UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
~~Washington, D. C.~~

WASHINGTON, DC 20549
~~___________~~

FORM 10-Q
~~___________~~

(Mark One)

~~(Mark One)~~
~~[X]~~ ☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐		~~For the quarterly period ended June 30, 2019~~

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

For the transition period from ___________ to ___________

Commission File Number:000-55117

VIRGINIA NATIONAL BANKSHARES ~~CORPORATION~~
CORPORATION

(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in its ~~charter)~~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)~~offices)		~~46-2331578~~ ~~(I.R.S. Employer~~ ~~Identification No.)~~ ~~22911~~ (Zip Code)

~~(434) 817-8621~~
~~(Registrant's~~

Registrant’s telephone number, including area ~~code)~~code: (434) 817-8621

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

VABK

OTCQX

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~~☒ 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~~☒ 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	☒

Non-accelerated filer	☐	☐	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 ☒ No

Indicate by check mark whether the ~~number of shares outstanding of each~~registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the ~~issuer’s classes~~Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of August 6, 2020, the registrant had 2,714,273 shares of common stock, ~~as of August 6, 2019:~~$2.50 par value per share, outstanding.

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

VIRGINIA NATIONAL BANKSHARES CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. Financial Information
	Item 1		Financial Statements	Page 3
		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 andResults of Operations	Page 3135
		Application of Critical Accounting Policies and Estimates		Page 3137
		Financial Condition		Page 3237
		Results of Operations		Page 3744

	Item 3		Quantitative and Qualitative Disclosures About Market Risk	Page 4451

	Item 4		Controls and Procedures	Page 4452

Part II. Other Information
	Item 1		Legal Proceedings	Page 4452
	Item 1A		Risk Factors	Page 4452
	Item 2		Unregistered Sales of Equity Securities and Use of Proceeds	Page 4452
	Item 3		Defaults Upon Senior Securities	Page 4452
	Item 4		Mine Safety Disclosures	Page 4552
	Item 5		Other Information	Page 4552
	Item 6 Exhibits		~~Exhibits~~	Page 4553

Signatures			Page 4654

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

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

	June 30, 2020			December 31, 2019*
ASSETS	(Unaudited)
Cash and due from banks	$	10,116		$	14,908
Federal funds sold		24,771			4,177
Securities:
Available for sale, at fair value		102,772			114,041
Restricted securities, at cost		1,736			1,683
Total securities		104,508			115,724
Loans		632,394			539,533
Allowance for loan losses		(4,917	)		(4,209	)
Loans, net		627,477			535,324
Premises and equipment, net		5,669			6,145
Bank owned life insurance		16,628			16,412
Goodwill		372			372
Other intangible assets, net		374			408
Accrued interest receivable and other assets		9,669			9,157
Total assets	$	799,584		$	702,627
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits:
Noninterest-bearing	$	197,227		$	166,975
Interest-bearing		136,274			122,994
Money market and savings deposit accounts		284,101			221,964
Certificates of deposit and other time deposits		96,599			109,278
Total deposits		714,201			621,211
Accrued interest payable and other liabilities		6,291			5,309
Total liabilities		720,492			626,520

Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $2.50 par value, 2,000,000 shares authorized, 0 shares outstanding		-			-
Common stock, $2.50 par value, 10,000,000 shares authorized; 2,714,273 (including 26,268 nonvested shares), and 2,692,005 (including 4,000 nonvested shares) issued and outstanding at June 30, 2020 and December 31, 2019, respectively		6,720			6,720
Capital surplus		32,307			32,195
Retained earnings		39,102			37,235
Accumulated other comprehensive income (loss)		963			(43	)
Total shareholders' equity		79,092			76,107
Total liabilities and shareholders' equity	$	799,584		$	702,627

Derived from audited Consolidated Financial Statements

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

(Unaudited)

For the three months ended For the six months ended
June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Interest and dividend income:
Loans, including fees $ 6,105 $ 5,935 $ 12,202 $ 11,649
Federal funds sold 74 39 93 74
Investment securities:
Taxable 246 271 498 549
Tax exempt 76 86 157 171
Dividends 31 33 57 61
Total interest and dividend income 6,532 6,364 13,007 12,504

Interest expense:
Demand and savings deposits 463 264 844 496
Certificates and other time deposits 586 262 1,045 402
Repurchase agreements and other borrowings 22 146 89 218
Total interest expense 1,071 672 1,978 1,116
Net interest income 5,461 5,692 11,029 11,388
Provision for (recovery of) loan losses (64 ) 701 620 605
Net interest income after provision for (recovery of) loan losses 5,525 4,991 10,409 10,783

Noninterest income:
Trust income 402 427 749 841
Advisory and brokerage income 156 142 292 282
Royalty income 4 34 8 552
Deposit account fees 192 236 373 483
Debit/credit card and ATM fees 189 204 346 391
Earnings/increase in value of bank owned life insurance 466 111 576 220
Fees on mortgage sales 56 46 86 82
Gains on sales of securities 64 - 64 -
Losses on sales of other assets - - - (33 )
Other 171 107 265 203
Total noninterest income 1,700 1,307 2,759 3,021

Noninterest expense:
Salaries and employee benefits 2,321 1,982 4,667 3,973
Net occupancy 444 449 923 930
Equipment 114 118 231 245
Data processing 330 295 646 547
Other 1,476 1,183 2,629 2,349
Total noninterest expense 4,685 4,027 9,096 8,044

Income before income taxes 2,540 2,271 4,072 5,760
Provision for income taxes 425 439 711 1,132
Net income $ 2,115 $ 1,832 $ 3,361 $ 4,628
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

	For the three months ended					For the six months ended
	June 30, 2020		June 30, 2019			June 30, 2020		June 30, 2019
Interest and dividend income:
Loans, including fees	$	6,156	$	6,105		$	12,027	$	12,202
Federal funds sold		10		74			95		93
Investment securities:
Taxable		229		246			738		498
Tax exempt		92		76			167	157
Dividends		24		31			48		57
Total interest and dividend income		6,511		6,532			13,075		13,007

