engaging third party experts and consultants. In addition, WashingtonFirst could become subject to litigation from customers whose sensitive data was obtained without their consent, and to damage to the company’s reputation, which could have an adverse effect on the company’s financial condition and results of operation. From time to time, WashingtonFirst is subject to cybersecurity attacks arising in the normal course of its business. In the opinion of management, there have been no cybersecurity attacks which would have a material adverse effect on WashingtonFirst’s financial condition, results of operation or products and services.

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WashingtonFirst’s operations rely on certain external vendors.
WashingtonFirst’s business is dependent on the use of outside service providers that support its day-to-day operations including data processing and electronic communications. WashingtonFirst’s operations are exposed to risk that a service provider may not perform in accordance with established performance standards required in its agreements for any number of reasons including: equipment or network failure, a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or simple change in their strategic focus. While WashingtonFirst has comprehensive policies and procedures in place to mitigate risk at all phases of service provider management from selection, to performance monitoring and renewals, the failure of a service provider to perform in accordance with contractual agreements could be disruptive to WashingtonFirst’s business, which could have a material adverse effect on our financial condition and results of operations.
Our business operations may not generate the cash needed to make payments of principal and interest on our outstanding subordinated debt notes may have negative consequences.
On October 5, 2015, the Company entered into a Subordinated Note Purchase Agreement (the "Purchase Agreement") with each of sixteen accredited investors (the "Purchasers") pursuant to which the Company sold $25 million in aggregate principal amount of its 6.00% Fixed-to-Floating Rate Subordinated Notes due October 2025 (the "Notes") to the Purchasers at a price equal to 100% of the aggregate principal amount of the Notes. Each Purchase Agreement contains certain customary representations, warranties and covenants made by the Company, on the one hand, and the respective Purchasers, on the other hand.
The Notes were offered and sold in reliance on the exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder. Accordingly, the Notes were offered and sold exclusively to persons who are "accredited investors" within the meaning of Rule 501(a) of Regulation D.
The Notes were issued under an Indenture, dated October 5, 2015 (the “Indenture”), by and between the Company and Wilmington Trust, National Association, as trustee (the “Trustee”). The Trustee will also serve as the initial paying agent and registrar with respect to the Notes.
Our ability to make payments on our indebtedness, including the notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay the principal of or interest on our indebtedness, including the notes, or to fund our other liquidity needs.
WashingtonFirst’s profitability may be significantly reduced if we are not able to sell mortgages.
Currently, the Bank generally sells virtually all of the mortgage loans originated by its subsidiary, the Mortgage Company. The profitability of the Mortgage Company depends in large part upon our ability to originate a high volume of loans and to quickly sell them in the secondary market. Thus, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to sell loans into that market.
The Mortgage Company’s ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae and Freddie Mac and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Some of the largest participants in the secondary market, including Fannie Mae and Freddie Mac, are government-sponsored enterprises with substantial market influence whose activities are governed by federal law. Any future changes in laws that significantly affect the activity of these government-sponsored enterprises and other institutional and non-institutional investors or any impairment of our ability to participate in such programs could, in turn, adversely affect our operations.
Fannie Mae and Freddie Mac have reported past substantial losses and a need for substantial amounts of additional capital. Such losses were due to these entities’ business models being tied extensively to the U.S. housing market which severely contracted during the recent economic downturn. In response to the deteriorating financial condition of Fannie Mae and Freddie Mac from the U.S. housing market contraction, Congress and the U.S. Treasury undertook a series of actions to stabilize these entities. The FHFA was established in July 2008 pursuant to the Regulatory Reform Act in an effort to enhance regulatory oversight over Fannie Mae and Freddie Mac. FHFA placed Fannie Mae and Freddie Mac into federal conservatorship in September 2008. Both Fannie Mae and Freddie Mac have returned to profitability as a result of the housing market recovery, but their long-term financial viability is highly dependent on governmental support. If the governmental support is inadequate, these companies could fail to offer programs necessary to an active secondary market. In addition, future policies that change the relationship between Fannie Mae and Freddie Mac and the U.S. government, including those that result in their winding down, nationalization, privatization, or elimination may have broad adverse implications for the residential mortgage market, the mortgage-backed securities market and the Mortgage Company’s business, operations and financial condition. If this were to occur, the Mortgage Company’s ability to sell mortgage loans readily could be hampered, and the profitability of the Bank could be significantly reduced.
Changes in fee structures by third party loan purchasers and mortgage insurers may decrease our loan production volume and the margin we can recognize on conforming home loans, and may adversely impact our results of operations.

24



In the future, third party loan purchasers may revise their fee structures and increase the costs of doing business with them. Such changes may have a negative impact on our ability to originate loans to be sold because of the increased costs of such loans and may decrease our profitability with respect to loans held for sale. In addition, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these third party loan purchasers could negatively impact our results of business, operations and cash flows.

If we breach any of the representations or warranties we make to a purchaser or securitizer of our mortgage loans, we may be liable to the purchaser or securitizer for certain costs and damages.

When we sell or securitize mortgage loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. Our agreements require us to repurchase mortgage loans if we have breached any of these representations or warranties, in which case we may be required to repurchase such loan and record a loss upon repurchase and/or bear any subsequent loss on the loan. We may not have any remedies available to us against a third party for such losses, or the remedies available to us may not be as broad as the remedies available to the purchaser of the mortgage loan against us. In addition, if there are remedies against a third party available to us, we face further risk that such third party may not have the financial capacity to perform remedies that otherwise may be available to us. Therefore, if a purchaser enforces remedies against us, we may not be able to recover our losses from a third party and may be required to bear the full amount of the related loss.

If repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition will be adversely affected.

We may face risk of loss if we purchase loans from a seller that fails to satisfy its indemnification obligations.

We generally receive representations and warranties from the originators and sellers from whom we purchase loans such that if a loan defaults and there has been a breach of such representations and warranties, we may be able to pursue a remedy against the seller of the loan for the unpaid principal and interest on the defaulted loan. However, if the originator and/or seller breach such representations and warranties and does not have the financial capacity to pay the related damages, we may be subject to the risk of loss for such loan as the originator or seller may not be able to pay such damages or repurchase loans when called upon by us to do so.

