UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

___________

FORM 10-Q
___________

(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended ~~September~~June 30, ~~2017~~ 2019

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ~~____________________~~____________ to ~~____________________~~ ____________

Commission File Number:000-55117

VIRGINIA NATIONAL BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)

Virginia	~~46-2331578~~
(State or other jurisdiction of	~~(I.R.S. Employer~~
incorporation or organization)	~~Identification No.)~~

404 People Place, Charlottesville, Virginia	~~22911~~
(Address of principal executive offices)		46-2331578 (I.R.S. Employer Identification No.) 22911 (Zip Code)

(434) 817-8621
(Registrant's telephone number, including area code)

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

☒ Yes ☐No

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

☒ Yes ☐No

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

Large accelerated filer	☐	Accelerated filer	☒
		~~Accelerated filer~~	☐
Non-accelerated filer	☐	~~(Do not check if a smaller reporting company)~~		Smaller reporting company	☒

		Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of ~~November 7, 2017:~~August 6, 2019:

Class of Stock		Shares Outstanding
Common Stock, Par Value $2.50	~~2,410,680~~	2,688,005

VIRGINIA NATIONAL BANKSHARES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. Financial Information
	Item 1		Financial Statements
		Consolidated Balance Sheets (unaudited)		Page 3
		Consolidated Statements of Income (unaudited)		Page 4
		Consolidated Statements of Comprehensive Income (unaudited)		Page 5
		Consolidated Statements of Changes in Shareholders’ Equity (unaudited)		Page 6
		Consolidated Statements of Cash Flows (unaudited)		Page 7
		Notes to Consolidated Financial Statements (unaudited)		Page 8

	Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 31
		Application of Critical Accounting Policies and Estimates		Page 31
		Financial Condition		Page 32
		Results of Operations		Page 37

	Item 3		Quantitative and Qualitative Disclosures About Market Risk	Page 44

	Item 4		Controls and Procedures	Page 44

Part II. Other Information
	Item ~~1Legal~~1		Legal Proceedings	Page 44
	Item ~~1ARisk~~1A		Risk Factors	Page 44
	Item ~~2Unregistered~~2		Unregistered Sales of Equity Securities and Use of Proceeds	Page 44
	Item ~~3Defaults~~3		Defaults Upon Senior Securities	Page 44
	Item 4		Mine Safety Disclosures	Page 45
	Item ~~4Mine Safety Disclosures~~5		Other Information	Page 45
	Item ~~5Other Information~~6		Exhibits	Page 45
	~~Item 6Exhibits~~	~~Page 45~~

Signatures				Page 46

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS

(~~dollars~~Dollars in thousands, except per share data)

September 30, 2017 December 31, 2016 *
ASSETS (Unaudited)
Cash and due from banks $ 7,143 $ 10,047
Federal funds sold 3,155 28,453
Securities:
Available for sale, at fair value 71,049 56,662
Restricted securities, at cost 2,709 1,709
Total securities 73,758 58,371
Loans 501,024 482,135
Allowance for loan losses (3,824 ) (3,688 )
Loans, net 497,200 478,447
Premises and equipment, net 7,437 8,046
Bank owned life insurance 14,229 13,917
Goodwill 372 372
Other intangible assets, net 604 680
Accrued interest receivable and other assets 6,430 6,697
Total assets $ 610,328 $ 605,030
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing $ 166,544 $ 176,098
Interest-bearing 98,528 96,869
Money market deposit accounts 128,149 136,658
Certificates of deposit and other time deposits 114,049 115,026
Total deposits 507,270 524,651
Repurchase agreements and other borrowings 37,001 19,700
Accrued interest payable and other liabilities 1,208 1,625
Total liabilities 545,479 545,976

Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, no shares outstanding - -
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,410,680 and 2,368,777 issued and outstanding at September 30, 2017 and December 31, 2016, respectively 6,027 5,922
Capital surplus 22,036 21,152
Retained earnings 37,082 32,759
Accumulated other comprehensive loss (296 ) (779 )
Total shareholders' equity 64,849 59,054
Total liabilities and shareholders' equity $ 610,328 $ 605,030

*Derived from audited Consolidated Financial Statements

~~See Notes to Consolidated Financial Statements~~

	June 30, 2019			December 31, 2018 *
ASSETS	(Unaudited)
Cash and due from banks	$	12,483		$	11,741
Federal funds sold		12,311			7,133
Securities:
Available for sale, at fair value		56,848			61,392
Restricted securities, at cost		1,684			1,683
Total securities		58,532			63,075
Loans		521,763			537,190
Allowance for loan losses		(4,817	)		(4,891	)
Loans, net		516,946			532,299
Premises and equipment, net		6,594			7,042
Bank owned life insurance		16,190			16,790
Goodwill		372			372
Other intangible assets, net		441			477
Accrued interest receivable and other assets		9,904			5,871
Total assets	$	633,773		$	644,800
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	158,166		$	185,819
Interest-bearing		97,620			106,884
Money market and savings deposit accounts		175,740			171,299
Certificates of deposit and other time deposits		121,993			108,531
Total deposits		553,519			572,533
Accrued interest payable and other liabilities		5,911			1,525
Total liabilities		559,430			574,058

Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, no shares outstanding		-			-
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,560,138 and 2,543,452 issued and outstanding at June 30, 2019 and December 31, 2018, respectively		6,400			6,359
Capital stock dividend distributable		320			-
Capital surplus		32,138			27,013
Retained earnings		35,522			38,647
Accumulated other comprehensive loss		(37	)		(1,277	)
Total shareholders' equity		74,343			70,742
Total liabilities and shareholders' equity	$	633,773		$	644,800

Derived from audited Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(~~dollars~~Dollars in thousands, except per share data)
(Unaudited)

	For the three months ended					For the nine months ended						For the three months ended					For the six months ended
	September 30, 2017			September 30, 2016		September 30, 2017			September 30, 2016			June 30, 2019			June 30, 2018		June 30, 2019		June 30, 2018
Interest and dividend income:
Loans, including fees	$	5,348		$	4,385	$	15,454		$	13,012		$	6,105		$	5,935	$	12,202	$	11,649
Federal funds sold		30			45		208			101			74			39		93		74
Investment securities:
Taxable		328			237		838			762			246			271		498		549
Tax exempt		78			78		203			242			76			86		157		171
Dividends		23			23		69			67			31			33		57		61
Other		1			3		7			7
Total interest and dividend income		5,808			4,771		16,779			14,191			6,532			6,364		13,007		12,504

Interest expense:
Demand and savings deposits		108			68		341			203			463			264		844		496
Certificates and other time deposits		179			157		516			474			586			262		1,045		402
Repurchase agreements and other borrowings		38			9		58			33			22			146		89		218
Total interest expense		325			234		915			710			1,071			672		1,978		1,116
Net interest income		5,483			4,537		15,864			13,481			5,461			5,692		11,029		11,388
Provision for (recovery of) loan losses		168			104		213			(291	)		(64	)		701		620		605
Net interest income after provision for (recovery of) loan losses		5,315			4,433		15,651			13,772			5,525			4,991		10,409		10,783

Noninterest income:
Trust income		394			388		1,171			1,174			402			427		749		841
Advisory and brokerage income		132			106		387			287			156			142		292		282
Royalty income		22			11		198			20			4			34		8		552
Customer service fees		225			240		678			686
Deposit account fees													192			236		373		483
Debit/credit card and ATM fees		206			223		650			653			189			204		346		391
Earnings/increase in value of bank owned life insurance		103			111		312			331			466			111		576		220
Fees on mortgage sales		55			41		104			156			56			46		86		82
Gains (losses) on sales and calls of securities		(78	)		181		(74	)		189
Gains (losses) on sales of other assets		-			6		-			(21	)
Gains on sales of securities													64			-		64		-
Losses on sales of other assets													-			-		-		(33	)
Other		99			106		308			312			171			107		265		203
Total noninterest income		1,158			1,413		3,734			3,787			1,700			1,307		2,759		3,021

Noninterest expense:
Salaries and employee benefits		1,998			1,939		5,770			5,704			2,321			1,982		4,667		3,973
Net occupancy		461			465		1,390			1,413			444			449		923		930
Equipment		124			134		398			401			114			118		231		245
Data processing													330			295		646		547
Other		1,334			1,283		3,897			3,859			1,476			1,183		2,629		2,349
Total noninterest expense		3,917			3,821		11,455			11,377			4,685			4,027		9,096		8,044

Income before income taxes		2,556			2,025		7,930			6,182			2,540			2,271		4,072		5,760
Provision for income taxes		811			629		2,530			1,921			425			439		711		1,132
Net income	$	1,745		$	1,396	$	5,400		$	4,261		$	2,115		$	1,832	$	3,361	$	4,628

Net income per common share, basic	$	0.73		$	0.59	$	2.26		$	1.80
Net income per common share, diluted	$	0.72		$	0.59	$	2.24		$	1.79
Net income per common share, basic *												$	0.79		$	0.69	$	1.25	$	1.74
Net income per common share, diluted *												$	0.79		$	0.68	$	1.25	$	1.72
Weighted average common shares outstanding, basic *													2,688,005			2,666,120		2,683,122		2,663,842
Weighted average common shares outstanding, diluted *													2,688,965			2,688,345		2,687,391		2,685,704

Share data has been retroactively adjusted to reflect the 5% stock dividend effective July 5, 2019.

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(~~dollars~~Dollars in thousands)
(Unaudited)

	For the three months ended						For the nine months ended					For the three months ended						For the six months ended
	September 30, 2017			September 30, 2016			September 30, 2017		September 30, 2016			June 30, 2019			June 30, 2018			June 30, 2019			June 30, 2018
Net income	$	1,745		$	1,396		$	5,400	$	4,261		$	2,115		$	1,832		$	3,361		$	4,628

Other comprehensive income (loss)

Unrealized gain (loss) on securities, net of tax of ($105) and $224 for the three and nine months ended September 30, 2017; and net of tax of $54 and $388 for the three and nine months ended September 30, 2016		(206	)		104			434		756
Unrealized gain (loss) on securities, net of tax of $141 and $342 for the three and six months ended June 30, 2019; and net of tax of ($29) and ($226) for the three and six months ended June 30, 2018													537			(105	)		1,291			(848	)

Reclassification adjustment net of tax of $27 and $25 for the three and nine months ended September 30, 2017; and net of tax of ($62) and ($64) for the three and nine months ended September 30, 2016		51			(119	)		49		(125	)
Reclassification adjustment for realized gains on sales of securities, net of tax of ($13) and ($13) for the three and six months ended June 30, 2019; and net of tax of $0 and $0 for the three and six months ended June 30, 2018													(51	)		-			(51	)		-

Total other comprehensive income (loss)		(155	)		(15	)		483		631			486			(105	)		1,240			(848	)

Total comprehensive income	$	1,590		$	1,381		$	5,883	$	4,892		$	2,601		$	1,727		$	4,601		$	3,780

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE ~~NINE~~THREE AND SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019 AND ~~2016~~2018
(~~dollars~~Dollars in thousands, except per share data)
(Unaudited)

										Accumulated													Accumulated
										Other													Other
	Common			Capital			Retained			Comprehensive						Common		Capital		Retained			Comprehensive
	Stock			Surplus			Earnings			Income (Loss)			Total			Stock *		Surplus *		Earnings			Income (Loss)			Total
Balance, December 31, 2015	$	6,031		$	22,214		$	28,170		$	(118	)	$	56,297
Balance, December 31, 2017																$	6,027	$	22,038	$	37,923		$	(883	)		65,105
Stock options exercised		28			151			-			-			179			16		128		-			-			144
Stock purchased under stock repurchase plan		(137	)		(1,123	)		-			-			(1,260	)
Stock option expense		-			20			-			-			20			-		1		-			-			1
Cash dividends declared ($0.36 per share)		-			-			(850	)		-			(850	)
Stock dividend distributable *																	301		4,673		(4,974	)		-			-
Cash dividends declared ($0.19 per share)																	-		-		(482	)		-			(482	)
Net income																	-		-		2,796			-			2,796
Other comprehensive loss																	-		-		-			(743	)		(743	)
Balance, March 31, 2018																$	6,344	$	26,840	$	35,263		$	(1,626	)	$	66,821
Stock options exercised																	9		65		-			-			74
Stock option expense																	-		16		-			-			16
Cash dividends declared ($0.30 per share)																	-		-		(763	)		-			(763	)
Net income																	-		-		1,832			-			1,832
Other comprehensive loss																	-		-		-			(105	)		(105	)
Balance, June 30, 2018																$	6,353	$	26,921	$	36,332		$	(1,731	)	$	67,875

																							Accumulated
																							Other
																Common		Capital		Retained			Comprehensive
																Stock **		Surplus **		Earnings			Income (Loss)			Total
Balance, December 31, 2018																$	6,359	$	27,013	$	38,647		$	(1,277	)		70,742
Stock options exercised																	14		88		-			-			102
Stock option expense																	-		24		-			-			24
Stock grants																	27		397		-			-			424
Cash dividends declared ($0.30 per share)																	-		-		(767	)		-			(767	)
Net income		-			-			4,261			-			4,261			-		-		1,246			-			1,246
Other comprehensive income		-			-			-			631			631			-		-		-			754			754
Balance, September 30, 2016	$	5,922		$	21,262		$	31,581		$	513		$	59,278

Balance, December 31, 2016	$	5,922		$	21,152		$	32,759		$	(779	)	$	59,054
Stock options exercised		105			876			-			-			981
Balance, March 31, 2019																$	6,400	$	27,522	$	39,126		$	(523	)	$	72,525
Stock option expense		-			8			-			-			8			-		23		-			-			23
Cash dividends declared ($0.45 per share)		-			-			(1,077	)		-			(1,077	)
Stock dividend distributable **																	320		4,593		(4,913	)		-			-
Cash dividends declared ($0.30 per share)																	-		-		(806	)		-			(806	)
Net income		-			-			5,400			-			5,400			-		-		2,115			-			2,115
Other comprehensive income		-			-			-			483			483			-		-		-			486			486
Balance, September 30, 2017	$	6,027		$	22,036		$	37,082		$	(296	)	$	64,849
Balance, June 30, 2019																$	6,720	$	32,138	$	35,522		$	(37	)	$	74,343

*		Common stock and capital surplus as of March 31 and June 30, 2018 includes the 5% stock dividend distributed effective April 13, 2018.

**		Common stock and capital surplus as of June 30, 2019 includes the 5% stock dividend distributable effective July 5, 2019.

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)

	For the nine months ended						For the six months ended
	September 30, 2017			September 30, 2016			June 30, 2019			June 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,400		$	4,261		$	3,361		$	4,628
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recovery of) loan losses		213			(291	)
Provision for loan losses								620			605
Net amortization and accretion of securities		327			335			133			140
Net losses (gains) on sales and calls of securities		74			(189	)
Net gains on sale of securities								(64	)		-
Net losses on sales of assets		-			21			-			33
Earnings on bank owned life insurance		(312	)		(331	)		(576	)		(221	)
Amortization of intangible assets		87			68			51			58
Depreciation and other amortization		858			879			532			565
Stock option/stock grant expense		8			20
Decrease in accrued interest receivable and other assets		18			302
Decrease in accrued interest payable and other liabilities		(205	)		(540	)
Stock option expense								47			17
Stock grants, unrestricted								424			-
Net change in:
Accrued interest receivable and other assets								(48	)		208
Accrued interest payable and other liabilities								64			(289	)
Net cash provided by operating activities		6,468			4,535			4,544			5,744

CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted investments								(1	)		(887	)
Purchases of available for sale securities		(45,290	)		(18,982	)		(6,946	)		-
Net increase in restricted investments		(1,000	)		(28	)
Proceeds from maturities, calls and principal payments of available for sale securities		7,212			21,473			2,547			2,706
Proceeds from sales of available for sale securities		24,022			2,672			10,443			-
Net increase in organic loans		(9,109	)		(14,545	)
Net (increase) decrease in purchased loans		(9,857	)		7,322
Net decrease (increase) in organic loans								14,168			(9,470	)
Net decrease in purchased loans								565			3,299
Cash payment for wealth management book of business		(300	)		(700	)		(50	)		(100	)
Proceeds from settlement of bank owned life insurance								1,176			-
Purchase of bank premises and equipment		(249	)		(477	)		(84	)		(357	)
Net cash used in investing activities		(34,571	)		(3,265	)
Net cash provided by (used in) investing activities								21,818			(4,809	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW accounts, and money market accounts		(16,404	)		4,925
Net (decrease) increase in certificates of deposit and other time deposits		(977	)		3,787
Net decrease in demand deposits, NOW accounts, and money market accounts								(32,476	)		(28,472	)
Net increase in certificates of deposit and other time deposits								13,462			22,256
Net decrease in repurchase agreements		(7,699	)		(9,616	)		-			(5,705	)
Net increase in short term borrowings		25,000			-
Common stock repurchased		-			(1,260	)
Net increase in other short term borrowings								-			20,000
Proceeds from stock options exercised		981			179			102			218
Cash dividends paid		(1,000	)		(784	)		(1,530	)		(941	)
Net cash used in financing activities		(99	)		(2,769	)		(20,442	)		7,356

NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(28,202	)	$	(1,499	)	$	5,920		$	8,291

CASH AND CASH EQUIVALENTS:
Beginning of period	$	38,500		$	43,527		$	18,874		$	18,277
End of period	$	10,298		$	42,028		$	24,794		$	26,568

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	899		$	708		$	1,904		$	1,048
Taxes	$	2,900		$	2,029		$	1,150		$	1,415

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on available for sale securities	$	732		$	955
Unrealized gain (loss) on available for sale securities							$	1,569		$	(1,074	)
Initial right-of-use assets obtained in exchange for new operating lease liabilities							$	4,279		$	-

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~September~~June 30, ~~2017~~2019

Note 1. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its ~~subsidiary~~subsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), ~~and the Bank’s subsidiary,~~a registered investment adviser. Effective July 1, 2018, VNBTrust, National Association ~~which offers~~(“VNBTrust”), formerly a subsidiary of the Bank, was merged into Virginia National Bank, and the Bank continued to offer investment management, wealth advisory and trust and estate administration services under the name of VNB Wealth Management, ~~(“VNBTrust”~~also referred to herein as “VNB Wealth.” All references herein to VNB Wealth Management or ~~“VNB Wealth”).~~VNB Wealth refer to VNBTrust for periods prior to July 1, 2018. In 2019, the services offered by VNB Wealth are provided by Masonry Capital or by the Bank under VNB Trust & Estate Services or VNB Investment Services. All significant intercompany balances and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included.