Interest expense:
Demand and savings deposits		390		463			1,085		844
Certificates and other time deposits		366		586			860		1,045
Repurchase agreements and other borrowings		—		22			—		89
Total interest expense		756		1,071			1,945		1,978
Net interest income		5,755		5,461			11,130		11,029
Provision for (recovery of) loan losses		378		(64	)		1,143		620
Net interest income after provision for (recovery of) loan losses		5,377		5,525			9,987		10,409

Noninterest income:
Trust income		228		402			538		749
Advisory and brokerage income		163		156			341		292
Royalty income		24		4			71		8
Deposit account fees		143		192			322		373
Debit/credit card and ATM fees		134		189			291		346
Earnings/increase in value of bank owned life insurance		109		466			216		576
Fees on mortgage sales		30		56			77		86
Gains on sales of securities		590		64			643		64
Loan swap fee income		124		38			633		46
Other		81		133			163		219
Total noninterest income		1,626		1,700			3,295		2,759

Noninterest expense:
Salaries and employee benefits		2,258		2,321			4,682		4,667
Net occupancy		452		444			904		923
Equipment		136		114			267		231
Data processing		338		330			666		646
Other		1,220		1,476			2,428		2,629
Total noninterest expense		4,404		4,685			8,947		9,096

Income before income taxes		2,599		2,540			4,335		4,072
Provision for income taxes		511		425			843		711
Net income	$	2,088	$	2,115		$	3,492	$	3,361
Net income per common share, basic *	$	0.77	$	0.79		$	1.29	$	1.25
Net income per common share, diluted *	$	0.77	$	0.79		$	1.29	$	1.25
Weighted average common shares outstanding, basic *		2,710,019		2,688,005			2,701,411		2,683,122
Weighted average common shares outstanding, diluted *		2,711,017		2,688,965			2,702,311		2,687,391

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 in thousands)

(Unaudited)

      For the three months ended       For the six months ended
June 30, 2019       June 30, 2018 June 30, 2019       June 30, 2018
Net income $ 2,115 $ 1,832 $ 3,361 $ 4,628

Other comprehensive income (loss)

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 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) 486 (105 ) 1,240 (848 )

Total comprehensive income $          2,601 $          1,727 $          4,601 $          3,780

	For the three months ended						For the six months ended
	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Net income	$	2,088		$	2,115		$	3,492		$	3,361

Other comprehensive income

Unrealized gain on securities, net of tax of $512 and $403 for the three and six months ended June 30, 2020; and net of tax of $141 and $342 for the three and six months ended June 30, 2019		1,920			537			1,514			1,291

Reclassification adjustment for realized gains on sales of securities, net of tax of ($124) and ($135) for the three and six months ended June 30, 2020; and net of tax of ($13) and ($13) for the three and six months ended June 30, 2019		(466	)		(51	)		(508	)		(51	)

Total other comprehensive income		1,454			486			1,006			1,240

Total comprehensive income	$	3,542		$	2,601		$	4,498		$	4,601

See Notes to Consolidated Financial Statements

VIRGINIA NATIONAL BANKSHARES CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~2019~~2020 AND ~~2018~~
2019

(Dollars in thousands, except per share data)

(Unaudited)

                        Accumulated
Other
Common Capital Retained Comprehensive
Stock * Surplus * Earnings Income (Loss) Total
Balance, December 31, 2017 $ 6,027 $ 22,038 $ 37,923 $ (883 ) 65,105
Stock options exercised 16 128 - - 144
Stock option expense - 1 - - 1
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 - - 1,246 - 1,246
Other comprehensive income - - - 754 754
Balance, March 31, 2019 $ 6,400 $ 27,522 $ 39,126 $ (523 ) $ 72,525
Stock option expense - 23 - - 23
Stock dividend distributable ** 320 4,593 (4,913 ) - -
Cash dividends declared
($0.30 per share) - - (806 ) - (806 )
Net income - - 2,115 - 2,115
Other comprehensive income - - - 486 486
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.~~

								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
Unrestricted stock grants		27		397		-			-			424
Cash dividends declared ($0.30 per share)		-		-		(767	)		-			(767	)
Net income		-		-		1,246			-			1,246
Other comprehensive income		-		-		-			754			754
Balance, March 31, 2019	$	6,400	$	27,522	$	39,126		$	(523	)	$	72,525
Stock option expense		-		23		-			-			23
Stock dividend distributable *		320		4,593		(4,913	)		-			-
Cash dividends declared ($0.30 per share)		-		-		(806	)		-			(806	)
Net income		-		-		2,115			-			2,115
Other comprehensive income		-		-		-			486			486
Balance, June 30, 2019	$	6,720	$	32,138	$	35,522		$	(37	)	$	74,343

Balance, December 31, 2019	$	6,720	$	32,195	$	37,235		$	(43	)	$	76,107
Stock option expense		-		24		-			-			24
Restricted stock grant expense		-		15		-			-			15
Cash dividends declared ($0.30 per share)		-		-		(811	)		-			(811	)
Net income		-		-		1,404			-			1,404
Other comprehensive loss		-		-		-			(448	)		(448	)
Balance, March 31, 2020	$	6,720	$	32,234	$	37,828		$	(491	)	$	76,291
Stock option expense		-		34		-			-			34
Restricted stock grant expense		-		39		-			-			39
Cash dividends declared ($0.30 per share)		-		-		(814	)		-			(814	)
Net income		-		-		2,088			-			2,088
Other comprehensive income		-		-		-			1,454			1,454
Balance, June 30, 2020	$	6,720	$	32,307	$	39,102		$	963		$	79,092

* 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 six months ended
June 30, 2019       June 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,361 $ 4,628
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 620 605
Net amortization and accretion of securities 133 140
Net gains on sale of securities (64 ) -
Net losses on sales of assets - 33
Earnings on bank owned life insurance (576 ) (221 )
Amortization of intangible assets 51 58
Depreciation and other amortization 532 565
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 4,544 5,744

CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted investments (1 ) (887 )
Purchases of available for sale securities (6,946 ) -
Proceeds from maturities, calls and principal payments of
available for sale securities 2,547 2,706
Proceeds from sales of available for sale securities 10,443 -
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 (50 ) (100 )
Proceeds from settlement of bank owned life insurance 1,176 -
Purchase of bank premises and equipment (84 ) (357 )
Net cash provided by (used in) investing activities 21,818 (4,809 )

CASH FLOWS FROM FINANCING ACTIVITIES:
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 - (5,705 )
Net increase in other short term borrowings - 20,000
Proceeds from stock options exercised 102 218
Cash dividends paid (1,530 ) (941 )
Net cash used in financing activities    (20,442 ) 7,356
NET DECREASE IN CASH AND CASH EQUIVALENTS $ 5,920 $ 8,291

CASH AND CASH EQUIVALENTS:
Beginning of period $ 18,874 $ 18,277
End of period $ 24,794 $ 26,568

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,904 $ 1,048
Taxes $ 1,150 $ 1,415

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
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 $     -

	For the six months ended
	June 30, 2020			June 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,492		$	3,361
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,143			620
Net amortization and accretion of securities		210			133
Net gains on sale of securities		(643	)		(64	)
Earnings on bank owned life insurance		(216	)		(576	)
Amortization of intangible assets		57			51
Depreciation and other amortization		915			881
Stock option expense		58			47
Stock grants, unrestricted		-			424
Stock grant expense, restricted		54			-
Net change in:
Accrued interest receivable and other assets		(430	)		(397	)
Accrued interest payable and other liabilities		292			64
Net cash provided by operating activities		4,932			4,544

CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in restricted investments		(53	)		(1	)
Purchases of available for sale securities		(62,259	)		(6,946	)
Proceeds from maturities, calls and principal payments of available for sale securities		29,161			2,547
Proceeds from sales of available for sale securities		46,075			10,443
Net decrease (increase) in organic loans		(103,984	)		14,168
Net decrease in purchased loans		10,688			565
Cash payment for wealth management book of business		(50	)		(50	)
Proceeds from settlement of bank owned life insurance		-			1,176
Purchase of bank premises and equipment		(80	)		(84	)
Net cash provided by (used in) investing activities		(80,502	)		21,818

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts, and money market accounts		105,669			(32,476	)
Net increase (decrease) in certificates of deposit and other time deposits		(12,679	)		13,462
Proceeds from stock options exercised		-			102
Cash dividends paid		(1,618	)		(1,530	)
Net cash provided by (used in) financing activities		91,372			(20,442	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	15,802		$	5,920

CASH AND CASH EQUIVALENTS:
Beginning of period	$	19,085		$	18,874
End of period	$	34,887		$	24,794

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest	$	2,032		$	1,904
Taxes	$	375		$	1,150

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on available for sale securities	$	1,274		$	1,569
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)

June 30, ~~2019~~2020

Note 1. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Virginia National Bankshares Corporation (the “Company”), and its subsidiaries Virginia National Bank (the “Bank”) and Masonry Capital Management, LLC (“Masonry Capital”), a registered investment ~~adviser.~~advisor. Effective July 1, 2018, VNBTrust, National Association (“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, also referred to herein as “VNB Wealth.” All references herein to VNB Wealth Management or 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 Sturman Wealth Advisors, formerly known as 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. Operating results for the ~~three-month~~three and ~~six-month periods~~six months ended June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020.

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, ~~2018.~~ 2019. If needed, certain previously reported amounts have been reclassified to conform to current period presentation. No such reclassifications were significant.

Adoption of New Accounting Guidance

Interagency COVID-19 Guidance In March 2020, various regulatory agencies, including the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance may have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Recent Accounting Pronouncements

Financial Instruments – Credit LossesIn 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~~FASB has issued multiple updates to ASU 2016-13 as codified in ~~this ASU~~Topic 326, including ASU’s 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, and 2020-03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are ~~effective for SEC filers~~required to apply the guidance 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 meets regularly to address the compliance requirements, data requirements and sources, and analysis efforts 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 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.

~~Goodwill Impairment Testing~~Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

Income Taxes In ~~January 2017,~~December 2019, the FASB issued ASU ~~No. 2017-04, “Intangibles~~2019-12, “Income Taxes (Topic 740) – ~~Goodwill and Other (Topic 350):~~ Simplifying the ~~Test~~Accounting for ~~Goodwill Impairment.~~Income Taxes.” The ~~amendments~~ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in ~~this~~Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU ~~simplify how an entity~~ is ~~required~~part of the FASB’s simplification initiative to ~~test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures~~make narrow-scope simplifications and improvements to accounting standards through a ~~goodwill impairment loss by comparing the implied fair value~~series 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. Publicshort-term projects. For 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.

~~Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement~~In August 2018, the FASB issued ASU 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 Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the 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, ~~2019,~~2020, 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~~2019-12 to have a material impact on its consolidated financial statements.

~~Financial Instruments~~

Investments – ~~Credit Losses – Derivatives and Hedging~~Equity Securities In ~~April 2019,~~January 2020, the FASB issued ASU ~~2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815,~~2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic ~~825, Financial Instruments.~~815.” ~~This~~The ASU ~~clarifies~~is based on a consensus of the FASB’s Emerging Issues Task Force and ~~improves areas of guidance related~~is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ~~recently issued standards on credit losses, hedging, and recognition and measurement including improvements~~ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from ~~various Transition Resource Group meetings. The~~observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, ~~2019,~~2020, and interim periods within those fiscal years. Early adoption is permitted. The Company ~~is currently assessing~~does not expect the ~~impact that~~adoption of ASU ~~2019-04 will~~2020-01 to have a material impact on its consolidated financial statements.