WashingtonFirst may not be able to expand its wealth advisory services and retain current clients.

WashingtonFirst and its subsidiary Wealth Advisors, may not be able to attract new and retain current investment advisory clients due to competition from the following: commercial banks and trust companies; mutual fund companies; other investment advisory firms; law firms; brokerage firms; and other financial services companies. Their ability to successfully attract and retain clients is dependent upon their ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. Due to changes in economic conditions, the performance of Wealth Advisors may be negatively impacted by the financial markets in which investment clients’ assets are invested, causing clients to seek other alternative investment options. If Wealth Advisors is not successful, the Company’s results from operations and financial position may be negatively impacted.
WashingtonFirst depends on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, WashingtonFirst may rely on information furnished to it by or on behalf of clients and counterparties, including financial statements and other financial information. WashingtonFirst also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to customers, WashingtonFirst expects that a customer’s financial statements present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. WashingtonFirst’s financial condition and results of operations could be negatively impacted to the extent it relies on customer-provided financial statements or other information which are discovered to be materially misleading.
WashingtonFirst relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if it is forced to foreclose upon such loans.
A significant portion of WashingtonFirst’s loan portfolio consists of loans secured by real estate. WashingtonFirst relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease. As a result of any of these factors, the real estate securing some of WashingtonFirst’s loans may be more or less valuable than anticipated at the time the loans were made. If a default

25


occurs on a loan secured by real estate that is less valuable than originally estimated, WashingtonFirst may not be able to recover the outstanding balance of the loan and may suffer a loss.
WashingtonFirst is exposed to risk of environmental liabilities with respect to properties to which it takes title.
In the course of its business, WashingtonFirst may foreclose and take title to real estate, potentially becoming subject to environmental liabilities associated with the properties. WashingtonFirst may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs or it may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. Costs associated with investigation or remediation activities can be substantial. If WashingtonFirst or the Bank is the owner or former owner of a contaminated site, it may be subject to statutory and/or common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect WashingtonFirst’s business.

Item 1B. Unresolved Staff Comments
The Company does not have any unresolved staff comments to report for the year ended December 31, 2016.

Item 2. Properties
The Company leases offices and branch locations that are used in the normal course of business. WashingtonFirst does not own any banking facilities. As of March 9, 2017, WashingtonFirst leased 22 properties of which 19 were operating branches; two were offices for mortgage and wealth business activities; and one was a corporate headquarters office. The branches consist of twelve locations in Virginia, five in Maryland, and two branches in the District of Columbia. All of the leased properties are in good operating condition and are adequate for WashingtonFirst’s present and anticipated future needs.

26


 
Corporate Office
 
 
Corporate Headquarters
11921 Freedom Drive
Reston, VA 20190
 
 
Virginia Branches
 
Annandale
Great Falls
Reston
7023 Little River Turnpike
9851 Georgetown Pike
11636 Plaza America Drive
Annandale, VA 22003
Great Falls, VA 22066
Reston, VA 20190
 
 
 
Ballston
Herndon
Sterling
4501 North Fairfax Drive
13081 Worldgate Drive
46901 Cedar Lake Plaza
Arlington, VA 22203
Herndon, VA 20170
Sterling, VA 20164
 
 
 
Fairfax
Manassas Park
Tysons Corner
10777 Main Street
9113 Manassas Drive
2095 Chain Bridge Road
Fairfax, VA 22030
Manassas Park, VA 20111
Vienna, VA 22182
 
 
 
Fair Lakes
McLean
Old Town Alexandria
12735 Shoppes Lane
1356 Chain Bridge Road
115 N. Washington Street
Fairfax, VA 22033
McLean, VA 22101
Alexandria, VA 22314
 
 
 
 
Maryland Branches
 
Bethesda
Oxon Hill
Greenbelt
7708 Woodmont Avenue
6089 Oxon Hill Road
6329 Greenbelt Road
Bethesda, MD 20814
Oxon Hill, MD 20745
College Park, MD 20740
 
 
 
Rockville
Potomac
 
14941 Shady Grove Road
9812 Falls Road
 
Rockville, MD 20850
Potomac, MD 20854
 
 
 
 
 
District of Columbia Branches
 
19th Street
Connecticut Avenue
 
1146 19th Street, NW
1025 Connecticut Avenue, NW
 
Washington, DC 20036
Washington, DC 20036
 
 
 
 
 
WashingtonFirst Mortgage Offices
 
Fairfax Office
Rockville Office
 
12700 Fair Lakes Circle, Suite #400
7811 Montrose Road, Suite #501
 
Fairfax, VA 22033
Rockville, MD 20854
 
 
 
 
 
1st Portfolio Wealth Advisors Office
 
Fairfax Office
 
 
12700 Fair Lakes Circle, Suite #400
 
 
Fairfax, VA 22033
 
 

Item 3. Legal Proceedings
From time to time, the Company and its subsidiaries may become involved in various legal proceedings relating to claims arising in the normal course of its business. In the opinion of management, there are currently no pending or threatened legal proceedings which would have a material adverse effect on the Company’s financial condition or results of operations.

Item 4. Mine Safety Disclosures
Not applicable.

27


PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market for Common Stock. Our voting common stock is listed for trading on the NASDAQ Capital Market under the symbol “WFBI.” Our non-voting common stock is not listed on any exchange. As of March 9, 2017, there were 12,114,985 shares of common stock voting issued and outstanding and 816,835 shares of common stock non-voting issued and outstanding. As of that date, our common stock voting was held by approximately 450 shareholders of record and the closing price of our common stock voting was $27.13. As of that date, our common stock non-voting was held by two shareholders of record.
The information below represents the high and low closing price per share of the common stock voting stock for the periods indicated below, as reported on the NASDAQ:
 
Sales Prices (1)
 
Common Stock Voting and Non-Voting Cash Dividends Declared
 
Common Stock Voting
 
 
High
 
Low
 
 
(per share)
2017
 
 
 
 
 
First Quarter (through March 9, 2017)
$
29.07

 
$
27.13

 
$
0.07

2016
 
 
 
 
 