The preparation of financial statements in conformity with GAAP and the reporting guidelines prescribed by regulatory authorities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses (including impaired loans), other-than-temporary impairment of securities, intangible assets, and fair value ~~measurements, and deferred tax assets.~~measurements. Operating results for the three-month and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2019.

The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended December 31, ~~2016.~~2018. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

~~Adoption of New Accounting Standard~~

Accounting Standards Update (ASU) 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employer Share-Based Payment Accounting,” became effective with the quarter ended March 31, 2017. This ASU simplifies several aspects of the accounting for share-based payment award transactions, one of which is the recognition of excess tax benefits and deficiencies related to share-based payments. Prior to the adoption of ASU 2016-09, such tax consequences were recognized as components of additional paid-in capital. With the adoption of this ASU, tax benefits and deficiencies are recognized within income tax expense. In accordance with the adoption provisions of ASU 2016-09, the Company has prospectively applied the requirement to present excess tax benefits as an operating activity on the statement of cash flows. Further, the Company continues to estimate the number of award forfeitures in recording costs for share-based awards. The adoption did not have a material impact on our financial statements for the nine months ended September 30, 2017.

Recent Accounting Pronouncements

~~In January 2016, the FASB issued ASU 2016-01, “Financial~~Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); and 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

Credit LossesIn February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers.” The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is in the early stages of assessing the impact that ASU 2016-02 will have on its consolidated financial statements, including evaluating leases and contracts which are covered and calculating the impact on its assets and liabilities. The Company does not expect the amendment to have a material impact on its net income but does anticipate an increase in assets and liabilities due to the recognition of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases, primarily real estate leases for office space, as well as additional disclosure on all our lease obligations.

~~During~~ June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. However, on July 17, 2019, the FASB Board decided to delay the effective date of this ASU for smaller reporting companies, such as the Company. The FASB Board directed its staff to draft a proposed Accounting Standards Update for vote by written ballot on the proposed amendment regarding the CECL effective date. If the proposed amendment is approved, the effective date for the Company will extend to fiscal years beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements. Early in 2017, the Company formed a cross-functional steering committee, including some members of senior management, to provide governance and guidance over the project plan. The steering committee ~~has begun~~meets regularly to address the compliance requirements, data requirements and sources, and analysis efforts ~~which will be~~that are required to adopt these new requirements. In addition to attending seminars and webinars on this topic with regulators and other experts, the committee is working closely with the Company’s vendor to gather additional loan data which is anticipated to be needed for this ~~calculation.~~calculation and is attending training sessions on the software to be utilized to calculate the expected credit losses. The extent of the change is indeterminable at this time as it will be dependent upon portfolio composition and credit quality at the adoption date, as well as economic conditions and forecasts at that time. Upon adoption, the impact to the allowance for credit losses (currently allowance for loan losses) will have an offsetting one-time cumulative-effect adjustment to retained earnings.

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

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

~~During~~ January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

~~During March 2017,~~Disclosure Framework - Changes to the Disclosure Requirements for Fair Value MeasurementIn August 2018, the FASB issued ASU ~~2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.~~2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in ~~this ASU shorten~~Topic 820 to add disclosures regarding changes in unrealized gains and losses, the ~~amortization period for certain callable debt securities purchased at a premium. Upon adoption~~range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the ~~standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity.~~narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, ~~2018,~~2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

Financial Instruments – Credit Losses – Derivatives and HedgingIn April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group meetings. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle.permitted. The Company is currently assessing the impact that ASU ~~2017-08~~2019-04 will have on its consolidated financial statements.

~~During~~Financial Instruments – Credit Losses – Targeted Transition ReliefIn May ~~2017,~~2019, the FASB issued ASU ~~2017-09, “Compensation – Stock Compensation~~2019-05, “Financial Instruments—Credit Losses (Topic ~~718)~~326): ~~Scope of Modification Accounting.~~Targeted Transition Relief.” The amendments in this ASU provide ~~guidance~~entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on ~~determining which~~an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes ~~to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.~~in fair value flowing through earnings. The amendments are effective for ~~all entities for annual periods, including~~fiscal years beginning after December 15, 2019, and interim periods within those ~~annual periods, beginning after December 15, 2017.~~fiscal years. The amendments should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the balance sheet. Early adoption is ~~permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued.~~permitted. The Company is currently assessing the impact that ASU ~~2017-09~~2019-05 will have on its consolidated financial statements.

During August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption of ASU 2017-12 to have a material impact on its consolidated financial statements.

Note 2. Securities

The amortized cost and fair values of securities available for sale as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 were as follows (dollars in thousands):

September 30, 2017	Amortized		Gross Unrealized		Gross Unrealized			Fair
June 30, 2019										Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	19,500	$	-	$	(334	)	$	19,166	$	19,500	$	-	$	(39	)	$	19,461
Mortgage-backed securities/CMOs		31,819		2		(197	)		31,624		26,611		23		(169	)		26,465
Municipal bonds		20,178		125		(44	)		20,259		10,785		143		(6	)		10,922
Total Securities Available for Sale										$	56,896	$	166	$	(214	)	$	56,848
	$	71,497	$	127	$	(575	)	$	71,049

December 31, 2016	Amortized		Gross Unrealized		Gross Unrealized			Fair
December 31, 2018										Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		(Losses)			Value		Cost		Gains		(Losses)			Value
U.S. Government agencies	$	14,998	$	-	$	(497	)	$	14,501	$	19,500	$	-	$	(526	)	$	18,974
Corporate bonds		2,017		-		(7	)		2,010
Mortgage-backed securities/CMOs		25,470		27		(515	)		24,982		25,901		1		(839	)		25,063
Municipal bonds		15,357		30		(218	)		15,169		17,608		12		(265	)		17,355
	$	57,842	$	57	$	(1,237	)	$	56,662
Total Securities Available for Sale										$	63,009	$	13	$	(1,630	)	$	61,392

As of ~~September~~June 30, ~~2017,~~2019, there were ~~$55.1~~$36.9 million, or 4527 issues of individual securities, in a loss position. These securities have an unrealized loss of ~~$575~~$214 thousand and consisted of 2319 mortgage-backed/CMOs, ~~7 agency~~4 municipal bonds, and ~~15 municipal~~4 agency bonds.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at ~~September~~June 30, ~~2017~~2019, and December 31, ~~2016~~2018 (dollars in thousands):

September 30, 2017
June 30, 2019
	Less than 12 Months					12 Months or more					Total					Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized					Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	9,931	$	(69	)	$	9,235	$	(265	)	$	19,166	$	(334	)	$	-	$	-		$	11,961	$	(39	)	$	11,961	$	(39	)
Mortgage-backed/CMOs		23,918		(147	)		2,145		(50	)		26,063		(197	)		4,041		(7	)		19,374		(162	)		23,415		(169	)
Municipal bonds		9,279		(37	)		612		(7	)		9,891		(44	)		1,048		(5	)		503		(1	)		1,551		(6	)
	$	43,128	$	(253	)	$	11,992	$	(322	)	$	55,120	$	(575	)	$	5,089	$	(12	)	$	31,838	$	(202	)	$	36,927	$	(214	)

December 31, 2016
December 31, 2018
	Less than 12 Months					12 Months or more					Total					Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized					Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	14,501	$	(497	)	$	-	$	-		$	14,501	$	(497	)	$	-	$	-		$	18,974	$	(526	)	$	18,974	$	(526	)
Corporate bonds		2,010		(7	)		-		-			2,010		(7	)
Mortgage-backed/CMOs		18,980		(441	)		2,629		(74	)		21,609		(515	)		-		-			24,657		(839	)		24,657		(839	)
Municipal bonds		10,382		(218	)		-		-			10,382		(218	)		4,983		(34	)		10,722		(231	)		15,705		(265	)
	$	45,873	$	(1,163	)	$	2,629	$	(74	)	$	48,502	$	(1,237	)	$	4,983	$	(34	)	$	54,353	$	(1,596	)	$	59,336	$	(1,630	)

The Company’s securities portfolio is primarily made up of fixed rate bonds, the prices of which move inversely with interest rates. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. At the end of any accounting period, the portfolio may have both unrealized gains and losses. Management does not believe any of the securities in an unrealized loss position are impaired due to credit quality. Accordingly, as of ~~September~~June 30, ~~2017,~~2019, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s consolidated income statement.

An “other-than-temporary impairment” (“OTTI”) is considered to exist if either of the following conditions are met: it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, or the Company does not expect to recover the security’s entire amortized cost basis (even if the Company does not intend to sell). In the event that a security would suffer impairment for a reason that was “other than temporary,” the Company would be expected to write down the security’s value to its new fair value, and the amount of the write down would be included in earnings as a realized loss. As of ~~September~~June 30, ~~2017,~~2019, management has concluded that none of its investment securities have an OTTI based upon the information available. Additionally, management has the ability to hold any security with an unrealized loss until maturity or until such time as the value of the security has recovered from its unrealized loss position.

Securities having carrying values of ~~$27.4~~$5.0 million at ~~September~~June 30, ~~2017~~2019 were pledged as collateral to secure public ~~deposits and repurchase agreements.~~deposits. At December 31, ~~2016,~~2018, securities having carrying values of ~~$34.2~~$18.0 million were similarly pledged.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, proceeds from the sales of securities amounted to ~~$24.0~~$10.4 million, ~~with gross~~and realized ~~losses~~gain on these securities ~~of $74~~netted $64 thousand. For the ~~nine~~six months ended ~~September~~June 30, ~~2016, proceeds from the~~2018, there were no sales of securities amounted to $2.7 million, and gross realized gains on these securities were $44 thousand, and an additional $10.7 million in calls of securities accounted for the additional $145 thousand in realized gains.securities.

Restricted securities are securities with limited marketability and consist of stock in the Federal Reserve Bank of Richmond (“FRB”), the Federal Home Loan Bank of Atlanta (“FHLB”), and CBB Financial Corporation (“CBBFC”), the holding company for Community Bankers Bank. These restricted securities, totaling ~~$2.7 million as of September 30, 2017 and~~ $1.7 million as of both June 30, 2019 and December 31, ~~2016,~~2018 are carried at cost.

Note 3. Loans

The composition of the loan portfolio by loan classification at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 appears below (dollars in thousands).

	September 30,			December 31,			June 30,			December 31,
	2017			2016			2019			2018
Commercial
Commercial and industrial - organic	$	42,230		$	41,560		$	39,376		$	41,526
Commercial and industrial - government guaranteed		22,722			5,550			35,143			31,367
Commercial and industrial - syndicated		17,262			19,107			12,091			12,134
Total commercial and industrial		82,214			66,217			86,610			85,027
Real estate construction and land
Residential construction		2,310			395			1,021			1,552
Commercial construction		12,788			4,422			3,663			5,078
Land and land development		10,049			10,865			9,636			10,894
Total construction and land		25,147			15,682			14,320			17,524
Real estate mortgages
1-4 family residential, first lien, investment		39,251			37,538			40,807			40,311
1-4 family residential, first lien, owner occupied		16,809			16,629			16,304			16,775
1-4 family residential, junior lien		3,393			2,871			2,894			3,169
1-4 family residential - purchased								18,451			18,647
Home equity lines of credit, first lien		8,968			7,912			8,544			8,325
Home equity lines of credit, junior lien		13,498			14,022			9,472			10,912
Farm		10,551			11,253			9,298			10,397
Multifamily		31,948			31,052			24,432			27,328
Commercial owner occupied		77,823			83,296			95,286			93,800
Commercial non-owner occupied		107,828			107,062			116,890			123,214
Total real estate mortgage		310,069			311,635			342,378			352,878
Consumer
Consumer revolving credit		22,459			20,373			24,341			21,540
Consumer all other credit		9,705			11,328			4,196			5,530
Student loans purchased		51,430			56,900			49,918			54,691
Total consumer		83,594			88,601			78,455			81,761
Total loans		501,024			482,135			521,763			537,190
Less: Allowance for loan losses		(3,824	)		(3,688	)		(4,817	)		(4,891	)
Net loans	$	497,200		$	478,447		$	516,946		$	532,299

The balances in the table above include unamortized premiums and net deferred loan costs and fees. As of ~~September~~June 30, ~~2017,~~2019, and December 31, 2018, unamortized premiums on loans purchased were ~~$2.1~~$2.6 million ~~with $700 thousand in unamortized premiums recorded as of December 31, 2016.~~and $2.5 million, respectively. Net deferred loan costs (fees) totaled ~~$236~~$95 thousand and ~~$344~~$129 thousand as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

Accounting guidance requires certain disclosures about investments in impaired loans, the allowance for loan losses and interest income recognized on impaired loans. A loan is considered impaired when it is probable that the Company will be unable to collect all principal and interest amounts when due according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and current economic conditions.

Following is a breakdown by class of the loans classified as impaired loans as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. These loans are reported at their recorded investment, which is the carrying amount of the loan as reflected on the Company’s balance sheet, net of charge-offs and other amounts applied to reduce the net book balance. Average recorded investment in impaired loans is computed using an average of month-end balances for these loans for either the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 or the twelve months ended December 31, ~~2016.~~2018. Interest income recognized is for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 or the twelve months ended December 31, ~~2016.~~2018. (Dollars below reported in thousands.)

Included in the impaired loans above are non-accrual loans. Generally, loans are placed on non-accrual when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other non-accrual loans is recognized only to the extent of interest payments received. The recorded investment in non-accrual loans is shown below by class (dollars in thousands):

Additionally, Troubled Debt Restructurings (“TDRs”) are considered impaired loans. TDRs occur when the Company agrees to modify the original terms of a loan by granting a concession that it would not otherwise consider due to the deterioration in the financial condition of the borrower. These concessions are done in an attempt to improve the paying capacity of the borrower, and in some cases to avoid foreclosure, and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

Based on regulatory guidance on Student Lending, ~~issued in May, 2016,~~ the Company has classified 6168 of its student loans purchased as TDRs for a total of ~~$937 thousand~~$1.2 million as of ~~September~~June 30, ~~2017.~~2019. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. AsInitially, all student loans ~~purchased are~~were fully insured by a surety bond, and the Company ~~does~~did not expect to experience a loss on these loans. Based on the loss of insurance after July 27, 2018 due to the insolvency of the insurer, management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan losses; interest continues to accrue on these TDRs during any deferment and forbearance periods.

The following provides a summary, by class, of TDRs that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and TDRs that have been placed in non-accrual status, which are considered to be nonperforming (dollars in thousands).