LIBOR and Other Reference Rates In March 2020, the Financial ~~Instruments – Credit Losses – Targeted Transition Relief~~~~In May 2019, the FASB~~Accounting Standards Board (FASB) issued ASU ~~2019-05, “Financial Instruments—Credit Losses~~No. 2020-04 “Reference Rate Reform (Topic ~~326)~~848): ~~Targeted Transition Relief.~~Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ~~amendments in this~~ ASU ~~provide entities~~provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that ~~have certain instruments within~~reference the ~~scope of Subtopic 326-20 with an option~~London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to ~~irrevocably elect~~be discontinued. It is intended to help stakeholders during the ~~fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326.~~global market-wide reference rate transition period. 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 in fair value flowing through earnings. The amendments areguidance is effective for ~~fiscal years beginning after~~all entities as of March 12, 2020 through December ~~15, 2019,~~31, 2022. To facilitate an orderly transition from LIBOR, Inter-bank Offered Rate (“IBOR”) and ~~interim periods within those fiscal years.~~other benchmark rates to alternative reference rates (“ARRs”), the Company has established a focus committee, which includes members of senior management, including the Chief Credit Officer and Chief Financial Officer, among others. The ~~amendments should be applied on a modified-retrospective basis by means~~task of ~~a cumulative-effect adjustment~~this committee is to identify, assess and monitor risk associated with the ~~opening balance~~expected discontinuation or unavailability of ~~retained earnings balance~~benchmarks, including LIBOR, achieve operations readiness and engage impacted clients in connection with the ~~balance sheet. Early adoption is permitted.~~transition to ARRs. The Company is ~~currently~~ assessing ASU 2020-04 and its impact on the ~~impact that ASU 2019-05~~Company’s transition away from LIBOR for its loan and other financial instruments.

SEC Filing Requirements On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date. Prior to these changes, the Company was required to comply with section 404(b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer” as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues. The Company expects to meet this expanded category of smaller reporting company and will no longer be considered an accelerated filer. If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (ICFR) and include the opinion on ICFR in its annual report on Form 10-K. Smaller reporting companies also have ~~on its consolidated~~additional time to file quarterly and annual financial statements. All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for smaller reporting companies. As the Bank’s total assets exceed $500 million, it remains subject to FDICIA’s internal reporting requirements, but does not require an auditor attestation concerning internal controls over financial reporting. As such, professional and consulting expenditures should decline by an immaterial amount.

Note 2. Securities

The amortized cost and fair values of securities available for sale as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows (dollars in thousands):

June 30, 2019 Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains (Losses) Value
U.S. Government agencies $ 19,500 $ - $ (39 ) $ 19,461
Mortgage-backed securities/CMOs 26,611 23 (169 ) 26,465
Municipal bonds 10,785 143 (6 ) 10,922
Total Securities Available for Sale $ 56,896 $ 166 $ (214 ) $ 56,848

December 31, 2018 Amortized Gross Unrealized Gross Unrealized Fair
Cost Gains (Losses) Value
U.S. Government agencies $ 19,500 $ - $ (526 ) $ 18,974
Mortgage-backed securities/CMOs 25,901 1 (839 ) 25,063
Municipal bonds 17,608 12 (265 ) 17,355
Total Securities Available for Sale $ 63,009 $ 13 $ (1,630 ) $ 61,392

June 30, 2020	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	9,003	$	40	$	(6	)	$	9,037
Mortgage-backed securities/CMOs		57,842		762		(202	)		58,402
Municipal bonds		34,707		773		(147	)		35,333
Total Securities Available for Sale	$	101,552	$	1,575	$	(355	)	$	102,772

December 31, 2019	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	15,000	$	-	$	(48	)	$	14,952
Corporate bonds		7,469		-		-			7,469
Mortgage-backed securities/CMOs		71,970		76		(314	)		71,732
Municipal bonds		19,656		282		(50	)		19,888
Total Securities Available for Sale	$	114,095	$	358	$	(412	)	$	114,041

As of June 30, ~~2019,~~2020, there were ~~$36.9~~$42.2 million, or 2729 issues of individual securities, held in aan unrealized loss position. These securities have an unrealized loss of ~~$214~~$355 thousand and consisted of 1912 mortgage-backed/CMOs, 415 municipal bonds, and 42 agency bonds.

The following table summarizes all securities with unrealized losses, segregated by length of time in a continuous unrealized loss position, at June 30, ~~2019,~~2020, and December 31, ~~2018~~2019 (dollars in thousands):

June 30, 2019
Less than 12 Months 12 Months or more Total
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
U.S. Government agencies $ - $ - $ 11,961 $ (39 ) $ 11,961 $ (39 )
Mortgage-backed/CMOs 4,041 (7 ) 19,374 (162 ) 23,415 (169 )
Municipal bonds 1,048 (5 ) 503 (1 ) 1,551 (6 )
$ 5,089 $      (12 ) $ 31,838 $ (202 ) $ 36,927 $ (214 )
December 31, 2018
Less than 12 Months 12 Months or more Total
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
U.S. Government agencies $ - $ - $ 18,974 $ (526 ) $ 18,974 $ (526 )
Mortgage-backed/CMOs - - 24,657 (839 ) 24,657 (839 )
Municipal bonds 4,983 (34 ) 10,722 (231 ) 15,705 (265 )
$     4,983 $     (34 ) $     54,353 $     (1,596 ) $     59,336 $     (1,630 )

June 30, 2020
	Less than 12 Months					12 Months or more				Total
			Unrealized					Unrealized				Unrealized
	Fair Value		Losses			Fair Value		Losses		Fair Value		Losses
U.S. Government agencies	$	2,994	$	(6	)	$	—	$	—	$	2,994	$	(6	)
Mortgage-backed/CMOs		25,205		(202	)		—		—		25,205		(202	)
Municipal bonds		13,958		(147	)		—		—		13,958		(147	)
	$	42,157	$	(355	)	$	—	$	—	$	42,157	$	(355	)

December 31, 2019
	Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	9,957	$	(43	)	$	1,995	$	(5	)	$	11,952	$	(48	)
Mortgage-backed/CMOs		39,061		(228	)		7,716		(86	)		46,777		(314	)
Municipal bonds		5,922		(50	)		—		—			5,922		(50	)
	$	54,940	$	(321	)	$	9,711	$	(91	)	$	64,651	$	(412	)

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~~considered by management to be driven by 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 June 30, ~~2019,~~2020, 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 June 30, ~~2019,~~2020, 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 ~~$5.0~~$4.0 million at June 30, ~~2019~~2020 were pledged as collateral to secure public ~~deposits.~~deposits and facilitate borrowing from the Federal Reserve Bank of Richmond (“FRB”). At December 31, ~~2018,~~2019, securities having carrying values of ~~$18.0~~$5.0 million were similarly pledged.