Fourth Quarter
29.91

 
22.42

 
0.07

Third Quarter
24.24

 
20.30

 
0.06

Second Quarter
22.14

 
18.82

 
0.06

First Quarter
21.93

 
19.41

 
0.06

2015
 
 
 
 
 
Fourth Quarter
21.60

 
17.14

 
0.06

Third Quarter
18.09

 
15.19

 
0.05

Second Quarter
16.67

 
15.24

 
0.05

First Quarter
16.18

 
14.29

 
0.05

 
 
 
 
 
 
(1) Prices adjusted to reflect all stock dividends
 
 
The Company commenced paying cash dividends in 2014. Although the Company expects to declare and pay quarterly cash dividends in the future, payment of dividends is at the discretion of the Board of Directors of the Company, and is subject to various federal and state regulatory limitations. Regulatory restrictions on the ability of the Bank to pay dividends to the Company are set forth in “Part 1, Item 1A - Risk Factors.”
The Board of Directors has declared four (4) stock dividends, on the Company’s outstanding shares of common stock voting and common stock non-voting, in the amount of five percent (5%) each: on January 23, 2012 (paid February 29, 2012), on April 5, 2013 (paid May 17, 2013), on July 21, 2014 (paid September 2, 2014), and on December 13, 2016 (paid December 28, 2016).
Stock Price Performance. The following graph and table show the cumulative total return on the common stock of the Company over the last five years, compared with the cumulative total return of a broad stock market index (the Standard and Poor’s 500 Index or “S&P 500”), and a narrower index (the SNL U.S. Bank Index). The graph assumes that $100 was invested on December 31, 2011 in each of: WashingtonFirst’s common stock voting; the S&P 500 Stock Market Index: and the SNL U.S. Bank Index. The graph also assumes that all dividends were reinvested into the same securities throughout the past five years. WashingtonFirst obtained the information contained in the performance graph and table below from SNL Financial.

28


a201610-kdoc_chartx39189.jpg
 
For the Year Ended December 31,
Index
2011
 
2012
 
2013
 
2014
 
2015
 
2016
WashingtonFirst Bankshares, Inc.
$
100.00

 
$
109.00

 
$
150.58

 
$
169.17

 
$
256.13

 
$
347.96

S&P 500
100.00

 
116.00

 
153.57

 
174.60

 
177.01

 
198.18

SNL U.S. Bank
100.00

 
134.95

 
185.28

 
207.12

 
210.65

 
266.16


Issuer Repurchase of Common Stock. WashingtonFirst has not repurchased any shares of its common stock.


Item 6. Selected Financial Data
The selected consolidated financial data presented below should be reviewed in conjunction with the audited consolidated financial statements and related notes and with Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Use of Non-GAAP Financial Measures. The information set forth below contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are "tangible common equity," "tangible book value per common share," "efficiency ratio", and “adjusted allowance for loan losses”. Management uses these non-GAAP measures in its analysis of our performance because it believes these measures are material and will be used as a measure of our performance by investors. These disclosures should not be considered in isolation or as a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies. Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures. A reconciliation table is set forth in Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.


29


 
2016
 
2015
 
2014
 
2013
 
2012
 
($ in thousands, except per share data)
Results of Operations:
 
 
 
 
 
 
 
 
 
Interest income
$
73,847

 
$
63,183

 
$
55,119

 
$
46,829

 
$
28,219

Interest expense
12,471

 
9,211

 
7,219

 
6,130

 
4,949

Net interest income
61,376

 
53,972

 
47,900

 
40,699

 
23,270

Provision for loan losses
3,880

 
3,550

 
3,005

 
4,755

 
3,225

Net interest income after provision for loan losses
57,496

 
50,422

 
44,895

 
35,944

 
20,045

Non-interest income
27,505

 
7,891

 
1,998

 
1,139

 
3,541

Non-interest expenses
56,863

 
39,589

 
33,116

 
28,117

 
20,178

Income before taxes
28,138

 
18,724

 
13,777

 
8,966

 
3,408

Income tax expense
10,131

 
6,469

 
4,353

 
2,627

 
1,173

Net income
18,007

 
12,255

 
9,424

 
6,339

 
2,235

Net income available to common stockholders
18,007

 
12,181

 
9,263

 
6,161

 
2,057

Per Share Data:
 
 
 
 
 
 
 
 
 
Net income - basic per share (6)
$
1.40

 
$
1.15

 
$
1.09

 
$
0.73

 
$
0.54

Net income - diluted per share (6)
1.37

 
1.13

 
1.06

 
0.72

 
0.53

Book value per common share (6)
14.94

 
13.95

 
12.07

 
10.65

 
10.13

Tangible book value per common share (6)
13.93

 
12.91

 
11.38

 
10.18

 
9.64

Dividends paid
0.24

 
0.20

 
0.16

 

 

Period End Balances:
 
 
 
 
 
 
 
 
 
Assets
$
2,002,911

 
$
1,674,466

 
$
1,333,390

 
$
1,127,559

 
$
1,147,818

Loans (1)
1,566,652

 
1,344,577

 
1,066,126

 
838,120

 
753,355

Investments (2)
291,930

 
226,241

 
171,733

 
148,897

 
138,221

Deposits
1,522,741

 
1,333,242

 
1,086,063

 
948,903

 
972,660

Borrowings (3)
270,587

 
149,913

 
104,311

 
63,489

 
64,923

Shareholders’ equity
192,660

 
178,595

 
134,538

 
107,604

 
101,520

Mortgage origination volume
772,076

 
213,449

 
23,050

 
3,648

 

Assets under management
297,394

 
226,688

 

 

 

Average Balances:
 
 
 
 
 
 
 
 
 
Assets
$
1,792,435

 
$
1,483,500

 
$
1,259,832

 
$
1,060,309

 
$
575,751

Loans (1)
1,440,519

 
1,187,273

 
949,808

 
783,683

 
443,578

Investments (2)
256,716

 
196,172

 
172,367

 
124,418

 
66,675

Deposits
1,443,948

 
1,194,549

 
1,059,529

 
892,167

 
487,318

Borrowings (3)
146,004

 
133,783

 
81,859

 
56,693

 
29,314

Shareholders’ equity
189,632

 
144,492

 
112,707

 
105,489

 
56,801

Performance Ratios:
 
 
 