A summary of loans shown above that were modified under the terms of a TDR during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 is shown below by class (dollars in thousands). The Post-Modification Recorded Balance reflects the period end balances, inclusive of any interest capitalized to principal, partial principal paydowns, and principal charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

~~There~~During the six months ended June 30, 2019, there were notwo loans modified as TDRs that subsequently defaulted ~~during the nine months ended September 30, 2017 or the twelve months ended December 31, 2016 that were~~which had been modified as TDRs during the twelve months prior to default. These student loans had a balance of $2 thousand prior to being charged off. There was one loan modified as a TDR that subsequently defaulted during the year ending December 31, 2018 which had been modified as a TDR during the twelve months prior to default. This student loan had a balance of $33 thousand prior to being charged off.

There were no loans secured by 1-4 family residential property that were in the process of foreclosure at either ~~September~~June 30, ~~2017~~2019 or December 31, ~~2016.~~2018.

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s quarterly evaluation of the collectability of the loan portfolio, credit concentrations, historical loss experience, specific impaired loans, and economic conditions. To determine the total allowance for loan losses, the Company estimates the reserves needed for each segment of the portfolio, including loans analyzed individually and loans analyzed on a pooled basis. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows.

For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Within these segments, the Company has sub-segmented its portfolio by classes within the segments, based on the associated risks within these classes.

Management utilizes a loss migration model for determining the quantitative risk assigned to unimpaired loans in order to capture historical loss information at the loan level, track loss migration through risk grade deterioration, and increase efficiencies related to performing the calculations. The quantitative risk factor for each loan class primarily utilizes a migration analysis loss method based on loss history for the prior twelve quarters.

The migration analysis loss method is used for all loan classes except for the following:

Furthermore, a nominal loss reserve is applied to loans rated ~~“Good”~~“Good,” as described below, in an abundance of caution.

Under the migration analysis method, average loss rates are calculated at the risk grade and class levels by dividing the twelve-quarter average net charge-off amount by the twelve-quarter average loan balances. Qualitative factors are combined with these quantitative factors to arrive at the overall general allowances.

The Company’s internal creditworthiness grading system is based on experiences with similarly graded loans. The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. Additionally, external reviews of a portion of the credits are conducted on a semi-annual basis.

Loans that trend upward on the risk ratings scale, toward more positive risk ratings, generally exhibit lower risk factor characteristics. Conversely, loans that migrate toward more negative ratings generally will result in a higher risk factor being applied to those related loan balances.

A 0% historical loss factor applied, as these loans are secured by cash or fully guaranteed by a U.S. government agency and represent a minimal risk. The Company has never experienced a loss within this category.

A 0% historical loss factor applied, as these loans represent a low risk and are secured by marketable collateral within margin. The Company has never experienced a loss within this category.

These loans have an acceptable risk but require more attention than normal servicing. A historical loss factor for loans rated “Watch” is applied to current balances of like-rated loans pooled by class.

These potential problem loans are currently protected but are potentially weak. A historical loss factor for loans rated “Special Mention” is applied to current balances of like-rated loans pooled by class.

These problem loans are inadequately protected by the sound worth and paying capacity of the borrower and/or the value of any collateral pledged. These loans may be considered impaired and evaluated on an individual basis. Otherwise, a historical loss factor for loans rated “Substandard” is applied to current balances of all other “Substandard” loans pooled by class.

Loans with this rating have significant deterioration in the sound worth and paying capacity of the borrower and/or the value of any collateral pledged, making collection or liquidation of the loan in full highly questionable. These loans would be considered impaired and evaluated on an individual basis.

The following represents the loan portfolio designated by the internal risk ratings assigned to each credit as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

In addition, the adequacy of the Company’s allowance for loan losses is evaluated through reference to eight qualitative factors, listed below and ranked in order of importance:

It has been the Company’s experience that the first five factors drive losses to a much greater extent than the last three factors; therefore, the first five factors are weighted more heavily. Qualitative factors are not assessed against loans rated “Excellent” or ~~“Good.~~“Good,” as the Company has never experienced a loss within these categories.

For each segment and class of loans, management must exercise significant judgment to determine the estimation method that fits the credit risk characteristics of its various segments. Although this evaluation is inherently subjective, qualified management utilizes its significant knowledge and experience related to both the Company’s market and the history of the Company’s loan losses.

Impaired loans are individually evaluated and, if deemed appropriate, a specific allocation is made for these loans. In reviewing the loans classified as impaired loans totaling ~~$2.5~~$2.6 million at ~~September~~June 30, ~~2017, there was no~~2019, specific valuation allowance ~~on any of these loans~~was recognized after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the borrower. The $51 thousand in the allowance total shown below as individually evaluated for impairment was attributed to the impaired student loans that required an allowance as of June 30, 2019 due to the loss of the insurance on this portfolio as discussed previously.

A summary of the transactions in the Allowance for Loan Losses by loan portfolio segment for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and the year ended December 31, ~~2016~~2018 appears below (dollars in thousands):

~~Allowance for Loan Losses Rollforward by Portfolio Segment~~
~~As of and for the period ended September 30, 2017~~

As previously mentioned, one of the major factors that the Company uses in evaluating the adequacy of its allowance for loan losses is changes in the volume of delinquent loans. Management monitors payment activity on a regular basis. For all classes of loans, the Company considers the entire balance of the loan to be contractually delinquent if the minimum payment is not received by the due date. Interest and fees continue to accrue on past due loans until they are changed to non-accrual status.

The following tables show the aging of past due loans as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016. Also included are loans that are 90 or more days past due but still accruing, because they are well secured and in the process of collection.~~2018. (Dollars below reported in thousands.)

On February 1, 2016 (the “Effective Date”), VNB Wealth purchased the book of business, including interest in the client relationships (“Purchased Relationships”), from a current officer (the “Seller”) of VNB Wealth pursuant to an employment and asset purchase agreement (the “Purchase Agreement”). Prior to becoming an employee of VNB Wealth and until the Effective Date of the sale, the Seller provided services to these Purchased Relationships as a sole proprietor. As of January 15, 2016, the fair value of the assets under management associated with the Purchased Relationships totaled $31.5 million. Under the terms of the Purchase Agreement, the Company will receive all future revenue for investment management, advisory, brokerage, insurance, consulting, trust and related services performed for the Purchased Relationships.

The purchase price of $1.2 million is payable over a five year period. During the first quarter of 2016, the Company recognized goodwill and other intangible assets arising from this purchase. As required under ASC Topic 805, “Business Combinations,” using the acquisition method of accounting, below is a summary of the net asset values, as determined by an independent third party, based on the fair value measurements and the purchase price. The intangible assets identified below will be amortized using a straight line method over the estimated useful life, and the amortized cost will be shown as noninterest expense. In accordance with ASC 350, “Intangibles-Goodwill and Other,” the Company will review the carrying value of indefinite lived goodwill at least annually or more frequently if certain impairment indicators exist. (Dollars below reported in thousands.)

Through the nine months ended September 2017 and 2016, the Company recognized $87 thousand and $68 thousand, respectively, in amortization expense from these identified intangible assets with a finite life. The net carrying value of $604 thousand will be recognized as amortization expense in future reporting periods through 2026. The following shows the gross and net balance of these intangible assets as of September 30, 2017. (Dollars below reported in thousands.)

As of September 30, 2017, the Company carried a contingent liability of $156 thousand, representing the net of the fair value of the purchase price, less the initial two annual payments made to the Seller. The remaining three annual payments as delineated in the Purchase Agreement will be paid from this liability.

On ~~September 22, 2014,~~June 13, 2019, the ~~Company announced the approval by its~~ Board of Directors ofapproved a stock ~~repurchase program authorizing repurchase~~dividend of ~~up to 400,000~~five percent (5%) on the outstanding shares of common stock of the ~~Company's common~~Company (or .05 share for each share outstanding) which was issued on July 5, 2019 to all shareholders of record as of the close of business on June 26, 2019, referred to as the “5% Stock Dividend”. Shareholders received cash in lieu of any fractional shares ~~through September 18, 2015.~~that they otherwise would have been entitled to receive in connection with the stock dividend. The ~~Company announced~~price paid for fractional shares was based on ~~September 21, 2015 that its Board of Directors extended~~ the ~~program for another year. A total of 343,559 shares at a weighted~~volume-weighted average price of ~~$22.89~~a share of common stock for the most recent three (3) days prior to the record date during which a trade of the Company’s stock occurred.

For the following table, share and per share ~~were repurchased through~~data have been adjusted to reflect the ~~program.~~5% Stock Dividend. The ~~program expired on September 18, 2016.~~

~~The following~~table shows the weighted average number of shares used in computing net income per common share and the effect on the weighted average number of shares of diluted potential common stock for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. Potential dilutive common stock equivalents have no effect on net income available to common shareholders. (Dollars below reported in thousands except per share data.)

For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2017,~~2019, there were no66,308 option shares, as adjusted, considered anti-dilutive and excluded from this calculation. For the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2016, option~~2018, there were 65,888 options shares, ~~totaling 59,110 were~~as adjusted, considered anti-dilutive and ~~were~~ excluded from this calculation.

At the Annual Shareholders Meeting on May 21, 2014, shareholders approved the Virginia National Bankshares Corporation 2014 Stock Incentive Plan (“2014 Plan”). The 2014 Plan makes available up to ~~250,000~~275,625 shares of the Company’s common stock, as adjusted by the 5% Stock Dividend and prior stock dividends, to be issued to plan participants. ~~Similar to the Company’s 2003 Stock Incentive Plan (“2003 Plan”) and 2005 Stock Incentive Plan (“2005 Plan”), the~~The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock and other stock based awards. No new grants will be issued under the ~~2003 Plan or the~~ 2005 Plan as ~~these plans have~~this plan has expired.

For all of the Company’s stock incentive plans (the “Plans”), the option price of incentive stock options will not be less than the fair value of the stock at the time an option is granted. Nonqualified stock options may be granted at prices established by the Board of Directors, including prices less than the fair value on the date of grant. Outstanding stock options generally expire in ten years from the grant date. Stock options generally vest by the fourth or fifth anniversary of the date of the grant.

A summary of the shares issued and available under each of the Plans is shown below as of ~~September~~June 30, ~~2017.~~2019. Share data and exercise price range per share have been adjusted to reflect the 5% Stock Dividend. Although the ~~2003 Plan and~~ 2005 Plan ~~have~~has expired and no new grants will be issued under ~~these plans,~~this plan, there were options issued before the ~~plans~~plan expired which are still outstanding as shown below.

The Company accounts for all of its stock incentive plans under recognition and measurement accounting principles which require that the compensation cost relating to stock-based payment transactions be recognized in the financial statements. Stock-based compensation arrangements include stock options and restricted stock. All stock-based payments to employees are required to be valued at a fair value on the date of grant and expensed based on that fair value over the applicable vesting period. For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recognized $8$47 thousand and ~~$20~~$17 thousand, respectively, in compensation expense for stock options. As of ~~September~~June 30, ~~2017,~~2019, there was ~~$10~~$359 thousand in ~~unamortized~~unrecognized compensation expense remaining to be recognized in future reporting periods through ~~2021.~~2024.

Changes in the stock options outstanding related to all of the Plans are summarized ~~as follows (dollars~~below. Share and per share data have been adjusted to reflect the 5% Stock Dividend. (Dollars in thousands except per share data):

The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. ~~There were no stock~~Stock option grants for 420 and 65,888 shares, as adjusted for the 5% Stock Dividend, were issued during the ~~twelve months ended December 31, 2016. During the~~ first ~~nine~~six months of ~~2017, a stock option grant of 2,000 shares was issued,~~2019 and ~~the~~2018, respectively. The fair value ~~on the grant issued~~of each option granted in 2019 was estimated based on the assumptions noted in the following table:

Summary information pertaining to options outstanding at ~~September~~June 30, ~~2017~~2019 is ~~as follows:~~shown below. Share and per share data have been adjusted to reflect the 5% Stock Dividend.

On February 20, 2019, a total of 11,535 shares of stock, as adjusted for the 5% Stock Dividend, were granted to non-employee directors and certain members of executive management for services to be provided during the year ending December 31, 2019. Based on the market price on February 20, 2019 of $36.72, as adjusted for the 5% Stock Dividend, the total expense for these shares will be $424 thousand which will be expensed over the twelve months of 2019 as those services are provided. For the six months ended June 30, 2019, $212 thousand of this total has been realized in stock grant expense. There were no ~~restricted~~ stock grants ~~outstanding throughout 2016 or as of September 30, 2017. No restricted stock grants were awarded~~issued during ~~2016 or~~ the ~~first nine months of 2017.~~year ended December 31, 2018.

The Company follows ASC 820, “Fair Value Measurements and Disclosures,” to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in the principal or most advantageous market for the asset or liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

The following tables present the balances measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 (dollars in thousands):

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

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

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $2.5 million as of September 30, 2017 and $2.4 million as of December 31, 2016. None of these impaired loans required a valuation allowance after consideration was given for each borrowing as to the fair value of the collateral on the loan or the present value of expected future cash flows from the customer.

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the Allowance for Loan Losses. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Income. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company had no OREO property.

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

Impaired loans that are measured based on expected future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest are not recorded at fair value, and are therefore excluded from fair value disclosure requirements.

Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The Company had impaired loans of $2.6 million as of June 30, 2019 and $2.8 million as of December 31, 2018. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest rate.

ASC 825, “Financial Instruments,” requires disclosures about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

~~For those short-term~~The company uses the exit price notion in calculating the fair values of financial instruments ~~including cash, due from banks, federal funds sold and interest-bearing deposits maturing within ninety days, the carrying amount is a reasonable estimate of fair value.~~

Fair values for securities, excluding restricted securities, are based on third party vendor pricing models. The carrying value of restricted securities consists of stock in FRB, FHLB, and CBBFC and is based on the redemption provisions of each entity and therefore excluded from the following table.

~~The~~not measured at fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans, such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note.

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

~~The carrying amounts of repurchase agreements and other borrowings, including federal funds purchased and FHLB advances, approximate fair value.~~

Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. For the reporting period, the fair value of unfunded loan commitments and standby letters of credit were deemed to be immaterial and therefore, they have not been included in the following tables.a recurring basis.

The carrying values and estimated fair values of the Company's financial instruments as of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016~~2018 are as follows (dollars in thousands):

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

A component of the Company’s other comprehensive income, in addition to net income from operations, is the recognition of the unrealized gains and losses on available for sale securities, net of income taxes. Reclassifications of realized gains and losses on available for sale securities are reported in the income statement as “Gains (losses) on sales and calls of securities” with the corresponding income tax effect reflected as a component of income tax expense. Amounts reclassified out of accumulated other comprehensive income are presented below for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (dollars in thousands):

~~Virginia National Bankshares Corporation~~Beginning in 2019, the Company has ~~two~~four reportable ~~segments, the Bank and VNB Wealth.~~

The Company’s commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non-interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for this segment.

The VNB Wealth segment includes (a) trust income from the investment management, wealth advisory and trust and estate services offered by VNBTrust, comprised of both management fees and performance fees, (b) advisory and brokerage income from investment advisory, retail brokerage, annuity and insurance services offered under the name of VNB Investment Services and (c) royalty income from the sale of Swift Run Capital Management, LLC in 2013. More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2016 (the “Company’s 2016 Form 10-K”).

A management fee for administrative and technology support services provided by the Bank is charged to VNB Wealth. For both the nine months ended September 30, 2017 and 2016, management fees of $75 thousand were charged to VNB Wealth and eliminated in consolidated totals.

~~The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.~~segments. Each reportable segment is a strategic business unit that offers different products and services. They are managed separately, because each segment appeals to different markets and, accordingly, require different technology and marketing strategies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

A management fee for administrative and technology support services provided by the Bank is allocated to the other three lines of business previously combined under VNB Wealth. For both the six months ended June 30, 2019 and 2018, management fees totaling $50 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three months and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 is shown in the following tables (dollars in thousands). ~~The~~

* Not reportable. Asset information is not reported for these segments, as the assets previously allocated to VNB Wealth ~~total~~are reported at the Bank level subsequent to the merger of VNBTrust into the Bank effective July 1, 2018; also, assets specifically allocated to these VNB Wealth lines of business are insignificant and are no longer provided to the chief operating decision maker.

Prior to January 1, 2019, Virginia National Bankshares Corporation had two reportable segments, the Bank andVNB Wealth.

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. Lease payments for short-term leases are recognized as ~~shown~~lease expense on a straight-line basis over the lease term. Payments for leases with terms longer than twelve months are included in the determination of the lease liability.