For the six months ended June 30, 2020, proceeds from the sales of securities amounted to $46.1 million, with gross realized gains of $655 thousand and gross realized losses of $12 thousand, for a net realized gain of $643 thousand. For the six months ended June 30, 2019, proceeds from the sales of securities amounted to $10.4 million, with gross realized gains of $93 thousand and gross realized losses of $29 thousand, for a net realized gain ~~on these securities netted~~of $64 thousand. ~~For the six months ended June 30, 2018, there were no sales of securities.~~

Restricted securities are securities with limited marketability and consist of stock in the ~~Federal Reserve Bank of Richmond (“FRB”),~~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 $1.7 million as of both June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are carried at cost.

Note 3. Loans

The composition of the loan portfolio by loan classification at June 30, ~~2019~~2020 and December 31, ~~2018~~2019 appears below (dollars in thousands).

	June 30,			December 31,			June 30,			December 31,
	2019			2018			2020			2019
Commercial
Commercial and industrial - organic	$	39,376		$	41,526		$	37,459		$	38,843
Commercial and industrial - Paycheck Protection Program								84,244			—
Commercial and industrial - government guaranteed		35,143			31,367			33,959			35,347
Commercial and industrial - syndicated		12,091			12,134			6,374			6,398
Total commercial and industrial		86,610			85,027			162,036			80,588
Real estate construction and land
Residential construction		1,021			1,552			3,208			2,197
Commercial construction		3,663			5,078			16,010			6,880
Land and land development		9,636			10,894			7,282			8,063
Total construction and land		14,320			17,524			26,500			17,140
Real estate mortgages
1-4 family residential, first lien, investment		40,807			40,311			55,180			44,099
1-4 family residential, first lien, owner occupied		16,304			16,775			16,766			20,671
1-4 family residential, junior lien		2,894			3,169			2,254			2,520
1-4 family residential - purchased		18,451			18,647			27,050			33,428
Home equity lines of credit, first lien		8,544			8,325			9,862			10,268
Home equity lines of credit, junior lien		9,472			10,912			9,990			9,671
Farm		9,298			10,397			7,949			8,808
Multifamily		24,432			27,328			32,330			27,093
Commercial owner occupied		95,286			93,800			97,267			96,117
Commercial non-owner occupied		116,890			123,214			121,823			118,561
Total real estate mortgage		342,378			352,878			380,471			371,236
Consumer
Consumer revolving credit		24,341			21,540			18,435			20,081
Consumer all other credit		4,196			5,530			4,209			5,741
Student loans purchased		49,918			54,691			40,743			44,747
Total consumer		78,455			81,761			63,387			70,569
Total loans		521,763			537,190			632,394			539,533
Less: Allowance for loan losses		(4,817	)		(4,891	)		(4,917	)		(4,209	)
Net loans	$	516,946		$	532,299		$	627,477		$	535,324

During the second quarter of 2020, the Bank originated $86.9 million of Small Business Administration (SBA) Paycheck Protection Program (PPP) loans, which were designed to provide economic relief to small businesses adversely impacted by COVID-19.

The balances in the table above include unamortized premiums and net deferred loan costs ~~and fees.~~(fees). As of June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, unamortized premiums on loans purchased were ~~$2.6~~$2.2 million and $2.5 million, respectively. Net deferred loan costs (fees) totaled ~~$95 thousand~~$(2.5) million and ~~$129~~$100 thousand as of June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019. The deferred fees increased $2.6 million due to the fees collected from the SBA for the PPP loans which are being amortized over the contractual life of the underlying loans, most of which are over a 24-month period.

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 June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. 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 six months ended June 30, ~~2019~~2020 or the twelve months ended December 31, ~~2018.~~2019. Interest income recognized is for the six months ended June 30, ~~2019~~2020 or the twelve months ended December 31, ~~2018. (Dollars~~2019.(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.

In accordance with regulatory guidance, the Bank has approved for certain customers who have been adversely affected by COVID-19 to defer principal-only, or principal and interest, payments for a 90- to 180-day period. Such short-term modifications, which were made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. While interest will continue to accrue to income, in accordance with GAAP, if the Bank ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and therefore, interest income in future periods could be negatively impacted. A total of $56.8 million in loan deferments have been approved in total since the beginning of the pandemic, and as of June 30, 2020, $17.0 million, or 29.9%, of the total loan deferments approved have returned to normal payment schedules and are now current.

Based on regulatory guidance on Student Lending, the Company has classified 6872 of its student loans purchased as TDRs for a total of ~~$1.2~~$1.1 million as of June 30, ~~2019.~~2020. 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. Initially, all student loans were fully insured by a surety bond, and the Company 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~~probable 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 six months ended June 30, ~~2019~~2020 and ~~2018~~2019 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.

During the six months ended June 30, ~~2019,~~2020, there were ~~two~~2 loans modified as TDRs that subsequently defaulted which had been modified as TDRs during the twelve months prior to default. These student loans had a balance of $2$7 thousand prior to being charged off. There ~~was one loan~~were 3 loans modified as a TDR that subsequently defaulted during the year ~~ending~~ended December 31, ~~2018~~2019 which had been modified as a TDR during the twelve months prior to default. ~~This~~These student loan had ~~a balance of $33~~balances totaling $23 thousand prior to being charged off.

There were no0 loans secured by 1-4 family residential property that were in the process of foreclosure at either June 30, ~~2019~~2020 or December 31, ~~2018.~~2019.