 
 
 
 
 
 
Return on average assets
1.00
%
 
0.83
%
 
0.75
%
 
0.60
%
 
0.39
%
Return on average shareholders' equity
9.50
%
 
8.48
%
 
8.36
%
 
6.01
%
 
3.92
%
Yield on average interest-earning assets
4.23
%
 
4.32
%
 
4.51
%
 
4.57
%
 
5.02
%
Rate on average interest-bearing liabilities
1.02
%
 
0.90
%
 
0.83
%
 
0.84
%
 
1.24
%
Net interest spread
3.21
%
 
3.42
%
 
3.68
%
 
3.73
%
 
3.78
%
Net interest margin
3.52
%
 
3.74
%
 
3.92
%
 
3.97
%
 
4.14
%
Efficiency ratio (4)
63.42
%
 
64.00
%
 
66.59
%
 
64.92
%
 
75.26
%
Dividend payout ratio
17.14
%
 
17.39
%
 
14.68
%
 
%
 
%
Capital Ratios:
 
 
 
 
 
 
 
 
 
Total regulatory capital to risk-weighted assets
13.99
%
 
14.86
%
 
13.20
%
 
14.05
%
 
13.77
%
Tier 1 capital to risk-weighted assets
11.61
%
 
12.22
%
 
12.14
%
 
12.80
%
 
12.71
%
Tier 1 leverage
10.14
%
 
10.67
%
 
10.23
%
 
10.53
%
 
9.97
%
Tangible common equity to tangible assets (5)
9.03
%
 
9.95
%
 
8.62
%
 
7.64
%
 
6.97
%
Average equity to average assets
10.58
%
 
9.74
%
 
8.95
%
 
9.95
%
 
9.87
%



30



 
2016
 
2015
 
2014
 
2013
 
2012
 
($ in thousands, except per share data)
Credit Quality Ratios:
 
 
 
 
 
 
 
 
 
Allowance for loan losses to loans held for investment
0.89
%
 
0.94
%
 
0.87
%
 
1.02
%
 
0.83
%
Adjusted allowance for loan losses to total loans held for investment (7)
1.11
%
 
1.30
%
 
1.46
%
 
1.67
%
 
2.09
%
Non-performing loans to total loans held for investment
0.46
%
 
1.11
%
 
1.02
%
 
2.48
%
 
2.48
%
Non-performing assets to total assets
0.43
%
 
0.86
%
 
0.84
%
 
1.97
%
 
1.92
%
Net charge-offs to average loans held for investment
0.18
%
 
0.04
%
 
0.24
%
 
0.32
%
 
0.43
%
 
 
 
 
 
 
 
 
 
 
(1) Includes Loans held for sale at lower of cost or fair value and loans held for investment at amortized cost.
(2) Includes the following categories from the balance sheet: available-for-sale investment securities and restricted stocks.
(3) Includes the following categories from the balance sheet: other borrowings, FHLB advances, and long-term borrowings.
(4) The efficiency ratio is calculated as total non-interest expense (less debt extinguishment costs) divided by the sum of net interest income and total non-interest income (less gain on sale of AFS securities). This non-GAAP financial measure is presented to facilitate an understanding of the Company's performance.
(5) Tangible common equity to tangible assets ratio is a non-GAAP financial measure that is presented to facilitate an understanding of the Company's capital structure. Refer to the reconciliation of tangible common equity to tangible assets ratio in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations".
(6) Adjusted for stock dividends.
(7) This is a non-GAAP financial measure. Credit purchase accounting marks are GAAP marks under purchase accounting guidance. Refer to the reconciliation of GAAP Allowance Ratio to Adjusted Allowance ratio in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations".



31


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Critical Accounting Policies and Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP and follow general practices in the U.S. banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely to a greater extent on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Management believes the following accounting policies are the most critical to aid in fully understanding and evaluating our reported financial results:
allowance for loan losses;
business combinations
goodwill and identifiable intangible asset impairment; and,
accounting for income taxes.
Allowance for Loan Losses
The allowance for loan and lease losses is an estimate of the probable losses that are inherent in the loan and lease portfolio at the balance sheet date. The allowance is based on the basic principle that a loss be accrued when it is probable that the loss has occurred at
the date of the financial statements and the amount of the loss can be reasonably estimated.
Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of probable losses in the lending portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions or reductions to the allowance may be necessary based on changes in the loans and comprising the portfolio and changes in the financial condition of borrowers, resulting from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Company periodically review the loan and lease portfolio and the allowance. Such reviews may result in additional provisions based on their judgments of information available at the time of each examination.
Impaired Loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
The Company’s allowance for loan and lease losses has three basic components: a general allowance (ASC 450 reserves) reflecting historical losses by loan category, as adjusted by several factors whose effects are not reflected in historical loss ratios; specific allowances (ASC 310 reserves) for individually identified loans; and an unallocated component. Each of these components, and the allowance methodology used to establish them, are described in detail in Note 1 of the Notes to the Consolidated Financial Statements included in this report. The amount of the allowance is reviewed monthly by management, and periodically by independent consultants.
General reserve component consists of two parts. The first part covers non-impaired loans and is quantitatively derived from an estimate of credit losses averaged during the preceding twelve quarters, adjusted for various qualitative factors applicable to loan portfolio segments. The estimate of credit losses is the product of the adjusted net charge-off historical loss experience multiplied by the balance of the loan segment. The qualitative environmental factors consist of national, local, and portfolio characteristics and are applied to the loan segments. The following are types of environmental factors management considers:
trends in delinquencies and other non-performing loans;

32


changes in the risk profile related to large loans in the portfolio;
changes in the categories of loans comprising the loan portfolio;
concentrations of loans to specific industry segments;
changes in economic conditions on both a local and national level;
changes in the Company’s credit administration and loan portfolio management processes; and
quality of the Company’s credit risk identification processes.