The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $4.3 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease for a term similar to the length of the lease, including any probable renewal options available. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

Each of the Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables ~~represent~~present information about the ~~assets~~Company’s leases (dollars in thousands):

A maturity analysis of ~~VNB Wealth~~operating lease liabilities and ~~should~~reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows (dollars in thousands):

The Company is currently involved in pending and threatened legal proceedings, both relating to the same matter. While management does not ~~be confused~~believe that the claims against the Company have merit and is prepared to vigorously defend such claims, the Company accrued a contingent liability of $300 thousand in accordance with ~~client assets under management.~~

applicable accounting guidance and based on the Company’s estimate of a range of possible loss. This amount (a) has been recognized as a loss and appears within other noninterest expense in the Consolidated Statements of Income for the three and six months ended June 30, 2019 and (b) appears as a contingent liability within accrued interest payable and other liabilities in the Consolidated Balance Sheet as of June 30, 2019.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Virginia National Bankshares Corporation’s consolidated financial statements, and notes thereto, for the year ended December 31, ~~2016,~~2018, included in the Company’s ~~2016~~2018 Form 10-K. Per share data for June 30, 2019 and all preceding periods disclosed have been adjusted to reflect the 5% stock dividend effective July 5, 2019 (the “5% Stock Dividend”). Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 are not necessarily indicative of the results for the year ending December 31, ~~2017~~2019 or any future period.

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q, including but not limited to, statements concerning future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses and plans and objectives for future operations, change in laws and regulations applicable to the Company and its subsidiaries, adequacy of funding sources, actuarial expected benefit payment, valuation of foreclosed assets, regulatory requirements, economic environment and other statements contained herein regarding matters that are not historical facts, are “forward-looking statements” as defined in the Securities Exchange Act of 1934. Such statements are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” “should” or words of similar meaning or other statements concerning the opinions or judgment of the Company and its management about future events. These statements are not historical facts but instead are subject to numerous assumptions, risks and uncertainties, and represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Any forward-looking statements made by the Company speak only as of the date on which such statements are made. Our actual results and financial position may differ materially from the anticipated results and financial condition indicated in or implied by these forward-looking statements. The Company makes no commitment to update or revise forward-looking statements in order to reflect new information or subsequent events or changes in expectations.

Factors that could cause our actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following: inflation, interest rates, market and monetary fluctuations; geopolitical developments including acts of war and terrorism and their impact on economic conditions; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; changes, particularly declines, in economic and business conditions, both generally and in the local markets in which the Company operates; the financial condition of the Company’s borrowers; competitive pressures on loan and deposit pricing and demand; changes in technology and their impact on the marketing of new products and services and the acceptance of these products and services by new and existing customers; the willingness of customers to substitute competitors’ products and services for the Company’s products and services; the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities and insurance); changes in accounting principles, policies and guidelines; the ability to retain key personnel; incorrect assumptions regarding the allowance for loan losses; risks and assumptions associated with mergers and acquisitions and other expansion activities; other risks and uncertainties described from time to time in press releases and other public filings; and the Company’s performance in managing the risks involved in any of the foregoing. The foregoing list of important factors is not exclusive, and the Company will not update any forward-looking statement, whether written or oral, that may be made from time to time.

The accounting and reporting policies followed by the Company conform, in all material respects, to GAAP and to general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The Company considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s consolidated financial statements. The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.

For additional information regarding critical accounting policies, refer to the Application of Critical Accounting Policies and Critical Accounting Estimates section under Item 7 in the Company’s ~~2016~~2018 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, ~~2016.~~2018.

The total assets of the Company as of ~~September~~June 30, ~~2017~~2019 were ~~$610.3~~$633.8 million. This is ~~a $5.3~~an $11.0 million ~~increase~~decrease from the ~~$605.0~~$644.8 million total assets reported at December 31, ~~2016~~2018 and a ~~$40.8~~$20.9 million ~~increase~~decrease from the ~~$569.5~~$654.7 million reported at ~~September~~June 30, ~~2016. The year-over-year net growth~~2018. A $15.4 million decrease in loans since December 31, 2018 was the major reason for the decrease in assets ~~was funded largely by a $23.5 million expansion in short-term borrowings and a $12.1 million expansion in deposits.~~since year-end.

The Company had overnight federal funds sold of ~~$3.2~~$12.3 million ~~at September~~as of June 30, ~~2017,~~2019, compared to ~~$28.5 million and $32.9~~$7.1 million as of December 31, ~~2016~~2018 and ~~September~~$18.3 million as of June 30, ~~2016, respectively.~~2018. Any excess funds are sold on a daily basis in the federal funds market. The Company intends to maintain sufficient liquidity at all times to meet its funding commitments.

The Company continues to participate in the Federal Reserve Bank of Richmond’s Excess Balance Account (“EBA”). The EBA is a limited-purpose account at the Federal Reserve Bank for the maintenance of excess cash balances held by financial institutions. The EBA eliminates the potential of concentration risk that comes with depositing excess balances with one or multiple correspondent banks.

The Company’s investment securities portfolio as of ~~September~~June 30, ~~2017~~2019 totaled ~~$73.8~~$58.5 million, ~~an increase~~a decrease of ~~$15.4~~$4.5 million ~~from~~compared with the ~~$58.4~~$63.0 million reported at December 31, ~~2016~~2018 and ~~an increase~~a decrease of ~~$1.6~~$8.2 million from the ~~$72.2~~$66.7 million reported at ~~September~~June 30, ~~2016.~~2018. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. ~~Throughout~~During June of 2019, management sold approximately $10.4 million of securities, realizing a gain of $64 thousand, to reposition the ~~third quarter of 2017, lower earning securities were sold and the proceeds were either used to purchase~~portfolio for higher yield. Approximately $6.9 million had been reinvested into higher yielding securities ~~or fund higher earning loans~~ as of June 30, 2019, and the ~~loan funding needs arose.~~remaining $3.5 million in purchases settle in July and August. At ~~September~~June 30, ~~2017,~~2019 and June 30, 2018, the investment securities holdings represented ~~12.1%~~9.2% and 10.2% of the Company’s total assets, ~~compared to 9.7% and 12.7% of total assets at December 31, 2016 and September 30, 2016,~~ respectively.

The Company’s investment securities portfolio included restricted securities totaling ~~$2.7 million as of September 30, 2017 and~~ $1.7 million as of June 30, 2019 and December 31, ~~2016 and September~~2018, compared to $3.2 million as of June 30, ~~2016.~~2018. These securities represent stock in the Federal Reserve Bank of Richmond (“FRB-R”), the Federal Home Loan Bank of Atlanta (“FHLB-A”), and CBB Financial Corporation (“CBBFC”), the holding company for Community Bankers Bank. The level of FRB-R and FHLB-A stock that the Company is required to hold is determined in accordance with membership guidelines provided by the Federal Reserve Bank Board of Governors or the Federal Home Loan Bank of Atlanta. The ~~$1.0 million increase from year-end~~decrease compared to June 30, 2018 was ~~required by FHLB-A as a result of~~due to the decrease in the Company’s short-term borrowing initiated ~~during~~with the ~~third~~FHLB-A from the second quarter of ~~2017.~~2018 to the second quarter of 2019. Stock ownership in the bank holding company for Community Bankers’ Bank provides the Bank with several benefits that are not available to non-shareholder correspondent banks. None of these restricted securities are traded on the open market and can only be redeemed by the respective issuer.

At ~~September~~June 30, ~~2017,~~2019, the unrestricted securities portfolio totaled ~~$71.0~~$56.8 million. The following table summarizes the Company's available for sale securities by type as of ~~September~~June 30, ~~2017,~~2019, December 31, ~~2016,~~2018, and ~~September~~June 30, ~~2016~~2018 (dollars in thousands):

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and reviewed quarterly for possible other-than-temporary impairments. During this review, management analyzes the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer, and the Company’s intent and ability to hold the security to recovery or maturity. These factors are analyzed for each individual security.

A management objective is to grow loan balances while maintaining the asset quality of the loan portfolio. The Company seeks to achieve this objective by maintaining rigorous underwriting standards coupled with regular evaluation of the creditworthiness of, and the designation of lending limits for, each borrower. The portfolio strategies include seeking industry, loan size, and loan type diversification in order to minimize credit exposure and originating loans in markets with which the Company is familiar. The predominant market area for loans includes Charlottesville, Albemarle County, Orange County, Harrisonburg, Winchester, Frederick County, Richmond and areas in the Commonwealth of Virginia that are within a 75 mile radius of any Virginia National Bank office.

As of ~~September~~June 30, ~~2017,~~2019, total loans were ~~$501.0~~$521.8 million, compared to ~~the balance of $482.1~~$537.2 million as of December 31, ~~2016~~2018 and ~~$430.9~~$535.0 million at ~~September~~June 30, ~~2016.~~2018. Loans as a percentage of total assets at ~~September~~June 30, ~~2017~~2019 were ~~82.1%~~82.3%, compared to ~~75.7%~~81.7% as of ~~September~~June 30, ~~2016.~~2018. Loans as a percentage of deposits at ~~September~~June 30, ~~2017~~2019 were ~~98.8%~~94.3%, compared to ~~87.0%~~99.7% as of ~~September~~June 30, ~~2016.~~2018. This loan-to-deposit ratio is in line with our strategy to achieve an effective mix of earning assets and liabilities on our balance sheet.

The following table summarizes the Company's loan portfolio by type of loan as of ~~September~~June 30, ~~2017,~~2019, December 31, ~~2016,~~2018, and ~~September~~June 30, ~~2016~~2018 (dollars in thousands):

~~From the $430.9 million outstanding at September 30, 2016, gross loans have increased $70.1~~Loan balances declined $15.4 million, or ~~16.3%.~~2.9%, since December 31, 2018 and declined $13.2 million, or 2.5%, from June 30, 2018. Over the one-year period, the ~~significant~~loan fluctuation consisted of $36.6 million in new funding from organic loan growth ~~was attributable to approximately $30.6~~and $28.0 million in net ~~organic loan~~ growth ~~supplemented~~in purchased loans, offset by ~~purchases of loans.~~$55.4 million in regular payoffs and normal amortization, $14.9 million in payoffs from businesses sold or properties sold by borrowers, and $7.5 million in a participation purchased being recalled by the primary lender. The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan ~~growth and enhance earnings.~~growth. Purchased loans with balances outstanding of ~~$91.4~~$115.6 million as of ~~September~~June 30, ~~2017~~2019 were comprised of:

Management will continue to evaluate loan purchase transactions as needed to supplement organic loan growth, as part of its strategy to strengthen earnings and attain an effective mix of earning assets.

While the increase in loan balances slowed to a modest $18.9 million during the first three quarters of 2017, compared to December 31, 2016, the Company experienced significant loan growth in the fourth quarter of 2016 and each of the five quarters ending December 31, 2015. The positive impact to earnings from that significant loan growth has been realized in the first nine months of 2017 and should continue throughout the remainder of the year.

Non-accrual loans ~~remained low and~~ totaled ~~$186~~$390 thousand at ~~September~~June 30, ~~2017,~~2019, compared to the ~~$167~~$615 thousand and ~~$173~~$447 thousand reported at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2016,~~2018, respectively. ~~At September 30, 2017, the~~The Company had loans in its portfolio totaling ~~$342~~$617 thousand, $895 thousand and $143 thousand, as of June 30, 2019, December 31, 2018 and June 30, 2018, respectively, that were ninety or more days past due which were all still accruing interest as the Company deems them to be collectible.

At ~~September~~June 30, ~~2017,~~2019 and December 31, 2018, the Company had loans classified as impaired loans in the amount of ~~$2.5~~$2.6 million, ~~classified as impaired loans, of which $2.3~~compared to $2.9 million ~~were Troubled Debt Restructurings (TDRs) that are still accruing interest. At December 31, 2016 and September~~at June 30, ~~2016, the Company had loans in the amount of $2.4 million classified as impaired loans, of which $2.3 million were Troubled Debt Restructurings (TDRs) that are still accruing interest.~~2018. Based on regulatory guidance on Student Lending, ~~issued in May, 2016,~~ the Company has classified 6168 of its purchased student loans as TDRs for a total of ~~$937 thousand~~$1.2 million as of ~~September~~June 30, ~~2017.~~2019. These borrowers that should have been in repayment have requested and been granted payment extensions or reductions exceeding the maximum lifetime allowable payment forbearance of twelve months (36 months lifetime allowance for military service), as permitted under the regulatory guidance, and are therefore considered restructurings. Student loan borrowers are allowed in-school deferments, plus an automatic six-month grace period post in-school status, before repayment is scheduled to begin, and these deferments do not count toward the maximum allowable forbearance. ~~As all student loans purchased are fully insured, the Company does not expect to experience a loss on~~Management has evaluated these loans individually for impairment and included any potential loss in the allowance for loan loss; interest continues to accrue on these TDRs during any deferment and forbearance periods.

Management identifies potential problem loans through its periodic loan review process and considers potential problem loans as those loans classified as special mention, substandard, or doubtful.

In general, the Company determines the adequacy of its allowance for loan losses by considering the risk classification and delinquency status of loans and other factors. Management may also establish specific allowances for loans which management believes require allowances greater than those allocated according to their risk classification. The purpose of the allowance is to provide for losses inherent in the loan portfolio. Since risks to the loan portfolio include general economic trends as well as conditions affecting individual borrowers, the allowance is an estimate. The Company is committed to determining, on an ongoing basis, the adequacy of its allowance for loan losses. The Company applies historical loss rates to various pools of loans based on risk rating classifications. In addition, the adequacy of the allowance is further evaluated by applying estimates of loss that could be attributable to any one of the following eight qualitative factors:

As discussed earlier, the Company utilizes a loss migration model. Migration analysis uses loan level attributes to track the movement of loans through various risk classifications in order to estimate the percentage of losses likely in the portfolio.

The relationship of the allowance for loan losses to total loans at ~~September~~June 30, ~~2017,~~2019, December 31, ~~2016,~~2018, and ~~September~~June 30, ~~2016~~2018 appears below (dollars in thousands):

~~A provision~~Provisions for loan losses totaling ~~$213~~$620 thousand ~~was~~and $605 thousand were recorded in the first ~~nine~~six months of ~~2017, while a recovery of $291 thousand was recognized for the first nine months of 2016.~~2019 and 2018, respectively. The following is a summary of the changes in the allowance for loan losses for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016~~2018 (dollars in thousands):

For additional insight into management’s approach and methodology in estimating the allowance for loan losses, please refer to the earlier discussion of “Allowance for Loan Losses” in Note 4 of the Notes to Consolidated Financial Statements. In addition, Note 4 includes details regarding the rollforward of the allowance by loan portfolio segments. The rollforward tables indicate the activity for loans that are charged-off, amounts received from borrowers as recoveries of previously charged-off loan balances, and the allocation by loan portfolio segment of the provision made during the period. The events that can positively impact the amount of allowance in a given loan segment include any one or all of the following: the recovery of a previously charged-off loan balance; the decline in the amount of classified or delinquent loans in a loan segment from the previous period, which most commonly occurs when these loans are repaid or are foreclosed; or when there are improvements in the ratios used to estimate the probability of loan losses. Improvements to the ratios could include lower historical loss rates, improvements to any of the qualitative factors mentioned above, or reduced loss expectations for individually-classified loans.

Management reviews the Allowance for Loan Losses on a quarterly basis to ensure it is adequate based upon the calculated potential losses inherent in the portfolio. Management believes the allowance for loan losses was adequately provided for as of ~~September~~June 30, ~~2017.~~2019.

The Company’s premises and equipment, net of depreciation, as of ~~September~~June 30, ~~2017~~2019 totaled ~~$7.4~~$6.6 million compared to ~~the $8.0 million and $8.2~~$7.0 million as of December 31, ~~2016~~2018 and ~~September~~$7.1 million as of June 30, ~~2016, respectively.~~2018. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method based on the estimated useful lives of assets. Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized and depreciated over their estimated useful lives. Upon disposition, assets and related accumulated depreciation are removed from the books, and any resulting gain or loss is charged to income.

As of ~~September~~June 30, ~~2017,~~2019, the Company and its subsidiaries occupied ~~six~~five full-service banking facilities in the cities of Charlottesville and Winchester, as well as the ~~counties~~county of Albemarle ~~and Orange~~ in Virginia. The ~~Company’s lease for the Loudoun Mall banking~~Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The Bank closed its Orange, Virginia office located at 186 North Loudoun Street, Winchester, Virginia expired, and the Company permanently closed that office on October 28, 2016. The Company is continuing to search for at least one new branch office location in Winchester. Any new offices that the Company decides to add are expectedeffective April 13, 2018; expanded messenger service continues to be ~~small commercial spaces.~~available to the customers within and surrounding Orange, Virginia.