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.

¹Commercial and industrial – government guaranteed class excludes Paycheck Protection Program loans

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

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 is 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 is applied, as these loans represent a low risk and are secured by marketable collateral within margin. In an abundance of caution, a nominal loss reserve is applied to these loans. The Company has never experienced a loss within this category.

Satisfactory– modest risk loans where the borrower has strong and liquid financial statements and more than adequate cash flow

Average– average risk loans where the borrower has reasonable debt service capacity

Marginal– acceptable risk loans where the borrower has acceptable financial statements but is leveraged

Watch

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.

Special Mention

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.

Substandard

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.

Doubtful

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 June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (dollars in thousands). There were no loans rated “Doubtful” as of either period.

Special Sub-
June 30, 2019 Excellent Good Pass Watch Mention standard TOTAL
Commercial
Commercial and industrial - organic $ 2,457 $ 20,638 $ 15,672 $ 176 $ - $ 433 $ 39,376
Commercial and industrial - government guaranteed 35,143 - - - - - 35,143
Commercial and industrial - syndicated - - 9,560 - - 2,531 12,091
Real estate construction
Residential construction - - 1,021 - - - 1,021
Commercial construction - - 3,663 - - - 3,663
Land and land development - - 8,675 484 - 477 9,636
Real estate mortgages
1-4 family residential, first lien, investment - - 36,600 3,827 114 266 40,807
1-4 family residential, first lien, owner occupied - - 15,181 1,060 9 54 16,304
1-4 family residential, junior lien - - 2,357 39 20 478 2,894
1-4 family residential, first lien - purchased - - 18,451 - - - 18,451
Home equity lines of credit, first lien - - 7,866 338 - 340 8,544
Home equity lines of credit, junior lien - - 9,291 99 - 82 9,472
Farm - - 7,652 328 - 1,318 9,298
Multifamily - - 24,432 - - - 24,432
Commercial owner occupied - - 86,398 6,828 - 2,060 95,286
Commercial non-owner occupied - - 113,143 2,684 - 1,063 116,890
Consumer
Consumer revolving credit 75 23,786 469 11 - - 24,341
Consumer all other credit 245 3,430 492 2 - 27 4,196
Student loans purchased - - 47,392 2,109 347 70 49,918
Total Loans $ 37,920 $ 47,854 $ 408,315 $ 17,985 $ 490 $ 9,199 $ 521,763

Special Sub-
December 31, 2018 Excellent Good Pass Watch Mention standard TOTAL
Commercial
Commercial and industrial - organic $ 3,692 $ 23,381 $ 13,993 $ 264 $ 28 $ 168 $ 41,526
Commercial and industrial - government guaranteed 31,367 - - - - - 31,367
Commercial and industrial - syndicated - - 9,588 - - 2,546 12,134
Real estate construction
Residential construction - - 1,552 - - - 1,552
Commercial construction - - 5,078 - - - 5,078
Land and land development - - 9,888 501 - 505 10,894
Real estate mortgages
1-4 family residential, first lien, investment - - 36,314 3,607 117 273 40,311
1-4 family residential, first lien, owner occupied - - 15,540 1,087 11 137 16,775
1-4 family residential, junior lien - - 2,573 58 22 516 3,169
1-4 family residential, first lien - purchased - - 18,647 - - - 18,647
Home equity lines of credit, first lien - - 7,911 414 - - 8,325
Home equity lines of credit, junior lien - - 10,704 97 - 111 10,912
Farm - - 8,719 339 - 1,339 10,397
Multifamily - - 27,328 - - - 27,328
Commercial owner occupied - - 86,868 6,932 - - 93,800
Commercial non-owner occupied - - 120,720 1,519 - 975 123,214
Consumer
Consumer revolving credit 44 20,852 644 - - - 21,540
Consumer all other credit 263 4,699 535 4 - 29 5,530
Student loans purchased - - 51,494 2,401 431 365 54,691
Total Loans $ 35,366 $ 48,932 $ 428,096 $ 17,223 $ 609 $ 6,964 $ 537,190

June 30, 2020	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial
Commercial and industrial - organic	$	5,980	$	16,733	$	14,182	$	224	$	—	$	340	$	37,459
Commercial and industrial - Paycheck Protection Program		84,244		-		-		-		-		-		84,244
Commercial and industrial - government guaranteed		33,959		-		-		-		-		-		33,959
Commercial and industrial - syndicated		-		-		6,374		-		-		-		6,374
Real estate construction
Residential construction		-		-		3,208		-		-		-		3,208
Commercial construction		-		-		16,010		-		-		-		16,010
Land and land development		-		-		7,059		200		-		23		7,282
Real estate mortgages
1-4 family residential, first lien investment		-		-		52,114		2,702		-		364		55,180
1-4 family residential, first lien, owner occupied		-		-		14,979		1,022		-		765		16,766
1-4 family residential, junior lien		-		-		1,805		31		15		403		2,254
1-4 family residential, first lien - purchased		-		-		27,050		-		-		-		27,050
Home equity lines of credit, first lien		-		-		9,862		-		-		-		9,862
Home equity lines of credit, junior lien		-		-		9,824		84		-		82		9,990
Farm		-		-		6,366		307		-		1,276		7,949
Multifamily		-		-		31,934		396		-		-		32,330
Commercial owner occupied		-		-		86,895		5,533		-		4,839		97,267
Commercial non-owner occupied		-		-		119,431		1,510		-		882		121,823
Consumer
Consumer revolving credit		839		17,433		160		-		-		3		18,435
Consumer all other credit		400		3,340		468		-		-		1		4,209
Student loans purchased		-		-		39,374		1,213		64		92		40,743
Total Loans	$	125,422	$	37,506	$	447,095	$	13,222	$	79	$	9,070	$	632,394