Specific reserve component is established for individually impaired loans. As a practical expedient, for collateral dependent loans, the Company measures impairment based on fair value of the collateral less costs to sell the underlying collateral. For loans on which the Company has not elected to use a practical expedient to measure impairment, the Company will measure impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate. In determining the cash flows to be included in the discount calculation the Company considers the several factors when estimating the probability and severity of potential losses, including borrower’s overall financial condition, resources and payment record, demonstrated or documented support available from guarantors, and adequacy of realizable collateral value in a liquidation scenario.
Unallocated component may be used to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.
Business Combinations
Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and liabilities assumed at the acquisition date measured at their fair value as of that date. To determine fair value, the Company utilizes third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principals and conditions. If they are necessary, to implement its plan to exit an activity of an acquiree, the costs that the Company expects, but is not obligated, to incur in the future are not liabilities at the acquisition date, nor are costs to terminate the employment of or relocate an acquiree’s employee(s). The Company does not recognize these costs as part of applying the acquisition method. Instead, the Company recognizes these costs as expenses in its post-combination financial statements in accordance with other applicable U.S. GAAP.
Acquisition-related costs are costs the Company incurs to effect a business combination. These costs include advisory, legal, accounting, valuation and other professional services. Some other examples of acquisition-related costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company will account for acquisition-related costs as expenses in periods in which the costs are incurred and the services received.
Loans acquired in a business combination are recorded at fair value on the date of acquisition. Loans acquired with deteriorating credit quality are accounted for in accordance with ASC 310-30, Receivables - Loans and Debt Securities Acquired with Deteriorating Credit Quality, and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are not considered to be impaired unless they deteriorate further subsequent to the acquisition. Certain acquired loans, including performing loans and revolving lines of credit, are accounted for in accordance with ASC 310-20, Receivables - Nonrefundable Fees and Other Costs, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.
Goodwill and Identifiable Intangible Assets
The Company follows ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company performs its annual impairment testing in the 4th quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Examples of such events include, but are not limited to, a significant deterioration in future operating results, adverse action by a regulator, or a loss of key personnel. If the fair value is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value. Intangible assets with definite useful lives such as core deposits and customer relationships are amortized over their estimated useful lives to their estimated residual values. These are initially measured at fair value and then are amortized over their useful lives. Determining the fair value requires the Company to use a degree of subjectivity. Intangible assets with definite useful lives are amortized over their estimated useful lives, to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s Consolidated Balance Sheets. Core deposit intangible assets arise when a

33


bank has a stable deposit base comprised of funds associated with long-term customer relationships. The intangible asset value derives from customer relationships that provide a low-cost source of funding. Client list intangible assets arise when a client list is acquired through a business combination and that client list is deemed to be an asset that will provide value over a finite period of time.
Accounting for Income Taxes
The Company accounts for income taxes by recording deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company’s accounting policy follows the prescribed authoritative guidance that a minimal probability threshold of a tax position must be met before a financial statement benefit is recognized. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in other non-interest expenses in its consolidated statements of income. Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the applicable reporting and accounting requirements.
Management expects that the Company’s adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates due to the requirement that any change in judgment or measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

Executive Overview
The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of the Company and its subsidiary. This discussion and analysis should be read in conjunction with Item 8 - “Consolidated Financial Statements and Notes”.
Consolidated net income available to common shareholders was $18.0 million (or $1.37 per diluted common share) for the year ended December 31, 2016. Net income available to common shareholders during 2016 increased $5.8 million, up 47.8% over the $12.2 million (or $1.13 per diluted common share) earned during the year ended December 31, 2015. These results reflect the following:
The increase in earnings is primarily attributable to the growth in earning assets of the Bank and mortgage originations. In July 2015, the Company successfully completed the 1st Portfolio Acquisition which added mortgage banking and wealth advisory services and related revenue streams.
Return on average assets for the year ended December 31, 2016 was 1.00% compared to 0.83% for the same period last year, and for the prior quarter.
Return on average shareholders’ equity for the year ended December 31, 2016 was 9.50% compared to 8.48% for the year ended December 31, 2015.
Net interest income after provision for loan losses for the year ended December 31, 2016 increased $7.1 million or 14.0% to $57.5 million compared to $50.4 million for the year ended December 31, 2015. This increase is primarily attributable to growth in earning assets of the Bank.
During the year ended December 31, 2016, the Mortgage Company generated $24.4 million in gross revenue on $772.1 million of mortgage production compared to $5.6 million in revenue on $213.4 million of mortgage production in the prior year. In 2016, mortgage production contributed net income of $3.2 million or $0.25 cents per share fully diluted.
As of December 31, 2016 and December 31, 2015, total assets were $2.0 billion and $1.7 billion, respectively. Total net loans held for investment increased by $225.2 million (17.4%) from $1.3 billion as of December 31, 2015, to $1.5 billion as of December 31, 2016. This increase is attributable to organic growth from our existing lending team. During the same period, total deposits increased $189.5 million (14.2%) to $1.5 billion. This increase is attributable to core deposit growth.
As of December 31, 2016, WashingtonFirst had $8.5 million in non-performing assets, 0.43% of total assets; a decrease of $6.0 million from $14.5 million at December 31, 2015. Allowance for loan losses increased to $13.6 million during the year ended December 31, 2016 increasing $1.3 million compared to December 31, 2015. The increase in the allowance was driven by provisions of $3.9 million partially offset by net charge-offs of $2.6 million.
The Company paid its 13th consecutive quarterly dividend of $0.07 on January 3, 2017.


34


The Company's primary market, the Washington, D.C. metropolitan area (which includes the District of Columbia proper, Northern Virginia and suburban Maryland), has been relatively less impacted by recessionary forces than other parts of the country. The region’s economic strength is due not only to the region’s significant federal presence, but also to strong growth in the business and professional services sector. Private sector growth was attributable in part to a diverse economy including a large health care component, substantial business services, and a highly educated work force. The unemployment rate in the region has remained consistently below the national average for the last several years. Much of this success is due to the region’s highly trained and educated workforce. According to the U.S. Census Bureau, the region is home to six of the top ten most highly educated counties in the nation and six of the top ten most affluent counties, as measured by household income. Collectively, the Company’s market area is more diverse and resilient than many other regions. During much of 2016, the Mid-Atlantic region in which the Company operates continued to show consistent economic improvement. Market interest rates and general conditions remained favorable for all business segments. The Bank experienced healthy loan growth while maintaining strong levels of liquidity, capital and credit quality. The Mortgage Company benefited from favorable interest rates spurring an increase in refinancings.