The multi-story office building at 404 People Place, Charlottesville, Virginia, located in Albemarle County, also serves as the Company’s corporate headquarters and operations center, as well as the principal offices of VNB ~~Wealth.~~Investment Services and Masonry Capital. VNB Trust & Estate Services’ main office is located at 112 Third Street, SE, Charlottesville, Virginia.

Both the Arlington Boulevard facility in Charlottesville and the People Place facility also contain office space that is currently under lease to tenants.

$3.9 million of the increase in each of Other Assets and Other Liabilities resulted from the Company’s implementation of ASU 2016-02 “Leases” (Topic 842). This implementation required the Company to recognize right-of-use assets, which are assets that represent the Company’s right to use, or control the use of, a specified asset for the lease term, offset by the lease liability, which is the Company’s obligation to make lease payments arising from a lease, measured on a discounted basis.

Depository accounts represent the Company’s primary source of funds and are comprised of demand deposits, interest-bearing checking, ~~accounts,~~ money market, ~~deposit~~and savings accounts ~~and~~as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle ~~area, the Orange County area,~~ and ~~the~~ Winchester ~~area.~~areas.

Total deposits as of ~~September~~June 30, ~~2017~~2019 were ~~$507.3~~$553.5 million, down ~~$17.4~~$19.0 million compared to the balances of ~~$524.7~~$572.5 million at December 31, ~~2016 and~~2018, yet up ~~$12.1~~$16.8 million compared to the ~~$495.2~~$536.7 million total as of ~~September~~June 30, ~~2016. The year-over-year increase was realized predominately in money market accounts.~~2018.

Noninterest-bearing demand deposits on ~~September~~June 30, ~~2017~~2019 were ~~$166.5~~$158.2 million, representing ~~32.8%~~28.6% of total deposits. Interest-bearing transaction, ~~and~~ money market, and savings accounts totaled ~~$226.7~~$273.4 million, and represented ~~44.7%~~49.4% of total deposits at ~~September~~June 30, ~~2017.~~2019. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented ~~77.5%~~78.0% of total deposit accounts at ~~September~~June 30, ~~2017.~~2019. These account types are an excellent source of low-cost funding for the Company.

The Company implemented insured cash sweep (“ICS^®”) deposit products during the third quarter of 2018. ICS^®deposit balances of $16.0 million and $24.4 million are included in the interest checking accounts and the money market and savings deposit accounts balances, respectively, in the table above, as of June 30, 2019. As of December 31, 2018, ICS^®deposit balances of $15.8 million and $21.0 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively.

The remaining ~~22.5%~~22.0% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$114.0~~$122.0 million at ~~September~~June 30, ~~2017.~~2019. Included in this deposit total are Certificate of Deposit Account Registry Service CDs, known as CDARS^TM, whereby depositors can obtain FDIC deposit insurance on account balances of up to $50 million. CDARS^TMdeposits totaled ~~$16.8~~$25.1 million as of ~~September~~June 30, ~~2017.~~2019, all of which were reciprocal balances for the Bank’s customers.

Short-term borrowings, consisting primarily of ~~FHLB Advances, repurchase agreements,~~Federal Home Loan Bank (FHLB) advances and federal funds purchased, are additional sources of funds for the Company. The level of these borrowings is determined by various factors, including customer demand and the Company's ability to earn a favorable spread on the funds obtained.

During the third quarter of 2017, the Company borrowed $25 million from the FHLB, which remained outstanding as of September 30, 2017. The Company had no outstanding borrowings from the FHLB as of December 31, 2016 or September 30, 2016. Average borrowings from the FHLB were $8.2 million during the third quarter of 2017.

Repurchase agreements, also referred to as securities sold under agreement to repurchase, ~~are~~were available to non-individual accountholders on an overnight term through the Company’s investment sweep product. Under the agreements to repurchase, invested funds ~~are~~were fully collateralized by security instruments that ~~are~~were pledged on behalf of customers utilizing this product. The repurchase agreement product was discontinued by the Company effective December 31, 2018, in connection with the roll-out of ICS^®to customers, and therefore, there were no balances in repurchase agreements as of June 30, 2019 or December 31, 2018. Total balances in repurchase agreements as of ~~September~~June 30, ~~2017~~2018 were ~~$12.0 million, compared to $19.7 million~~$13.4 million.

The Company has a collateral dependent line of credit with the FHLB of Atlanta. As of June 30, 2019 and ~~$13.5 million as of~~ December 31, ~~2016 and September~~2018, the Company had no outstanding balances from FHLB advances. As of June 30, ~~2016.~~2018, the Company had outstanding FHLB advances of $35.0 million.

Additional borrowing arrangements maintained by the Bank include formal federal funds lines with four major regional correspondent banks. The Company had no outstanding balances ~~in borrowed overnight federal funds~~ as of ~~September~~June 30, ~~2017, yet averaged $702 thousand for the third quarter of the year. The Company had no balances in federal funds purchased as of~~2019, December 31, ~~2016~~2018 or ~~September~~June 30, ~~2016.~~2018.

The following table displays the changes in shareholders' equity for the Company from December 31, ~~2016~~2018 to ~~September~~June 30, ~~2017~~2019 (dollars in thousands):

The Basel III regulatory capital rules effective January 1, 2015 required the Company and its subsidiaries to comply with the following new minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.50% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the prior requirement of 4.00%); (iii) a total capital ratio of 8.00% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.00% of total assets (unchanged from the prior requirement). These were the initial capital requirements.

Beginning January 1, 2016 a capital conservation buffer requirement began to be phased in over a four-year period, beginning at 0.625% of risk-weighted assets and increasing annually to 2.50% at January 1, 2019. Therefore, for the calendar year ~~2017,~~2019, this ~~1.25%~~2.5% buffer effectively results in the minimum (i) common equity Tier 1 capital ratio of ~~5.75%~~7.00% of risk-weighted assets; (ii) Tier 1 capital ratio of ~~7.25%~~8.50% of risk-weighted assets; and (iii) total capital ratio of ~~9.25%~~10.50% of risk-weighted assets. The minimum leverage ratio remains at 4.00%. For additional information regarding the new capital requirements, refer to the Supervision and Regulation section, under Item 1. Business, found in the Company’s Form 10-K Report for December 31, ~~2016.~~2018.

Using the new capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at ~~September~~June 30, ~~2017.~~2019. Under the current risk-based capital guidelines of federal regulatory authorities, the Company’s common equity Tier 1 capital ratio and Tier 1 capital ratio are both at ~~12.75%~~14.71% of its risk-weighted assets and are ~~well~~ in excess of the well-capitalized minimum capital requirements of 6.50% and 8.00%, respectively. Additionally, the Company has a total capital ratio of ~~13.51%~~15.68% of its risk-weighted assets and leverage ratio of ~~10.30%~~11.51% of total assets, which are both ~~well~~ in excess of the well-capitalized minimum 10.00% and 5.00% level designated by bank regulators under “well capitalized” capital guidelines.

The Company, in referring to its net income and net interest income, is referring to income computed in accordance with GAAP, unless otherwise noted. Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations also refer to various calculations that are non-GAAP presentations. They include:

Net interest income is discussed in Management’s Discussion and Analysis on a GAAP basis, unless noted as “FTE”; and the reconcilement below shows the fully taxable-equivalent adjustment to net interest income to aid the reader in understanding the computations of net interest margin and the efficiency ratio on a non-GAAP basis (dollars in thousands):

Net income for the three months ended ~~September~~June 30, ~~2017~~2019 was ~~$1.7~~$2.1 million, a ~~25.0%~~15.5% increase compared to the ~~$1.4~~$1.8 million reported for the three months ended ~~September~~June 30, ~~2016.~~2018. Net income per diluted share was ~~$0.72~~$0.79 for the quarter ended ~~September~~June 30, ~~2017~~2019 compared to ~~$0.59~~$.68 per diluted share for the same quarter in the prior ~~year.~~year, each adjusted to reflect the 5% Stock Dividend. The ~~$349 thousand~~ increase in net income for the ~~third~~second quarter of ~~2017,~~2019, when compared to the same period of ~~2016,~~2018, was driven by ~~an increase in net interest income of $946 thousand. Partially offsetting this improvement was~~ a ~~decrease in noninterest income of $255~~$765 thousand ~~and increases of $182 thousand~~fluctuation in the provision for (recovery of) loan losses and a $355 thousand increase in earnings from the proceeds of bank owned life insurance, offset by a $339 thousand increase in salaries and employee benefits and a $300 thousand loss accrual, included in other noninterest expense, related to pending and threatened legal proceedings. This loss accrual had the impact of reducing net income ~~taxes, $96~~by $237 thousand ~~in noninterest expenses,~~ and ~~$64 thousand~~earnings per share, diluted and adjusted for the 5% Stock Dividend, by $0.09, in the ~~provision for loan losses.~~second quarter of 2019. For more information regarding this accrual, please refer to the earlier discussion of Commitments and Contingent Liabilities in Note 11 of the Notes to Consolidated Financial Statements.

Net income for the first ~~nine~~six months of ~~2017~~2019 was ~~$5.4~~$3.4 million, ~~or 26.7% higher than~~a 27.4% decrease compared to the $4.6 million reported ~~net income of $4.3 million during~~for the ~~same period in 2016.~~six months ended June 30, 2018. Net income per diluted share was $1.25 for the six months ended June 30, 2019 compared to $1.72 per diluted share for the same quarter in the prior year, as adjusted to reflect the 5% Stock Dividend. The decrease in net income for the first ~~three quarters~~six months of ~~2017~~2019, when compared to the same period of 2018, was ~~$2.24, or $0.45 higher than the $1.79 per diluted share reported~~driven by a $544 thousand decrease in ~~the first three quarters of 2016. The $1.1 million~~royalty income, a $694 thousand increase in ~~net income during the first nine months of 2017~~salaries and employee benefits and a $300 thousand loss accrual included in other noninterest expense, as noted above, offset by a $355 thousand increase in earnings from the ~~first nine months~~proceeds of 2016 was attributable to an increase of $2.4 million in net interest income. Net income was negatively impacted by an increase of $609 thousand in provision for income taxes, an increase of $504 thousand in the provision for loan losses, an increase of $78 thousand in noninterest expense, and a decrease of $53 thousand in noninterest income.bank owned life insurance.

Net interest income (FTE) for the three months ended ~~September~~June 30, ~~2017~~2019 was $5.5 million, a ~~$946 thousand increase~~4.1% decrease compared to net interest income of ~~$4.5~~$5.7 million for the three months ended ~~September~~June 30, ~~2016.~~2018. Net interest income was ~~positively~~negatively impacted by ~~an increase in average earning assets~~the effect of ~~$58.1 million. Most~~higher rates paid on deposit balances, increasing interest expense by $482 thousand, compared to the effect of ~~this growth was in~~ higher ~~yielding~~rates earned on loans, and resulted in average loans for the third quarter of 2017 being $74.4 million higher than the average loans for the third quarter of 2016. For the nine months ended September 30, 2017, the Company recorded $15.9 million inwhich positively impacted net interest income ~~or 17.7% more than the $13.5 million recorded~~by $242 thousand. The lower volume of borrowing positively impacted net interest income by $180 thousand for the ~~same nine~~second quarter of 2019 as compared to the second quarter of 2018.

Net interest income (FTE) for the first six months of 2019 was $11.1 million, a ~~year ago.~~3.2% decrease compared to net interest income of $11.4 million for the first six months of 2018. Net interest income was negatively impacted by the effect of higher rates paid on deposit balances, increasing interest expense by $929 thousand, compared to the effect of higher rates earned on loans, which positively impacted net interest income by $532 thousand. The lower volume of borrowing positively impacted net interest income by $267 thousand for the second quarter of 2019 as compared to the second quarter of 2018.

Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets for the period. The level of interest rates, together with the volume and mix of earning assets and interest-bearing liabilities, impact net interest income (FTE) and net interest margin (FTE). The net interest margin (FTE) of ~~3.70% for the three months ended September 30, 2017 was 29 basis points higher than the 3.41%~~3.67% for the quarter ended ~~September~~June 30, ~~2016.~~2019 was eleven basis points lower than the 3.78% for the quarter ended June 30, 2018. The net interest margin (FTE) of 3.72% for the ~~first~~six months ended June 30, 2019 was nine ~~months of 2017 was 3.58% or 12~~ basis points ~~higher~~lower than the ~~3.46% reported~~3.81% for the ~~same period in 2016.~~quarter ended June 30, 2018. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP net interest margin.

Total interest income (FTE) for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 was ~~$2.6 million~~$165 thousand higher than the same period in the prior ~~year, accounting for the year-to-date increase in net interest income (FTE).~~year. The increased ~~loan volume~~yield on loans was the major contributor to the increased interest income. This shift resulted in an earning asset yield, as computed on a tax-equivalent basis, of ~~3.79%~~4.38% on average earning asset balances of ~~$596.2~~$599.8 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017.~~2019. The earning asset yield, as computed on a tax-equivalent basis, was ~~3.64%~~4.22% on average earning asset balances of ~~$524.9~~$607.1 million for the ~~nine~~three months ended ~~September~~June 30, ~~2016~~2018.

~~The Company’s net~~Total interest income ~~continues to benefit from having one of~~(FTE) for the ~~lowest cost of funds among community banks~~six months ended June 30, 2019 was $500 thousand higher than the same period in the ~~country.~~prior year. The increased yield on loans was the major contributor to the increased interest income. This shift resulted in an earning asset yield, as computed on a tax-equivalent basis, of 4.39% on average earning asset balances of $599.8 million for the six months ended June 30, 2019. The earning asset yield, as computed on a tax-equivalent basis, was 4.18% on average earning asset balances of $604.8 million for the six months ended June 30, 2018.

Offsetting the increased interest income was an increase in interest expense of $400 thousand for the three months ended June 30, 2019 compared to the same period in the prior year. Interest expense increased $862 thousand for the six months ended June 30, 2019 compared to the same period in the prior year. The primary reason for the increase in interest expense is the increased rates paid on deposits to be competitive in the market. The rate paid on interest-bearing deposits averaged 106 basis points in the second quarter of 2019, compared to 58 basis points for the second quarter of 2018. The rate paid on interest-bearing deposits averaged 98 basis points for the first six months of 2019, compared to 50 basis points for the first six months of 2018. Average balances of interest-bearing deposits also increased, from $366.4 million in the second quarter of 2018 to $397.1 million in the second quarter of 2019 and from $362.8 million for the first six months of 2018 to $388.6 million for the first six months of 2019. Average balances of borrowed funds decreased from $40.8 million in the second quarter of 2018 to $3.8 million in the second quarter of 2019, and decreased from $38.0 million for the first six months of 2018 to $6.9 million for the first six months of 2019, causing a decrease in interest expense on borrowed funds over both periods. A table showing the mix of no cost and low cost deposit accounts is shown under “Financial Condition - Deposits” earlier in this report. ~~Interest expense as a percentage of average earning assets was 0.21% for the nine months ended September 30, 2017 and 0.18% for the nine months ended September 30, 2016.~~

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and interest bearing liabilities, for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. These tables also include a rate/volume analysis for these same periods (dollars in thousands).

A recovery of loan losses of $64 thousand was recognized in the second quarter of 2019 due primarily to the lower level of delinquencies within the student loan portfolio, along with the decreased balances in the organic loan portfolio. A provision of $701 thousand was recognized in the second quarter of 2018 when we were notified of the loss of surety bonds which previously covered the student loan portfolio. A provision for loan losses of ~~$168~~$620 thousand was recorded in the ~~third quarter~~first six months of ~~2017,~~2019, compared to ~~a provision for loan losses of $104~~$605 thousand ~~for the same quarter in 2016. On a year-to-date basis, a provision for loan losses of $213 thousand was~~ recorded ~~in 2017, while a recovery of $291 thousand was recognized~~ for the first three quarters of 2016. This resulted in a negative impact to income of $504 thousand when comparing year-over-year. The 2017 provision for loan losses was recorded due to loan growth during the first ninesix months of ~~the year and to replenish the allowance for losses due to net charge-offs of $77 thousand during the period.~~2018. The allowance for loan losses as a percentage of total loans at ~~September~~June 30, ~~2017~~2019 was 0.92%, compared to 0.91% as of ~~0.76% was level with September~~December 31, 2018 and 0.88% as of June 30, ~~2016. As discussed earlier, the Company utilizes a loss migration model.~~2018. Further discussion of management’s assessment of the allowance for loan losses is provided earlier in the report and in Note 4 – Allowance for Loan Losses, found in the Notes to the Consolidated Financial Statements. In management’s opinion, the allowance was adequately provided for at ~~September~~June 30, ~~2017.~~2019.