December 31, 2019	Excellent		Good		Pass		Watch		Special Mention		Sub- standard		TOTAL
Commercial
Commercial and industrial - organic	$	6,463	$	16,453	$	14,257	$	1,493	$	37	$	140	$	38,843
Commercial and industrial - government guaranteed		35,347		-		-		-		-		-		35,347
Commercial and industrial - syndicated		-		-		6,398		-		-		-		6,398
Real estate construction
Residential construction		-		-		2,197		-		-		-		2,197
Commercial construction		-		-		6,880		-		-		-		6,880
Land and land development		-		-		7,563		207		-		293		8,063
Real estate mortgages
1-4 family residential, first lien, investment		-		-		39,641		4,076		-		382		44,099
1-4 family residential, first lien, owner occupied		-		-		19,578		1,040		-		53		20,671
1-4 family residential, junior lien		-		-		2,029		33		17		441		2,520
1-4 family residential, first lien - purchased		-		-		33,428		-		-		-		33,428
Home equity lines of credit, first lien		-		-		9,591		677		-		-		10,268
Home equity lines of credit, junior lien		-		-		9,357		232		-		82		9,671
Farm		-		-		6,149		318		-		2,341		8,808
Multifamily		-		-		26,690		403		-		-		27,093
Commercial owner occupied		-		-		86,884		5,928		1,677		1,628		96,117
Commercial non-owner occupied		-		-		116,092		1,558		-		911		118,561
Consumer										-
Consumer revolving credit		279		19,176		606		20		-		-		20,081
Consumer all other credit		199		5,035		507		-		-		-		5,741
Student loans purchased		-		-		42,598		1,729		211		209		44,747
Total Loans	$	42,288	$	40,664	$	430,445	$	17,714	$	1,942	$	6,480	$	539,533

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:

Changes in national and local economic conditions, including the condition of various market ~~segments;~~segments, which deteriorated in the first six months of 2020,

Changes in the value of underlying collateral;

Changes in volume of classified assets, measured as a percentage of capital;

Changes in volume of delinquent loans;

The existence and effect of any concentrations of credit and changes in the level of such concentrations;

Changes in lending policies and procedures, including underwriting standards;

Changes in the experience, ability and depth of lending management and staff; and

Changes in the level of policy exceptions.

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,” 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 ~~$2.6~~$2.1 million at June 30, ~~2019,~~2020, specific valuation allowance 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~~$7 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~~2020 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 six months ended June 30, ~~2019~~2020 and the year ended December 31, ~~2018~~2019 appears below (dollars in thousands):

Allowance for Loan Losses Rollforward by Portfolio Segment	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
					Real Estate
		Commercial			Construction			Real Estate			Consumer
As of and for the period ended June 30, 2020																	As of and for the period ended June 30, 2020
		Loans			and Land			Mortgages			Loans			Total				Commercial Loans			Real Estate Construction and Land		Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of January 1, 2019		$	811		$	119		$	2,611		$	1,350		$	4,891
Balance as of beginning of year																		$	302		$	109	$	2,684	$	1,114		$	4,209
Charge-offs			-			-			-			(823	)		(823	)			-			-		-		(581	)		(581	)
Recoveries			35			-			15			79			129				19			-		-		127			146
Provision for (recovery of) loan losses			2			(18	)		16			620			620				(59	)		96		691		415			1,143
Ending Balance		$	848		$	101		$	2,642		$	1,226		$	4,817			$	262		$	205	$	3,375	$	1,075		$	4,917

Ending Balance:
Individually evaluated for impairment		$	-		$	-		$	-		$	51		$	51			$	-		$	-	$	-	$	7		$	7
Collectively evaluated for impairment			848			101			2,642			1,175			4,766				262			205		3,375		1,068			4,910

Loans:
Individually evaluated for impairment		$	-		$	28		$	1,025		$	1,591		$	2,644			$	-		$	11	$	967	$	1,090		$	2,068
Collectively evaluated for impairment			86,610			14,292			341,353			76,864			519,119				162,036			26,489		379,504		62,297			630,326
Ending Balance		$	86,610		$	14,320		$	342,378		$	78,455		$	521,763			$	162,036		$	26,500	$	380,471	$	63,387		$	632,394

As of and for the year ended December 31, 2018
					Real Estate
		Commercial			Construction			Real Estate			Consumer
		Loans			and Land			Mortgages			Loans			Total
Allowance for Loan Losses:
Balance as of January 1, 2018		$	885		$	206		$	2,730		$	222		$	4,043
Charge-offs			(75	)		-			-			(1,022	)		(1,097	)
Recoveries			54			-			2			16			72
Provision for (recovery of) loan losses			(53	)		(87	)		(121	)		2,134			1,873
Ending Balance		$	811		$	119		$	2,611		$	1,350		$	4,891

Ending Balance:
Individually evaluated for impairment		$	-		$	-		$	-		$	90		$	90
Collectively evaluated for impairment			811			119			2,611			1,260			4,801

Loans:
Individually evaluated for impairment		$	-		$	32		$	1,132		$	1,602		$	2,766
Collectively evaluated for impairment			85,027			17,492			351,746			80,159			534,424
Ending Balance		$	85,027		$	17,524		$	352,878		$	81,761		$	537,190

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.~~placed in nonaccrual or charged off.

The following tables show the aging of past due loans as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. (Dollars below reported in thousands.)

On June 13, 2019, the Board of Directors approved a stock dividend of five percent (5%) on the outstanding shares of common stock of the 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 that they otherwise would have been entitled to receive in connection with the stock dividend. The price paid for fractional shares was based on the volume-weighted average price of 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 data have been adjusted to reflect the 5% Stock Dividend. The 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 six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. Potential dilutive common stock equivalents have no effect on net income available to common shareholders. Unvested restricted stock as noted in the Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 is included in the calculation of basic and diluted net income per share. (Dollars below reported in thousands except per share data.)