Acquisition Activities in 2015
On May 13, 2015, the Company entered into an Agreement and Plan of Reorganization (“1st Portfolio Agreement”) providing for the Company’s acquisition of 1st Portfolio Holding Corporation with and into the Company (“1st Portfolio Acquisition”). The 1st Portfolio Acquisition closed on July 31, 2015. 1st Portfolio Holding Corporation’s wholly owned subsidiary, 1st Portfolio Wealth Advisors became a wholly owned subsidiary of the Company and wholly owned subsidiary 1st Portfolio Lending Corporation (now WashingtonFirst Mortgage Corporation) became a wholly owned subsidiary of WashingtonFirst Bank.
The 1st Portfolio Acquisition was accounted for using the acquisition method. Accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the transaction date. The excess of fair value of net liabilities assumed exceeded cash received in the transaction resulting in goodwill of $5.2 million. The Company also recorded $1.4 million in customer list intangibles which will be amortized over 15 years.

Results of Operations
The following tables provide information regarding interest-earning assets and funding for the years ended 2016, 2015, and 2014. The balance of non-accruing loans is included in the average balance of loans presented, though the related income is accounted for on a cash basis. Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly. The increase in average rate on interest-bearing deposit accounts is consistent with general trends in average short-term rates during the periods presented. The upward trend in the average rate on time deposits reflects the maturity of older time deposits and the issuance of new time deposits at higher market rates.



35


Table M1: Average Balances, Interest Income and Expense and Average Yield and Rates
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
Average
Balance
 
Income/
Expense
 
Yield/
Rate
 
($ in thousands)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
47,598

 
$
1,790

 
3.76
%
 
$
10,596

 
$
401

 
3.78
%
 
$
961

 
$
64

 
6.66
%
Loans held for investment (1)
1,392,921

 
67,111

 
4.82
%
 
1,176,677

 
58,945

 
5.00
%
 
948,847

 
51,548

 
5.43
%
Investment securities - taxable
243,578

 
4,274

 
1.75
%
 
186,931

 
3,257

 
1.74
%
 
163,351

 
2,886

 
1.77
%
Investment securities - tax-exempt (2)
6,849

 
149

 
2.18
%
 
3,088

 
93

 
3.01
%
 
4,776

 
133

 
3.56
%
Other equity securities
6,289

 
284

 
4.52
%
 
6,153

 
257

 
4.18
%
 
4,240

 
166

 
3.92
%
Interest-bearing balances
86

 
1

 
1.57
%
 
4,239

 
27

 
0.64
%
 
14,056

 
87

 
0.62
%
Federal funds sold
48,110

 
264

 
0.55
%
 
55,121

 
222

 
0.40
%
 
87,388

 
235

 
0.27
%
Total interest earning assets
1,745,431

 
73,873

 
4.23
%
 
1,442,805

 
63,202

 
4.32
%
 
1,223,619

 
55,119

 
4.51
%
Non-interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
3,209

 
 
 
 
 
3,795

 
 
 
 
 
3,216

 
 
 
 
Premises and equipment
7,499

 
 
 
 
 
6,575

 
 
 
 
 
5,932

 
 
 
 
Other real estate owned
1,609

 
 
 
 
 
250

 
 
 
 
 
1,026

 
 
 
 
Other assets (3)
47,291

 
 
 
 
 
40,549

 
 
 
 
 
34,605

 
 
 
 
Less: allowance for loan losses
(12,604
)
 
 
 
 
 
(10,474
)
 
 
 
 
 
(8,566
)
 
 
 
 
Total non-interest earning assets
47,004

 
 
 
 
 
40,695

 
 
 
 
 
36,213

 
 
 
 
Total Assets
$
1,792,435

 
 
 
 
 
$
1,483,500

 
 
 
 
 
$
1,259,832

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
121,823

 
$
355

 
0.29
%
 
$
106,202

 
$
261

 
0.25
%
 
$
90,759

 
$
193

 
0.21
%
Money market deposit accounts
277,552

 
1,666

 
0.60
%
 
229,819

 
1,129

 
0.49
%
 
212,373

 
1,026

 
0.48
%
Savings accounts
207,153

 
1,469

 
0.71
%
 
137,010

 
943

 
0.69
%
 
124,943

 
896

 
0.72
%
Time deposits
475,224

 
5,237

 
1.10
%
 
411,336

 
4,098

 
1.00
%
 
358,982

 
3,328

 
0.93
%
Total interest-bearing deposits
$
1,081,752

 
8,727

 
0.81
%
 
884,367

 
6,431

 
0.73
%
 
787,057

 
5,443

 
0.69
%
FHLB advances
106,882

 
1,583

 
1.48
%
 
109,967

 
1,625

 
1.48
%
 
63,108

 
1,051

 
1.67
%
Other borrowings and long-term borrowings
39,122

 
2,161

 
5.52
%
 
23,816

 
1,155

 
4.85
%
 
18,751

 
725

 
3.87
%
Total interest-bearing liabilities
$
1,227,756

 
12,471

 
1.02
%
 
1,018,150

 
9,211

 
0.90
%
 
868,916

 
7,219

 
0.83
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
362,196

 
 
 
 
 
310,182

 
 
 
 
 
272,472

 
 
 
 
Other liabilities
12,851

 
 
 
 
 
10,676

 
 
 
 
 
5,737

 
 
 
 
Total non-interest-bearing liabilities
375,047

 
 
 
 
 
320,858

 
 
 
 
 
278,209

 
 
 
 
Total Liabilities
1,602,803

 
 
 
 
 
1,339,008

 
 
 
 
 
1,147,125

 
 
 
 
Shareholders’ Equity
189,632

 
 
 
 
 
144,492

 
 
 
 
 
112,707

 
 
 
 
Total Liabilities and Shareholders’ Equity
$
1,792,435

 
 
 
 
 
$
1,483,500

 
 
 
 
 
$
1,259,832

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Spread (4)
 
 
 
 
3.21
%
 
 
 
 
 
3.42
%
 
 
 
 
 
3.68
%
Net Interest Margin (2)(5)
 
 
$
61,402

 
3.52
%
 
 
 
$
53,991

 
3.74
%
 
 
 
$
47,900

 
3.92
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) 
Includes loans placed on non-accrual status.
(2) 
Yield and income presented on a fully taxable equivalent (FTE) basis using a federal statutory rate of 35 percent and includes $26 thousand and $19 thousand of FTE income for the year ended December 31, 2016, and December 31, 2015, respectively.
(3) 
Includes intangibles, deferred tax asset, accrued interest receivable, bank-owned life insurance and other assets.
(4) 
Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.
(5) 
Net interest margin is net interest income, expressed as a percentage of average earning assets.