The components of noninterest income for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 are shown below (dollars in thousands):

Noninterest income for the quarter ended ~~September~~June 30, ~~2017~~2019 of ~~$1.2~~$1.7 million was ~~$255~~$393 thousand ~~lower compared with~~or 30.1% higher than the ~~$1.4 million~~amount recorded for the quarter ended ~~September~~June 30, ~~2016. Losses on sales of securities of $78 thousand~~2018. This increase was largely due to the increase in ~~the third quarter of 2017 compared~~earnings from bank owned life insurance, due to a ~~gain of $181 thousand for sale of securities in the same quarter of 2016 accounted for~~death benefit received as a ~~$259 thousand reduction. As discussed earlier in this Management Discussion and Analysis section under “Securities,” the Company restructured a portion~~result of the ~~investment portfolio to achieve higher yields, resulting in the realized losses during the quarter ended September 30, 2017.~~death of a former employee.

The components of noninterest income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 are shown below (dollars in thousands):

~~On a year-to-date basis, noninterest~~Noninterest income for the six months ended June 30, 2019 of ~~$3.7~~$2.8 million was ~~recognized~~$262 thousand or 8.7% lower than the amount recorded for the six months ended June 30, 2018. This decrease was due to the lack of performance fee royalty income in the first ~~nine months~~quarter of ~~2017, a slight decrease~~2019, compared to $518 thousand in the first quarter of ~~$53 thousand~~2018. Royalty income is collected periodically from SRCM Holdings, LLC, as described in Note 1 – Summary of Significant Accounting Policies, found in the ~~same period in 2016. The restructuring of a portion of~~Notes to the ~~investment portfolio during~~Consolidated Financial Statements within the ~~quarter ended September 30, 2017, as discussed above, resulted in realized losses on sales of securities of $74 thousand~~Company’s Form 10-K for the ~~first three quarters of 2017, compared to gains on sales and calls of $189 thousand recognized in~~year ended December 31, 2018.

The decrease was offset by the ~~same period of 2016. This $263 thousand variance was the major cause for the contraction in noninterest income.~~

Wealth Management contributed positively to income in two areas. Royalty income was $178 thousand higher in the nine months ended September 30, 2017, partially as a result of a one-time payment received inincreased earnings from bank owned life insurance during the second quarter ~~in connection with a revision to our agreement with Swift Run Capital Management, LLC (“SRCM”). Advisory and brokerage income~~ of $387 thousand for the 2017 period was $100 thousand higher than the $287 thousand recognized for the same period in 2016. As a point of reference, for the full year of 2015, Wealth Management recognized $29 thousand in advisory and brokerage income. The purchase of the wealth management book of business early in 2016,2019, as ~~discussed earlier under Note 5 – Intangible Assets, accounts for the increased advisory and brokerage income during both periods.~~noted previously.

The components of noninterest expense for the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 are shown below (dollars in thousands):

Noninterest expense for the third quarter of 2017 of $3.9 million was $96 thousand higher than the quarter ended September 30, 2016. The $59 thousand increase in salaries and employee benefits was partially due to the expenses associated with hiring experienced loan officers. A reduction in data processing expenses of $61 thousand was mainly due to a renegotiated contract with the Company’s core data processing provider.

~~The components of noninterest expense for the nine months ended September 30, 2017 and 2016 are shown below (dollars in thousands):~~

Noninterest expense for the ~~first nine months~~second quarter of ~~2017~~2019 of ~~$11.5~~$4.7 million was ~~fairly level with~~$658 thousand higher than the ~~nine months ended September 30, 2016.~~second quarter of 2018. Salaries and employee benefits increased $339 thousand due to increased staffing for our new Richmond market and cyber and network security professionals, as well as the quarterly expense of stock grants issued in February 2019. Other expenses increased $277 thousand, due to a loss accrual of $300 thousand related to pending and threatened legal proceedings. For more information regarding this accrual, please refer to the earlier discussion of Commitments and Contingent Liabilities in Note 11 of the Notes to Consolidated Financial Statements. Management continues to evaluate expenses for potential containments and reductions that would have a positive impact on net income on an ongoing basis.

The components of noninterest expense for the six months ended June 30, 2019 and 2018 are shown below (dollars in thousands):

Noninterest expense for the first six months of 2019 of $9.1 million was $1.1 million higher than the first six months of 2018. Salaries and employee benefits increased $694 thousand due to increased staffing for our new Richmond market and cyber and network security professionals, as well as the expense of stock grants issued in February 2019. Other expenses increased $278 thousand, due to a loss accrual of $300 thousand as noted above.

The efficiency ratio (FTE) ~~fell~~increased to ~~58.6%~~65.2% for the ~~third~~second quarter of ~~2017, an improvement of 5.2 percentage points compared to the efficiency ratio (FTE) of 63.8%~~2019 from 57.3% for the same quarter of ~~2016. The efficiency ratio (FTE) of 58.1% for~~2018, due to the ~~first nine months of 2017 reflected an improvement of 7.3 percentage points compared to 65.4% for the same nine months of 2016.~~increase in noninterest expense. The improved asset mix ~~from the loan growth experienced the last three years, together with the restructuring of the securities portfolio during the past quarter,~~and higher yields on earning assets should ~~continue to~~ enhance net interest ~~income. Further, additional~~income; however, noninterest ~~income prospects should add to the revenue stream, while cost containment and reduction strategies should control expenses. This combination is expected to~~expense will continue to ~~support a low efficiency ratio.~~increase as the Company positions itself for growth and enters into new markets. Refer to the Reconcilement of Non-GAAP Measures table within the Non-GAAP presentations section for a reconcilement of GAAP to non-GAAP efficiency ratio.

The Company benefited from the Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017, which permanently lowered the corporate income tax rate to 21% effective January 1, 2018, amongst other significant changes to the U.S. tax law. For the three months ended ~~September~~June 30, ~~2017~~2019 and ~~September~~June 30, ~~2016,~~2018, the Company provided ~~$811~~$425 thousand and ~~$629~~$439 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of ~~31.7%~~16.7% and ~~31.1%~~19.3%, respectively. For the ~~nine~~six months ~~of 2017~~ended June 30, 2019 and ~~2016,~~June 30, 2018, the Company provided ~~$2.5~~$711 thousand and $1.1 million ~~and $1.9 million,~~for Federal income taxes, respectively, resulting in an effective income tax rate of ~~31.9%~~17.5% and ~~31.1%~~19.7%, respectively. The effective income tax rates differed from the U.S. statutory rate of ~~34% during the comparable periods~~21% primarily due to the effect of tax-exempt income from life insurance policies and municipal bonds.

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended ~~September~~June 30, ~~2017~~2019 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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

September 30, 2017			Unpaid				Average		Interest
June 30, 2019													Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income		Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Land and land development	$	43	$	96	$	-	$	47	$	-	$	28	$	88	$	-	$	29	$	-
1-4 family residential mortgages, first lien, owner occupied		103		139		-		109		-		-		-		-		40		-
1-4 family residential mortgages, junior lien		384		386				362		12		122		122				124		3
Commercial non-owner occupied real estate		983		983		-		997		35		903		903		-		913		24
Total impaired loans without a valuation allowance												1,053		1,113		-		1,106		27

Impaired loans with a valuation allowance
Student loans purchased		937		937		-		918		47		1,591		1,591		51		1,597		37
Impaired loans with a valuation allowance		-		-		-		-		-
Total impaired loans with a valuation allowance												1,591		1,591		51		1,597		37
Total impaired loans	$	2,450	$	2,541	$	-	$	2,433	$	94	$	2,644	$	2,704	$	51	$	2,703	$	64

December 31, 2016			Unpaid				Average		Interest
December 31, 2018													Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income		Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized		Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Land and land development	$	51	$	100	$	-	$	55	$	-	$	32	$	90	$	-	$	37	$	-
1-4 family residential mortgages, first lien, owner occupied		116		147		-		123		-		82		127		-		90		-
1-4 family residential mortgages, junior lien		354		354				360		16		127		127				248		15
Commercial non-owner occupied real estate		1,012		1,012		-		1,036		45		923		923		-		947		51
Total impaired loans without a valuation allowance												1,164		1,267		-		1,322		66

Impaired loans with a valuation allowance
Student loans purchased		889		889		-		498		55		1,602		1,602		90		1,387		86
Impaired loans with a valuation allowance		-		-		-		-		-
Total impaired loans with a valuation allowance												1,602		1,602		90		1,387		86
Total impaired loans	$	2,422	$	2,502	$	-	$	2,072	$	116	$	2,766	$	2,869	$	90	$	2,709	$	152

	For three months ended					For three months ended					For three months ended					For three months ended
	September 30, 2017					September 30, 2016					June 30, 2019					June 30, 2018
		Pre-		Post-			Pre-		Post-			Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification			Modification		Modification			Modification		Modification
	Number	Recorded		Recorded		Number	Recorded		Recorded		Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Balance		Balance		of Loans	Balance		Balance		of Loans	Balance		Balance		of Loans	Balance		Balance
Student loans purchased	7	$	42	$	42	12	$	134	$	134	10	$	78	$	78	4	$	41	$	41
Total loans modified during the period	7	$	42	$	42	12	$	134	$	134	10	$	78	$	78	4	$	41	$	41

	For nine months ended					For nine months ended					For six months ended					For six months ended
	September 30, 2017					September 30, 2016					June 30, 2019					June 30, 2018
		Pre-		Post-			Pre-		Post-			Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification			Modification		Modification			Modification		Modification
	Number	Recorded		Recorded		Number	Recorded		Recorded		Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Balance			Balance	of Loans	Balance			Balance	of Loans	Balance		Balance		of Loans	Balance		Balance
Student loans purchased	16	$	133	$	133	50	$	847	$	868	12	$	133	$	133	7	$	120	$	120
Total loans modified during the period	16	$	133	$	133	50	$	847	$	868	12	$	133	$	133	7	$	120	$	120

●	Commercial and industrial syndicated loans - Prior to the quarter ended September 30, 2016, there was not an established loss history in the commercial ~~andindustrial~~and industrial syndicated loans. The S&P credit and recovery ratings on the credit facilities were utilized to calculate ~~athree-year~~a three-year weighted average historical default rate. During the third quarter of 2016, there was a small loss in ~~thecommercial~~the commercial and industrial syndicated loans; therefore, the Company utilized a combination of the migration ~~analysisloss~~analysis loss method and the S&P credit and recovery ratings.

●	Commercial and industrial government guaranteed loans – These loans require no reserve as these are 100% guaranteed ~~byeither~~by either the Small Business Administration (“SBA”) or the United States Department of Agriculture (“USDA”).

	1)		Changes in national and local economic conditions, including the condition of various market ~~segments~~segments;
	2)		Changes in the value of underlying ~~collateral~~collateral;
	3)		Changes in volume of classified assets, measured as a percentage of ~~capital~~capital;
	4)		Changes in volume of delinquent ~~loans~~loans;
	5)		The existence and effect of any concentrations of credit and changes in the level of such ~~concentrations~~concentrations;
	6)		Changes in lending policies and procedures, including underwriting ~~standards~~standards;
	7)		Changes in the experience, ability and depth of lending management and ~~staff~~staff; and
	8)		Changes in the level of policy ~~exceptions~~exceptions.

Allowance for Loan Losses Rollforward by Portfolio Segment																Allowance for Loan Losses Rollforward by Portfolio Segment
As of and for the period ended June 30, 2019																As of and for the period ended June 30, 2019
				Real Estate																Real Estate
	Commercial			Construction			Real Estate			Consumer							Commercial			Construction			Real Estate			Consumer
	Loans			and Land			Mortgages			Loans			Total				Loans			and Land			Mortgages			Loans			Total
Allowance for Loan Losses:
Balance as of January 1, 2017	$	824		$	127		$	2,506		$	231		$	3,688
Balance as of January 1, 2019																	$	811		$	119		$	2,611		$	1,350		$	4,891
Charge-offs		(111	)		-			-			-			(111	)			-			-			-			(823	)		(823	)
Recoveries		21			-			2			11			34				35			-			15			79			129
Provision for (recovery of) loan losses		216			68			(30	)		(41	)		213				2			(18	)		16			620			620
Ending Balance	$	950		$	195		$	2,478		$	201		$	3,824			$	848		$	101		$	2,642		$	1,226		$	4,817

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-			$	-		$	-		$	-		$	51		$	51
Collectively evaluated for impairment		950			195			2,478			201			3,824				848			101			2,642			1,175			4,766

Loans:
Individually evaluated for impairment	$	-		$	43		$	1,470		$	937		$	2,450			$	-		$	28		$	1,025		$	1,591		$	2,644
Collectively evaluated for impairment		82,214			25,104			308,599			82,657			498,574				86,610			14,292			341,353			76,864			519,119
Ending Balance	$	82,214		$	25,147		$	310,069		$	83,594		$	501,024			$	86,610		$	14,320		$	342,378		$	78,455		$	521,763

As of and for the year ended December 31, 2016

As of and for the year ended December 31, 2018																As of and for the year ended December 31, 2018
				Real Estate																Real Estate
	Commercial			Construction			Real Estate			Consumer							Commercial			Construction			Real Estate			Consumer
	Loans			and Land			Mortgages			Loans			Total				Loans			and Land			Mortgages			Loans			Total
Allowance for Loan Losses:
Balance as of January 1, 2016	$	797		$	159		$	2,592		$	19		$	3,567
Balance as of January 1, 2018																	$	885		$	206		$	2,730		$	222		$	4,043
Charge-offs		(25	)		-			(12	)		-			(37	)			(75	)		-			-			(1,022	)		(1,097	)
Recoveries		32			-			3			12			47				54			-			2			16			72
Provision for (recovery of) loan losses		20			(32	)		(77	)		200			111				(53	)		(87	)		(121	)		2,134			1,873
Ending Balance	$	824		$	127		$	2,506		$	231		$	3,688			$	811		$	119		$	2,611		$	1,350		$	4,891

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	-		$	-			$	-		$	-		$	-		$	90		$	90
Collectively evaluated for impairment		824			127			2,506			231			3,688				811			119			2,611			1,260			4,801

Loans:
Individually evaluated for impairment	$	-		$	51		$	1,482		$	889		$	2,422			$	-		$	32		$	1,132		$	1,602		$	2,766
Collectively evaluated for impairment		66,217			15,631			310,153			87,712			479,713				85,027			17,492			351,746			80,159			534,424
Ending Balance	$	66,217		$	15,682		$	311,635		$	88,601		$	482,135			$	85,027		$	17,524		$	352,878		$	81,761		$	537,190

	September 30, 2017			December 31, 2016 *
ASSETS	(Unaudited)
Cash and due from banks	$	7,143		$	10,047
Federal funds sold		3,155			28,453
Securities:
Available for sale, at fair value		71,049			56,662
Restricted securities, at cost		2,709			1,709
Total securities		73,758			58,371
Loans		501,024			482,135
Allowance for loan losses		(3,824	)		(3,688	)
Loans, net		497,200			478,447
Premises and equipment, net		7,437			8,046
Bank owned life insurance		14,229			13,917
Goodwill		372			372
Other intangible assets, net		604			680
Accrued interest receivable and other assets		6,430			6,697
Total assets	$	610,328		$	605,030
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	166,544		$	176,098
Interest-bearing		98,528			96,869
Money market deposit accounts		128,149			136,658
Certificates of deposit and other time deposits		114,049			115,026
Total deposits		507,270			524,651
Repurchase agreements and other borrowings		37,001			19,700
Accrued interest payable and other liabilities		1,208			1,625
Total liabilities		545,479			545,976

Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, no shares outstanding		-			-
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,410,680 and 2,368,777 issued and outstanding at September 30, 2017 and December 31, 2016, respectively		6,027			5,922
Capital surplus		22,036			21,152
Retained earnings		37,082			32,759
Accumulated other comprehensive loss		(296	)		(779	)
Total shareholders' equity		64,849			59,054
Total liabilities and shareholders' equity	$	610,328		$	605,030

Troubled debt restructurings (TDRs)	September 30, 2017			December 31, 2016			June 30, 2019			December 31, 2018
	No. of	Recorded		No. of	Recorded		No. of	Recorded		No. of	Recorded
	Loans	Investment		Loans	Investment		Loans	Investment		Loans	Investment
Performing TDRs
1-4 family residential mortgages, junior lien	2	$	345	2	$	354	-	$	-	1	$	127
Commercial non-owner occupied real estate	1		983	1		1,012	1		903	1		923
Student loans purchased	61		937	50		889	68		1,229	65		1,157
Total performing TDRs	64	$	2,265	53	$	2,255	69	$	2,132	67	$	2,207