36


The following tables set forth information regarding the changes in the components of the Company’s net interest income for the periods indicated. For each category, information is provided for changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of variable rate investments, variable rate deposit accounts and adjustable rate mortgages to lower rates and the acquisition of new lower yielding investments and loans, as described above. The decrease in expense reflects the decreased cost of funding due to lower interest rates available in the debt markets. The increases due to changes in volume reflect the increase in on-balance sheet assets during the year ended December 31, 2016, and 2015.

Table M2: Changes in Rate and Volume Analysis
 
2016 vs. 2015
 
2015 vs. 2014
 
(Decrease)/Increase Due to
 
(Decrease)/Increase Due to
 
Rate
 
Volume
 
Total
 
Rate
 
Volume
 
Total
 
($ in thousands)
Income from interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans held for sale
$
(2
)
 
$
1,391

 
$
1,389

 
$
(39
)
 
$
376

 
$
337

Loans held for investment
(2,310
)
 
10,476

 
8,166

 
(4,226
)
 
11,623

 
7,397

Investment securities - taxable
19

 
998

 
1,017

 
(76
)
 
447

 
371

Investment securities - tax exempt
(31
)
 
87

 
56

 
(19
)
 
(40
)
 
(59
)
Other equity securities
21

 
6

 
27

 
12

 
79

 
91

Interest bearing balances
16

 
(42
)
 
(26
)
 
3

 
(63
)
 
(60
)
Federal funds sold
73

 
(31
)
 
42

 
91

 
(104
)
 
(13
)
Total income from interest-earning assets
(2,214
)
 
12,885

 
10,671

 
(4,254
)
 
12,318

 
8,064

Expense from interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
756

 
1,540

 
2,296

 
315

 
673

 
988

FHLB Advances

 
(42
)
 
(42
)
 
(143
)
 
717

 
574

Borrowed funds
178

 
828

 
1,006

 
205

 
225

 
430

Total expense from interest-bearing liabilities
934

 
2,326

 
3,260

 
377

 
1,615

 
1,992

Increase (Decrease) in net interest income
$
(3,148
)
 
$
10,559

 
$
7,411

 
$
(4,631
)
 
$
10,703

 
$
6,072


Interest Earning Assets
Average loan balances were $1.4 billion for the year ended December 31, 2016, compared to $1.2 billion and $948.8 million for 2015 and 2014, respectively. This 18.4% increase over the prior year is attributable primarily to organic growth. The related interest income from loans was $67.1 million for the year ended December 31, 2016 resulting in an average yield of 4.82%, compared to $58.9 million and $51.5 million for 2015 and 2014, resulting in average yields of 5.00% and 5.43%, respectively. The decrease in average yield on loans reflects competitive pressure on loan pricing during the period (including the repricing of adjustable rate loans). Interest rates are established for classes of loans that include variable rates based on the prime rate as reported by The Wall Street Journal or other identifiable bases while others carry fixed rates with terms as long as 30 years. Most variable rate originations include minimum initial rates and/or floors.
Taxable investment securities balances averaged $243.6 million for the year ended December 31, 2016, compared to $186.9 million and $163 million for 2015 and 2014, respectively. Interest income generated on these investment securities for the year ended December 31, 2016 totaled $4.3 million, or a 1.75% yield, compared to $3.3 million or a 1.74% yield and $2.9 million or a 1.77% yield for 2015 and 2014, respectively.
Tax-exempt investment securities balances averaged $6.8 million for the year ended December 31, 2016, compared to $3.1 million and $4.8 million for 2015 and 2014, respectively. Interest income generated on these investment securities for the year ended December 31, 2016 totaled $149.0 thousand, or a 2.18% yield, compared to $93.0 thousand or a 3.01% yield and $133.0 thousand or a yield of 3.56% for 2015 and 2014, respectively. The yield for tax-exempt securities has been presented on a fully taxable equivalent basis.
Other equity securities balances averaged $6.3 million for the year ended December 31, 2016, compared to $6.2 million and $4.2 million for 2015 and 2014, respectively. Interest income generated on these investment securities for the year ended

37


December 31, 2016 totaled $284.0 thousand, or a 4.52% yield, compared to $257.0 thousand or a 4.18% yield for 2015 and $166.0 thousand or a 3.92% yield for 2014.
Interest-bearing balances averaged $86.0 thousand for the year ended December 31, 2016, compared to $4.2 million for the year ended December 31, 2015. Interest income generated on these balances for the year ended December 31, 2016 totaled $1.0 thousand, or a 1.57% yield, compared to $27.0 thousand or a 0.64% yield for the year ended December 31, 2015.
Short-term investments in federal funds sold averaged $48.1 million for the year ended December 31, 2016, compared to $55.1 million for the year ended December 31, 2015. The decrease in average short-term investments in 2016 is attributable to loan growth out pacing deposit growth. Interest income generated on these assets for the year ended December 31, 2016 totaled $264.0 thousand, or a 0.55% yield, compared to $222.0 thousand, or a 0.40% yield, for the year ended December 31, 2015.
Interest Bearing Liabilities
Average interest-bearing deposits were $1.1 billion for the year ended December 31, 2016 compared to $884.4 million and $787.1 million for 2015 and 2014, respectively. This 22.3% increase in the average interest-bearing deposits in 2016 is the result of organic growth. The related interest expense from interest-bearing deposits was $8.7 million for the year ended December 31, 2016, compared to $6.4 million and $5.4 million for 2015 and 2014, respectively. The average rate on these deposits was 0.81% for the year ended December 31, 2016, compared to 0.73% for 2015 and 0.69% for 2014. This increase in the cost of interest-bearing deposits is attributable to increased competition in the Company’s market, and changes in the mix of interest-bearing deposits. The increase in interest expense is primarily attributable to an increase in the average balance of interest bearing liabilities as well as changes in the mix of deposit funding.
FHLB advances averaged $106.9 million for the year ended December 31, 2016, compared to $110.0 million and $63.1 million for 2015 and 2014, respectively. Interest expense incurred on these borrowings for year ended December 31, 2016, totaled $1.6 million, or a 1.48% rate, compared to $1.6 million, or a 1.48% rate, for 2015 and $1.1 million, or a 1.67% rate, for 2014. In late June 2016, the Company prepaid a long-term FHLB advance as part of management’s efforts to delever the balance sheet. This $25.0 million advance had a coupon rate of 3.99% but an effective cost of 2.04% after considering the purchase accounting mark on the instrument. In August 2016, the Company prepaid an additional $10.0 million advance.
Other borrowings and long-term liabilities averaged $39.1 million for the year ended December 31, 2016, compared to $23.8 million for 2015 and $18.8 million for 2014. Interest expense incurred on these borrowing for the year ended December 31, 2016, totaled $2.2 million, or a 5.52% rate, compared to $1.2 million, or a 4.85% rate for 2015 and $0.7 million or a 3.87% rate for 2014.
The Company’s net interest margin includes the benefit of acquisition accounting fair value adjustments (purchase marks). Net accretion related to acquisition accounting totaled $1.0 million for the year ended December 31, 2016. Borrowings accretion ceased after the FHLB advance with a purchase accounting mark was prepaid during the June 2016 deleveraging strategy mentioned earlier. Actual accretion results presented are augmented by prepayments of loans, whereas future projections of accretion are based solely on the contractual maturity of loans and do not include estimated accretion related to prepayment of loans. The actual 2016 and remaining estimated net accretion impact are reflected in the following table.

Table M3: Purchase Accounting Accretion Analysis
 
Loan Accretion
 
Borrowings Accretion (Amortization)
 
Total
 
($ in thousands)
For the years ending:
 
 
 
 
 
2016 (1)
1,004

 
93

 
1,097

2017
309

 
(139
)
 
170

2018
313

 
(139
)
 
174

2019
312

 
(139
)
 
173

2020
295

 
(139
)
 
156

2021
269

 
(139
)
 
130

Thereafter
2,446

 
(1,594
)
 
852

(1) The remaining purchase mark on an acquired FHLB advance totaling $2.3 million was accelerated upon early prepayment and moved from the margin to the debt extinguishment line item in order to net with the prepayment penalty incurred during the second quarter of 2016.


38


Non-Interest Income
For the year ended December 31, 2016, non-interest income was $27.5 million, compared to $7.9 million and $2.0 million for 2015 and 2014, respectively. This $19.6 million increase over the year ended December 31, 2015 is primarily attributable to the 1st Portfolio Acquisition in July 2015. Gains on the sale of available-for-sale investment securities totaled $1.3 million for the year ended December 31, 2016, compared to $10.0 thousand and $166.0 thousand for 2015 and 2014, respectively. The increase of $1.3 million over the year ended December 31, 2015 is primarily attributable to a deleveraging strategy implemented in June 2016 and, to a lesser extent, in July 2016. The aforementioned deleveraging strategy sought to prepay two long-term FHLB advances, one of which had been acquired during prior acquisitions, with the sale of securities in gain positions to substantially offset the cost of prepayment penalties incurred during the termination of the two FHLB advances. The net effect was to reduce average assets with minimal impact to earnings.
The Mortgage Company realized gains on the sale of loans of $18.3 million for the year ended December 31, 2016, compared to $4.6 million and $0.4 million for 2015 and 2014, respectively. During the year ended December 31, 2016, 61.6% of the mortgage loan volume was for purchase money mortgage loans, whereas only 54.8% and 64.4% of the mortgage volume for 2015 and 2014, respectively, was for purchase money loans. Additional fee income of $4.3 million was generated by the mortgage subsidiary for the year ended December 31, 2016. Gains realized through July 31, 2015, are related to the Bank’s legacy mortgage division which was combined with the Mortgage Company in August 2015 after the 1st Portfolio Acquisition. The mortgage subsidiary closed on a record volume of loans during the year ended December 31, 2016, compared to any prior comparable period in its history. Mortgage origination volume for the year ended December 31, 2016, was $772.1 million, compared to $213.4 million for the prior year. Mortgage operations tend to be subject to seasonality with higher levels of volume seen during the second and third quarters annually.
The Wealth Management segment generated $1.8 million in revenue for the year ended December 31, 2016. Prior to July 2015, no such income was generated. The Wealth Management segment generated $693.0 thousand in revenue for year ended December 31, 2015. Assets under management grew to $297.4 million as of December 31, 2016, at the wealth management subsidiary, compared to $226.7 million as of December 31, 2015.
Non-Interest Expense
For the year ended December 31, 2016, non-interest expense was $56.9 million, compared to $39.6 million and $33.1 million for 2015 and 2014, respectively. The increase of $17.3 million over the year ended December 31, 2015 is primarily attributable to the acquisition of 1st Portfolio in July 2015. Compensation and employee benefits were $35.2 million, $23.1 million, and $18.1 million for the year ended December 31, 2016, 2015, and 2014, respectively. This $12.1 million increase over the year ended December 31, 2015 is primarily attributable to mortgage loan officer commissions, increase in staff levels stemming from the 1st Portfolio Acquisition, and organic growth in the banking segment. Increases in premises and equipment expense is primarily due to an increase in rent expense associated with the addition of two new branches during the first quarter of 2016, as well as 1st Portfolio’s two office locations. Increases in data processing expense is primarily attributable to increased core processing costs given the Bank’s growth and enhancements to network infrastructure. During the year ended December 31, 2016, as part of the deleveraging strategy outlined earlier, the Company prepaid two long-term FHLB advances and incurred debt extinguishment costs of $1.3 million, respectively. No such costs were incurred during the year ended December 31, 2015 or prior.
Gain on sale of loans is highly correlated with salaries and employee benefits at the mortgage subsidiary due to commissions paid to loan officers. Salaries and employee benefits totaled $15.0 million for year ended December&#