Nonperforming TDRs
Student loans purchased							-	$	-	1	$	4
Land and land development	1	$	25	1	$	29	1		16	1		19
Total nonperforming TDRs							1	$	16	2	$	23
Total TDRs	65	$	2,290	54	$	2,284	70	$	2,148	69	$	2,230

									Special		Sub-
September 30, 2017	Excellent		Good		Pass		Watch		Mention		standard		TOTAL
Commercial
Commercial and industrial - organic	$	3,292	$	19,482	$	18,349	$	120	$	279	$	708	$	42,230
Commercial and industrial - government guaranteed		22,722		-		-		-		-		-		22,722
Commercial and industrial - syndicated		-		-		14,682		-		-		2,580		17,262
Real estate construction
Residential construction		-		-		2,310		-		-		-		2,310
Commercial construction		-		-		12,788		-		-		-		12,788
Land and land development		-		-		9,493		3		-		553		10,049
Real estate mortgages
1-4 family residential, first lien, investment		-		-		36,696		1,889		226		440		39,251
1-4 family residential, first lien, owner occupied		-		-		15,946		132		-		731		16,809
1-4 family residential, junior lien		-		-		2,753		269		196		175		3,393
Home equity lines of credit, first lien		-		-		8,928		40		-		-		8,968
Home equity lines of credit, junior lien		-		-		13,387		-		-		111		13,498
Farm		-		-		9,162		-		-		1,389		10,551
Multifamily		-		-		31,948		-		-		-		31,948
Commercial owner occupied		-		676		76,685		462		-		-		77,823
Commercial non-owner occupied		-		-		104,826		983		-		2,019		107,828
Consumer
Consumer revolving credit		9		21,750		699		1		-		-		22,459
Consumer all other credit		321		7,625		1,723		2		-		34		9,705
Student loans purchased		-		-		50,493		937		-		-		51,430
Total Loans	$	26,344	$	49,533	$	410,868	$	4,838	$	701	$	8,740	$	501,024

									Special		Sub-
December 31, 2016	Excellent		Good		Pass		Watch		Mention		standard		TOTAL
Commercial
Commercial and industrial - organic	$	816	$	24,225	$	15,840	$	259	$	236	$	184	$	41,560
Commercial and industrial - government guaranteed		5,550		-		-		-		-		-		5,550
Commercial and industrial - syndicated		-		-		16,175		-		-		2,932		19,107
Real estate construction
Residential construction		-		-		395		-		-		-		395
Commercial construction		-		-		4,422		-		-		-		4,422
Land and land development		-		-		10,271		5		-		589		10,865
Real estate mortgages
1-4 family residential, first lien, investment		-		-		35,102		1,724		229		483		37,538
1-4 family residential, first lien, owner occupied		-		-		15,207		325		-		1,097		16,629
1-4 family residential, junior lien		-		-		2,214		326		189		142		2,871
Home equity lines of credit, first lien		-		-		7,872		40		-		-		7,912
Home equity lines of credit, junior lien		-		-		13,911		-		-		111		14,022
Farm		-		-		11,253		-		-		-		11,253
Multifamily		-		-		31,052		-		-		-		31,052
Commercial owner occupied		-		695		81,582		1,019		-		-		83,296
Commercial non-owner occupied		-		-		104,963		1,012		-		1,087		107,062
Consumer
Consumer revolving credit		65		19,766		539		-		-		3		20,373
Consumer all other credit		284		9,977		1,027		4		-		36		11,328
Student loans purchased		-		-		56,011		889		-		-		56,900
Total Loans	$	6,715	$	54,663	$	407,836	$	5,603	$	654	$	6,664	$	482,135

Past Due Aging as of September 30, 2017	30-59		60-89		90 Days or								90Days Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic	$	-	$	-	$	-	$	-	$	42,230	$	42,230	$	-
Commercial and industrial - government guaranteed		-		-		-		-		22,722		22,722		-
Commercial and industrial - syndicated		-		-		-		-		17,262		17,262		-
Real estate construction and land
Residential construction		-		-		-		-		2,310		2,310		-
Commercial construction		-		-		-		-		12,788		12,788		-
Land and land development		18		-		-		18		10,031		10,049		-
Real estate mortgages
1-4 family residential, first lien, investment		-		-		-		-		39,251		39,251		-
1-4 family residential, first lien, owner occupied		-		-		18		18		16,791		16,809		18
1-4 family residential, junior lien		249		-		-		249		3,144		3,393		-
Home equity lines of credit, first lien		-		-		-		-		8,968		8,968		-
Home equity lines of credit, junior lien		-		-		-		-		13,498		13,498		-
Farm		-		-		-		-		10,551		10,551		-
Multifamily		-		-		-		-		31,948		31,948		-
Commercial owner occupied		-		-		-		-		77,823		77,823		-
Commercial non-owner occupied		-		-		-		-		107,828		107,828		-
Consumer loans
Consumer revolving credit		-		-		-		-		22,459		22,459		-
Consumer all other credit		-		1		-		1		9,704		9,705		-
Student loans purchased		500		162		324		986		50,444		51,430		324
Total Loans	$	767	$	163	$	342	$	1,272	$	499,752	$	501,024	$	342

Past Due Aging as of December 31, 2016	30-59		60-89		90 Days or								90Days Past Due
Past Due Aging as of																											90Days
June 30, 2019															30-59		60-89		90 Days or								Past Due
	Days Past		Days Past		More Past		Total Past				Total		and Still		Days Past		Days Past		More Past		Total Past				Total		and Still
	Due		Due		Due		Due		Current		Loans		Accruing		Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic	$	65	$	61	$	-	$	126	$	41,434	$	41,560	$	-	$	172	$	-	$	-	$	172	$	39,204	$	39,376	$	-
Commercial and industrial - government guaranteed		-		-		-		-		5,550		5,550		-		-		-		548		548		34,595		35,143		548
Commercial and industrial - syndicated		-		-		-		-		19,107		19,107		-		-		-		-		-		12,091		12,091		-
Real estate construction and land
Residential construction		-		-		-		-		395		395		-		-		-		-		-		1,021		1,021		-
Commercial construction		-		-		-		-		4,422		4,422		-		-		-		-		-		3,663		3,663		-
Land and land development		-		-		22		22		10,843		10,865		-		-		15		-		15		9,621		9,636		-
Real estate mortgages
1-4 family residential, first lien, investment		125		-		-		125		37,413		37,538		-		-		-		-		-		40,807		40,807		-
1-4 family residential, first lien, owner occupied		-		-		20		20		16,609		16,629		20		-		-		-		-		16,304		16,304		-
1-4 family residential, junior lien		-		-		-		-		2,871		2,871		-		-		-		-		-		2,894		2,894		-
1-4 family residential - purchased															.			-		-		-		18,451		18,451		-
Home equity lines of credit, first lien		-		-		-		-		7,912		7,912		-		-		-		-		-		8,544		8,544		-
Home equity lines of credit, junior lien		36		-		-		36		13,986		14,022		-		-		-		-		-		9,472		9,472		-
Farm		-		-		-		-		11,253		11,253		-		-		-		-		-		9,298		9,298		-
Multifamily		-		-		-		-		31,052		31,052		-		-		-		-		-		24,432		24,432		-
Commercial owner occupied		-		-		-		-		83,296		83,296		-		-		-		-		-		95,286		95,286		-
Commercial non-owner occupied		-		-		-		-		107,062		107,062		-		3,750		-		-		3,750		113,140		116,890		-
Consumer loans
Consumer revolving credit		-		-		-		-		20,373		20,373		-		-		-		-		-		24,341		24,341		-
Consumer all other credit		1		48		-		49		11,279		11,328		-		-		24		-		24		4,172		4,196		-
Student loans purchased		1,316		139		188		1,643		55,257		56,900		188		538		407		432		1,377		48,541		49,918		69
Total Loans	$	1,543	$	248	$	230	$	2,021	$	480,114	$	482,135	$	208	$	4,460	$	446	$	980	$	5,886	$	515,877	$	521,763	$	617

Past Due Aging as of																											90Days
December 31, 2018															30-59		60-89		90 Days or								Past Due
															Days Past		Days Past		More Past		Total Past				Total		and Still
															Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic															$	50	$	172	$	-	$	222	$	41,304	$	41,526	$	-
Commercial and industrial - government guaranteed																-		-		548		548		30,819		31,367		548
Commercial and industrial - syndicated																-		-		-		-		12,134		12,134		-
Real estate construction and land
Residential construction																-		-		-		-		1,552		1,552		-
Commercial construction																-		-		-		-		5,078		5,078		-
Land and land development																1		-		15		16		10,878		10,894		15
Real estate mortgages
1-4 family residential, first lien, investment																-		-		-		-		40,311		40,311		-
1-4 family residential, first lien, owner occupied																-		-		-		-		16,775		16,775		-
1-4 family residential, junior lien																-		-		-		-		3,169		3,169		-
1-4 family residential - purchased																954		-		-		954		17,693		18,647		-
Home equity lines of credit, first lien																-		-		-		-		8,325		8,325		-
Home equity lines of credit, junior lien																-		-		-		-		10,912		10,912		-
Farm																-		-		-		-		10,397		10,397		-
Multifamily																-		-		-		-		27,328		27,328		-
Commercial owner occupied																-		-		-		-		93,800		93,800		-
Commercial non-owner occupied																75		-		-		75		123,139		123,214		-
Consumer loans
Consumer revolving credit																-		-		-		-		21,540		21,540		-
Consumer all other credit																4		599		-		603		4,927		5,530		-
Student loans purchased																850		463		754		2,067		52,624		54,691		332
Total Loans															$	1,934	$	1,234	$	1,317	$	4,485	$	532,705	$	537,190	$	895

				Estimated
			% of Total	Economic Useful
	Fair Value		Intangible Assets	Life
Identified Intangible Assets
Non-Compete Agreement	$	103	9.0%	3 years
Customer Relationships Intangible		670	58.5%	10 years
Total Identified Intangible Assets	$	773	67.5%

Goodwill	$	372	32.5%	Indefinite
Total Intangible Assets	$	1,145	100.0%

	Gross Carrying		Accumulated		Net Carrying
	Value		Amortization		Value
Identified Intangible Assets
Non-Compete Agreement	$	103	$	57	$	46
Customer Relationships Intangible		670		112	$	558
Total Identified Intangible Assets	$	773	$	169	$	604

Three Months Ended	September 30, 2017					September 30, 2016					June 30, 2019					June 30, 2018
			Weighted	Per				Weighted	Per				Weighted	Per				Weighted	Per
			Average	Share				Average	Share				Average	Share				Average	Share
	Net Income		Shares	Amount		Net Income		Shares	Amount		Net Income		Shares	Amount		Net Income		Shares	Amount
Basic net income per share	$	1,745	2,401,083	$	0.73	$	1,396	2,366,530	$	0.59	$	2,115	2,688,005	$	0.79	$	1,832	2,666,120	$	0.69
Effect of dilutive stock options		-	20,965		-		-	13,863		-		-	960		-		-	22,225		(0.01	)
Diluted net income per share	$	1,745	2,422,048	$	0.72	$	1,396	2,380,393	$	0.59	$	2,115	2,688,965	$	0.79	$	1,832	2,688,345	$	0.68

Nine Months Ended	September 30, 2017					September 30, 2016
Six Months Ended											June 30, 2019					June 30, 2018
			Weighted	Per				Weighted	Per				Weighted	Per				Weighted	Per
			Average	Share				Average	Share				Average	Share				Average	Share
	Net Income		Shares	Amount		Net Income		Shares	Amount		Net Income		Shares	Amount		Net Income		Shares	Amount
Basic net income per share	$	5,400	2,387,960	$	2.26	$	4,261	2,369,517	$	1.80	$	3,361	2,683,122	$	1.25	$	4,628	2,663,842	$	1.74
Effect of dilutive stock options		-	21,521		-		-	14,393		-		-	4,269		-		-	21,862		(0.02	)
Diluted net income per share	$	5,400	2,409,481	$	2.24	$	4,261	2,383,910	$	1.79	$	3,361	2,687,391	$	1.25	$	4,628	2,685,704	$	1.72

	2003 Plan			2005 Plan			2014 Plan			2005 Plan			2014 Plan
Aggregate shares issuable		128,369			230,000			250,000			253,575			275,625
Options issued, net of forfeited and expired options		(108,054	)		(67,507	)		(2,000	)
Options or shares issued, net of forfeited and expired options											(59,870	)		(80,055	)
Cancelled due to Plan expiration		(20,315	)		(162,493	)		-			(193,705	)		-
Remaining available for grant		-			-			248,000			-			195,570

Grants issued and outstanding:
Total vested and unvested shares											1,379			67,415
Fully vested shares											1,379			13,182
Exercise price range										$	13.69 to		$	27.39 to
										$	13.69		$	42.62
Total vested and unvested shares		15,568			26,357			2,000

Fully vested shares		15,568			25,107			-

Exercise price range	$ $	18.26 to 18.26		$ $	11.74 to 23.26		$ $	30.20 to 30.20

	September 30, 2017
			Weighted Average		Aggregate
	Number of Options		Exercise Price		Intrinsic Value
Outstanding at January 1, 2017	98,893		$	22.83	$	592
Issued	2,000			30.20
Exercised	(41,903	)		22.70
Forfeited	(4,600	)		26.96
Expired	(10,465	)		30.86
Outstanding at September 30, 2017	43,925		$	20.96	$	656

Options exercisable at September 30, 2017	40,675		$	20.59	$	623

	For the ~~nine~~six months ended
	~~September~~June 30, ~~2017~~2019
Expected volatility¹¹	~~17.90~~16.88	%
Expected dividends²²	~~1.72~~3.24	%
Expected term (in years)³³	~~6.25~~6.50
Risk-free rate⁴⁴	~~2.00~~ 1.83	%

	Options Outstanding				Options Exercisable
		Weighted-	Weighted-			Weighted-
	Number of	Average	Average		Number of	Average
	Options	Remaining	Exercise		Options	Exercise
Exercise Price	Outstanding	Contractual Life	Price		Exercisable	Price
$ 11.74 to 20.00	19,118	2.1 Years	$	17.84	17,868	$	17.82
$ 20.01 to 30.00	22,807	0.9 Years		22.76	22,807		22.76
$ 30.01 to 36.74	2,000	9.5 Years		30.20	0		-
Total	43,925	1.8 Years	$	20.96	40,675	$	20.59

	Options Outstanding				Options Exercisable
		Weighted-	Weighted-			Weighted-
	Number of	Average	Average		Number of	Average
	Options	Remaining	Exercise		Options	Exercise
Exercise Price	Outstanding	Contractual Life	Price		Exercisable	Price
$10.65 to $20.00	1,386	3.6 Years	$	13.70	1,386	$	13.70
$20.01 to $30.00	1,107	7.7 Years		27.39	4		26.18
$30.01 to $40.00	8,820	8.9 Years		39.36	1,680		39.52
$40.01 to $42.62	57,481	8.9 Years		42.62	11,491		42.62
Total	68,794	8.8 Years	$	41.37	14,561	$	39.49

¹
¹Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

²		Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

³		Based on the average of the contractual life and vesting period for the respective option.

⁴		Based upon an interpolated US Treasury yield curve interest rate that corresponds to the contractual life of the option, in effect at the time of the grant.

Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 –	Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 –	Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market

Fair Value Measurements at September 30, 2017 Using:
											Fair Value Measurements at June 30, 2019 Using:
											Quoted Prices in		Significant
			Quoted Prices in		Significant Other		Significant				Active Markets		Other		Significant
			Active Markets for		Observable		Unobservable				for Identical		Observable		Unobservable
			Identical Assets		Inputs		Inputs				Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)		Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	19,166	$	-	$	19,166	$	-	$	19,461	$	-	$	19,461	$	-
Mortgage-backed securities/CMOs		31,624		-		31,624		-		26,465		-		26,465		-
Municipal bonds		20,259		-		20,259		-		10,922		-		10,922		-
Total securities available for sale	$	71,049	$	-	$	71,049	$	-	$	56,848	$	-	$	56,848	$	-

Fair Value Measurements at December 31, 2016 Using:
											Fair Value Measurements at December 31, 2018 Using:
											Quoted Prices in		Significant
			Quoted Prices in		Significant Other		Significant				Active Markets		Other		Significant
			Active Markets for		Observable		Unobservable				for Identical		Observable		Unobservable
			Identical Assets		Inputs		Inputs				Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)		Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	14,501	$	-	$	14,501	$	-	$	18,974	$	-	$	18,974	$	-
Corporate bonds		2,010		-		2,010		-
Mortgage-backed securities/CMOs		24,982		-		24,982		-		25,063		-		25,063		-
Municipal bonds		15,169		-		15,169		-		17,355		-		17,355		-
Total securities available for sale	$	56,662	$	-	$	56,662	$	-	$	61,392	$	-	$	61,392	$	-

			Fair Value Measurement at September 30, 2017 using:										Fair Value Measurement at June 30, 2019 using:
			Quoted Prices		Significant								Quoted Prices		Significant
			in Active		Other		Significant						in Active		Other		Significant
			Markets for		Observable		Unobservable						Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs						Identical Assets		Inputs		Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	10,298	$	10,298	$	-	$	-	$	10,298	$	24,794	$	24,794	$	-	$	-	$	24,794
Available for sale securities		71,049		-		71,049		-		71,049		56,848		-		56,848		-		56,848
Loans, net		497,200		-		-		490,081		490,081		516,946		-		-		501,483		501,483
Bank owned life insurance		14,229		-		14,229		-		14,229		16,190		-		16,190		-		16,190
Accrued interest receivable		1,850		-		395		1,455		1,850		2,264		-		278		1,986		2,264

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	393,221	$	-	$	393,221	$	-	$	393,221
Demand deposits and interest-bearing transaction, money market, and savings accounts											$	431,526	$	-	$	431,526	$	-	$	431,526
Certificates of deposit		114,049		-		113,992		-		113,992		121,993		-		122,730		-		122,730
Repurchase agreements and other borrowings		37,001		-		37,001		-		37,001
Accrued interest payable		123		-		123		-		123		317		-		317		-		317

			Fair Value Measurement at December 31, 2016 using:										Fair Value Measurement at December 31, 2018 using:
			Quoted Prices		Significant								Quoted Prices		Significant
			in Active		Other		Significant						in Active		Other		Significant
			Markets for		Observable		Unobservable						Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs						Identical Assets		Inputs		Inputs
	Carrying value		Level 1		Level 2		Level 3		Fair Value		Carrying value		Level 1		Level 2		Level 3		Fair Value
Assets
Cash and cash equivalent	$	38,500	$	38,500	$	-	$	-	$	38,500	$	18,874	$	18,874	$	-	$	-	$	18,874
Available for sale securities		56,662		-		56,662		-		56,662		61,392		-		61,392		-		61,392
Loans, net		478,447		-		-		476,438		476,438		532,299		-		-		514,917		514,917
Bank owned life insurance		13,917		-		13,917		-		13,917		16,790		-		16,790		-		16,790
Accrued interest receivable		1,662		-		272		1,390		1,662		2,100		-		342		1,758		2,100

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	409,625	$	-	$	409,625	$	-	$	409,625	$	464,002	$	-	$	464,002	$	-	$	464,002
Certificates of deposit		115,026		-		114,979		-		114,979		108,531		-		108,323		-		108,323
Repurchase agreements and other borrowings		19,700		-		19,700		-		19,700
Accrued interest payable		107		-		107		-		107		243		-		243		-		243

●	Bank -The commercial banking segment involves making loans and generating deposits from individuals, businesses and charitable organizations. Loan fee income, service charges from deposit accounts, and other non- interest-related fees, such as fees for debit cards and ATM usage and fees for treasury management services, generate additional income for the Bank segment.

●	VNB Investment Services- VNB Investment Services offers wealth management and investment advisory services. Revenue for this segment is generated primarily from investment advisory and financial planning fees, with a small and decreasing portion attributable to brokerage commissions.

●	VNB Trust & Estate Services– VNB Trust & Estate Services offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenue for this segment is generated from administration, service and custody fees, as well as management fees which are derived from Assets Under Management and incentive income which is based on the investment returns generated on performance-based Assets Under Management. Investment management services currently are offered through in-house and third-party managers. In addition, royalty income, in the form of fixed and incentive fees, from the sale of Swift Run Capital Management, LLC in 2013 is reported as income of VNB Trust & Estate Services. More information on royalty income and the related sale can be found under Summary of Significant Accounting Policies in Note 1 of the notes to consolidated financial statements, which is found in Item 8. Financial Statements and Supplementary Data, in the Company’s Form 10-K Report for December 31, 2018.

●	Masonry Capital- Masonry Capital offers investment management services for separately managed accounts and a private investment fund employing a value-based, catalyst-driven investment strategy. Revenue for this segment is generated from management fees which are derived from Assets Under Management and incentive income which is based on the investment returns generated on performance-based Assets Under Management.

				VNB		VNB Trust &
				Investment		Estate		Masonry
Three months ended June 30, 2019	Bank			Services		Services		Capital			Consolidated
Net interest income	$	5,461		$	-	$	-	$	-		$	5,461
Provision for (recovery of) loan losses		(64	)		-		-		-			(64	)
Noninterest income		1,137			156		348		59			1,700
Noninterest expense		4,073			147		303		162			4,685
Income before income taxes		2,589			9		45		(103	)		2,540
Provision for income taxes		435			2		10		(22	)		425
Net income	$	2,154		$	7	$	35	$	(81	)	$	2,115
Total assets	$	633,573			NR*		NR*	$	200		$	633,773

				VNB		VNB Trust &
				Investment		Estate		Masonry
Six months ended June 30, 2019	Bank			Services		Services		Capital			Consolidated
Net interest income	$	11,029		$	-	$	-	$	-		$	11,029
Provision for loan losses		620			-		-		-			620
Noninterest income		1,710			292		694		63			2,759
Noninterest expense		7,872			283		610		331			9,096
Income before income taxes		4,247			9		84		(268	)		4,072
Provision for income taxes		747			2		18		(56	)		711
Net income	$	3,500		$	7	$	66	$	(212	)	$	3,361

Three months ended June 30, 2018	Bank		VNB Wealth		Consolidated
Net interest income	$	5,653	$	39	$	5,692
Provision for loan losses		701		-		701
Noninterest income		703		604		1,307
Noninterest expense		3,513		514		4,027
Income before income taxes		2,142		129		2,271
Provision for income taxes		412		27		439
Net income	$	1,730	$	102	$	1,832
Total assets	$	644,221	$	10,436	$	654,657

Six months ended June 30, 2018	Bank		VNB Wealth		Consolidated
Net interest income	$	11,315	$	73	$	11,388
Provision for loan losses		605		-		605
Noninterest income		1,346		1,675		3,021
Noninterest expense		7,005		1,039		8,044
Income before income taxes		5,051		709		5,760
Provision for income taxes		983		149		1,132
Net income	$	4,068	$	560	$	4,628

	June 30, 2019
Lease liability	$	3,945
Right-of-use asset	$	3,930
Weighted average remaining lease term		5.50 years
Weighted average discount rate		2.82	%

	Three Months Ended June 30,				Six Months Ended June 30,
Lease Expense	2019		2018		2019		2018
Operating lease expense	$	204		NR*	$	408		NR*
Short-term lease expense		37		NR*		73		NR*
Total lease expense	$	241	$	226	$	481	$	451
Cash paid for amounts included in lease liabilities	$	197		NR*	$	393		NR*

* Not reportable

Undiscounted Cash Flow	June 30, 2019
Six months ending December 31, 2019	$	395
Twelve months ending December 31, 2020		799
Twelve months ending December 31, 2021		807
Twelve months ending December 31, 2022		767
Twelve months ending December 31, 2023		680
Twelve months ending December 31, 2024		469
Thereafter		354
Total undiscounted cash flows	$	4,271
Less: Discount		(326	)
Lease liability	$	3,945

Three months ended September 30, 2017	Bank			VNB Wealth			Consolidated
Net interest income	$	5,457		$	26		$	5,483
Provision for loan losses		168			-			168
Noninterest income		610			548			1,158
Noninterest expense		3,380			537			3,917
Income before income taxes		2,519			37			2,556
Provision for income taxes		798			13			811
Net income	$	1,721		$	24		$	1,745
Total assets	$	600,690		$	9,638		$	610,328

Three months ended September 30, 2016	Bank			VNB Wealth			Consolidated
Net interest income	$	4,526		$	11		$	4,537
Provision for loan losses		104			-			104
Noninterest income		909			504			1,413
Noninterest expense		3,291			530			3,821
Income (loss) before income taxes		2,040			(15	)		2,025
Provision for (benefit of) income taxes		634			(5	)		629
Net income (loss)	$	1,406		$	(10	)	$	1,396
Total assets	$	559,933		$	9,606		$	569,539

Nine months ended September 30, 2017	Bank			VNB Wealth			Consolidated
Net interest income	$	15,798		$	66		$	15,864
Provision for loan losses		213			-			213
Noninterest income		1,977			1,757			3,734
Noninterest expense		9,858			1,597			11,455
Income before income taxes		7,704			226			7,930
Provision for income taxes		2,452			78			2,530
Net income	$	5,252		$	148		$	5,400

Nine months ended September 30, 2016	Bank			VNB Wealth			Consolidated
Net interest income	$	13,447		$	34		$	13,481
Provision for (recovery of) loan losses		(291	)		-			(291	)
Noninterest income		2,332			1,455			3,787
Noninterest expense		9,645			1,732			11,377
Income (loss) before income taxes		6,425			(243	)		6,182
Provision for (benefit of) income taxes		2,003			(82	)		1,921
Net income (loss)	$	4,422		$	(161	)	$	4,261

	September 30, 2017				December 31, 2016				September 30, 2016
			Percent				Percent				Percent
	Balance		of Total		Balance		of Total		Balance		of Total
U.S.Government agencies	$	19,166	27.0	%	$	14,501	25.6	%	$	14,955	21.2	%
Corporate bonds		-	0.0	%		2,010	3.5	%		6,126	8.7	%
Mortgage-backed securities/CMOs		31,624	44.5	%		24,982	44.1	%		31,497	44.7	%
Municipal bonds		20,259	28.5	%		15,169	26.8	%		17,869	25.4	%
Total available for sale securities	$	71,049	100.0	%	$	56,662	100.0	%	$	70,447	100.0	%

●	Student loanstotaling ~~$51.4~~$49.9 million. The Company purchased two student loan packages in ~~2015. In~~2015 and a third in the fourth quarter of ~~2016, a third~~2016. A fourth tranche was closed in December 2017 for an additional ~~$24.8 million, inclusive of premium.~~$15.0 million. Along with the purchase of these ~~three~~four packages of student loans, the Company purchased surety bonds ~~that~~to fully insure this portion of the Company’s consumer portfolio. However, during June 2018, ReliaMax Surety, the insurance company which issued the surety bonds, was placed into liquidation due to insolvency. Loss claims were filed for loans in default as of July 27, 2018, when the surety bonds were terminated, and the Company anticipates payment on approved claims.

●	Loans guaranteed by a U.S. government agency (“(“government guaranteed”) totaling ~~$22.7~~$35.1 million, inclusive of premium. During the fourth quarter of 2016, the Company began augmenting the commercial and industrial portfolio with government guaranteed loans which represent the portion of loans that are 100% guaranteed by either the United States Department of Agriculture (“USDA”) or the Small Business Administration (“SBA”); the originating institution holds the unguaranteed portion of ~~the~~each loan and services it. These government guaranteed portion of loans are typically purchased at a premium. In the event of early prepayment, the Company may need to write off any unamortized premium.

●	Syndicated loanstotaling ~~$17.3~~$12.1 million. Syndicated loans represent shared national credits in leveraged lending transactions and are included in the commercial and industrial portfolio. The Company has developed policies to limit overall credit exposure to the syndicated market, as well as limits by industry and amount per borrower.

●	Mortgage loanstotaling $18.5 million. In the fourth quarter of 2018, the Company purchased a package of 1-to-4 family residential mortgages. Each of the 42 adjustable rate loans purchased were individually underwritten by the Company prior to the closing of the purchase. The collateral on these loans is located primarily on the East Coast of the United States.

●1)	~~National~~ Changes in national and local economic ~~trends;~~

●	~~Underlying collateral values;~~

●	~~Loan delinquency status and trends;~~

●	~~Loan risk classifications;~~

●	~~Industry concentrations;~~

●	~~Lending policies;~~conditions, including the condition of various market segments;
2)	Changes in the value of underlying collateral;

●3)	~~Experience,~~ Changes in volume of classified assets, measured as a percentage of capital;
4)	Changes in volume of delinquent loans;
5)	The existence and effect of any concentrations of credit and changes in the level of such concentrations;
6)	Changes in lending policies and procedures, including underwriting standards;
7)	Changes in the experience, ability and depth of lending management and staff; and

●8)	~~Levels~~Changes in the level of policy ~~exceptions~~exceptions.

	September 30,			December 31,			September 30,			June 30,			December 31,			June 30,
	2017			2016			2016			2019			2018			2018
Loans held for investment at period-end	$	501,024		$	482,135		$	430,889		$	521,763		$	537,190		$	535,005
Allowance for loan losses	$	3,824		$	3,688		$	3,278		$	4,817		$	4,891		$	4,698
Allowance as a percent of period-end loans		0.76	%		0.77	%		0.76	%		0.92	%		0.91	%		0.88	%

Deposit accounts
(dollars in thousands)													June 30, 2019				December 31, 2018				June 30, 2018
															% of Total				% of Total				% of Total
(dollars in thousands)	September 30, 2017				December 31, 2016				September 30, 2016
	Balance		% of Total Deposits		Balance		% of Total Deposits		Balance		% of Total Deposits		Balance		Deposits		Balance		Deposits		Balance		Deposits
No cost and low cost deposits:
Noninterest demand deposits	$	166,544	32.8	%	$	176,098	33.5	%	$	176,063	35.6	%	$	158,166	28.6	%	$	185,819	32.4	%	$	172,744	32.2	%
Interest checking accounts		98,528	19.4	%		96,869	18.5	%		91,808	18.5	%		97,620	17.6	%		106,884	18.7	%		86,008	16.0	%
Money market deposit accounts		128,149	25.3	%		136,658	26.0	%		114,903	23.2	%
Money market and savings deposit accounts														175,740	31.8	%		171,299	29.9	%		146,505	27.3	%

Total noninterest and low cost deposit accounts		393,221	77.5	%		409,625	78.0	%		382,774	77.3	%		431,526	78.0	%		464,002	81.0	%		405,257	75.5	%

Time deposit accounts:
Certificates of deposit		97,273	19.2	%		90,084	17.2	%		94,469	19.1	%		96,925	17.5	%		81,265	14.2	%		79,084	14.7	%
CDARS deposits		16,776	3.3	%		24,942	4.8	%		17,936	3.6	%		25,068	4.5	%		27,266	4.8	%		52,405	9.8	%
Total certificates of deposit and other time deposits		114,049	22.5	%		115,026	22.0	%		112,405	22.7	%		121,993	22.0	%		108,531	19.0	%		131,489	24.5	%

Total deposit account balances	$	507,270	100.0	%	$	524,651	100.0	%	$	495,179	100.0	%	$	553,519	100.0	%	$	572,533	100.0	%	$	536,746	100.0	%

Equity, December 31, 2016	$	59,054
Equity, December 31, 2018				$	70,742
Net income		5,400			3,361
Other comprehensive income		483			1,240
Cash dividends declared		(1,077	)		(1,573	)
Stock granted					424
Stock options exercised		981			102
Equity increase due to expensing of stock options		8			47
Equity, September 30, 2017	$	64,849
Equity, June 30, 2019				$	74,343

●	Fully taxable-equivalent (“FTE”) adjustments –Net interest margin and efficiency ratios are presented on an FTE basis, consistent with SEC guidance in Industry Guide 3 which states that tax exempt income may be calculated on a tax equivalent basis. This is a non-GAAP presentation. The FTE basis adjusts for the ~~tax-exemptstatus~~tax-exempt status of net interest income from certain investments using a federal tax rate of ~~34%~~21%, where applicable, to increase tax-exempt interest income to a taxable-equivalent basis.

●	Net interest margin –Net interest margin (FTE) is calculated as net interest income, computed on an FTE basis, expressed as a percentage of average earning assets. The Company believes this measure to be the preferred industry measurement of net interest margin and that it enhances comparability of net interest margin among peers in the industry.

●	Efficiency ratio –One of the ratios the Company monitors in its evaluation of operations is the efficiency ratio, which measures the cost to produce one dollar of revenue. The Company computes its efficiency ratio (FTE) by dividing noninterest expense by the sum of net interest income (FTE) and noninterest income. A lower ratio is an indicator of increased operational efficiency. This non-GAAP metric is used to assist investors in understanding how management assesses its ability to generate revenues from its non-funding-related expense base, as well as to align presentation of this financial measure with peers in the industry. The Company believes this measure to be the preferred industry measurement of operational efficiency, which is consistent with Federal Deposit Insurance Corporation (“FDIC”) studies.