For the ~~six-month period~~six months ended June 30, 2020, there were 104,301 option shares considered anti-dilutive and excluded from this calculation. For the six months ended June 30, 2019, there were 66,308 option shares, as adjusted, considered anti-dilutive and excluded from this calculation. ~~For the six-month period ended June 30, 2018, there were 65,888 options shares, as adjusted, considered anti-dilutive and 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 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. The 2014 Plan provides for granting of both incentive and nonqualified stock options, as well as restricted stock and other stock based awards. NoNaN new grants will be issued under the 2005 Stock Incentive Plan (“2005 Plan”) as this plan has expired.

For ~~all of~~ the ~~Company’s stock incentive plans~~2014 Plan and the 2005 Plan (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 June 30, ~~2019.~~2020. Share data and exercise price range per share have been adjusted to reflect the 5% Stock ~~Dividend.~~Dividend and prior stock dividends. Although the 2005 Plan has expired and no0 new grants will be issued under this plan, there were options issued before the plan expired ~~which~~that 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.

Changes in the stock options outstanding related to the Plans are summarized below. (Dollars in thousands except per share data):

For the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, the Company recognized ~~$47~~$58 thousand and ~~$17~~$47 thousand, respectively, in compensation expense for stock options. As of June 30, ~~2019,~~2020, there was ~~$359~~$377 thousand in unrecognized compensation expense remaining to be recognized in future reporting periods through ~~2024.~~

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

2025. The fair value of any stock option grant is estimated at the grant date using the Black-Scholes pricing model. ~~Stock~~26,000 stock option grants ~~for 420 and 65,888 shares, as adjusted for the 5% Stock Dividend,~~ were issued during the ~~first~~ six months ~~of 2019~~ended June 30, 2020, and ~~2018, respectively.~~420 stock option grants were issued during the six months ended June 30, 2019. NaN stock option grants were issued during the three months ended June 30, 2020 and 420 stock option grants were issued during the three months ended June 30, 2019. The fair value of each option granted in ~~2019~~2020 was estimated based on the assumptions noted in the following table:

Summary information pertaining to options outstanding at June 30, ~~2019~~2020 is shown below. Share and per share data have been adjusted to reflect the 5% Stock ~~Dividend.~~Dividend and prior stock dividends.

Unrestricted stock grants - NaN unrestricted stock grants were issued in the first six months of 2020. On February 20, 2019, a total of 11,535 shares of unrestricted 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~~ended December 31, 2019. Based on the market price on February 20, 2019 of ~~$36.72, as adjusted for the 5% Stock Dividend,~~$38.65, the total expense for these shares ~~will be~~of $424 thousand ~~which will be~~was expensed ~~over the twelve months of~~in 2019 as those services ~~are~~were provided. ~~For the six months ended~~As of June 30, 2019, $212 thousand of this total ~~has~~had been realized in stock grant expense. ~~There were no~~

Restricted stock grants – In September 2019, 4,000 restricted shares were granted to certain members of executive management, vesting over a four-year period. In March 2020, 10,368 restricted shares were granted to non-employee directors, vesting over a four-year period. In April 2020, 1,900 shares were issued to lenders in accordance with an internal lender incentive plan, vesting over a five-year period, and in May 2020, 10,000 restricted shares were granted to certain members of executive management, vesting over a four-year period. For the three and six months ended June 30, 2020, $39 thousand and $54 thousand, respectively, was expensed as a result of restricted stock grants. As of June 30, 2020, there was $643 thousand in unrecognized compensation expense for restricted stock grants remaining to be recognized in future reporting periods through 2025. For the three and six months ended June 30, 2019, there was 0 expense incurred, and as of June 30, 2019, there was 0 unrecognized compensation expense, for restricted stock grants, as 0 restricted stock had been granted during or at such time.

Changes in the restricted stock grants outstanding during the ~~year~~six months ended ~~December 31, 2018.~~June 30, 2020 are summarized below. (Dollars in thousands except per share data):

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 June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (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:

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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had no0 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 (a) the observable market price of the loan or the fair value of the collateral, or (b) 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.

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 ~~$2.6~~$2.1 million as of June 30, ~~2019~~2020 and ~~$2.8~~$2.5 million as of December 31, ~~2018.~~2019. All impaired loans were measured based on expected future cash flows discounted at the loan’s effective interest ~~rate.~~rate, or fair value of collateral, as noted above.

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.

The ~~company~~Company uses the exit price notion in calculating the fair values of financial instruments not measured at fair value on a recurring basis.

The carrying values and estimated fair values of the Company's financial instruments as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 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 six months ended June 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands)

Beginning in 2019, the Company has ~~four~~4 reportable 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 three months ended June 30, 2020 and 2019, management fees totaling $25 thousand were charged by the Bank and eliminated in consolidated totals. For both the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, management fees totaling $50 thousand were charged by the Bank and eliminated in consolidated totals.

Segment information for the three ~~months~~ and six months ended June 30, ~~2019~~2020 and ~~2018~~2019 is shown in the following tables (dollars in thousands).

* Not reportable. Asset Note that asset information is not reported ~~for these segments,~~below, as the assets previously allocated to VNB Wealth are

reported at the Bank level subsequent to the merger of VNBTrust, National Association, into the Bank effective July 1, 2018; also, assets specifically allocated to ~~these~~the 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 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 present information about the Company’s leases (dollars in thousands):

A maturity analysis of operating lease liabilities and 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 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 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, included in the Company’s Form 10-K for the year ended December 31, ~~2018, included in the Company’s 2018 Form 10-K.~~2019. Per share data for June 30, 2019 ~~and all preceding periods disclosed have~~has been adjusted to reflect the 5% stock dividend effective July 5, 2019 (the “5% Stock Dividend”). Operating results for the three and six months ended June 30, ~~2019~~2020 are not necessarily indicative of the results for the year ending December 31, ~~2019~~2020 or any future period.

Certain statements contained or incorporated by reference in this quarterly report on Form 10-Q, includingbut 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~~within the meaning of the Private Securities ~~Exchange~~Litigation Reform Act of ~~1934.~~1995. Such statements are often characterized by use of qualified words such as “expect,” “believe,” “estimate,” “project,” “anticipate,” “intend,” “will,” ~~“should”~~“should,” or words of similar meaning or other statements concerning the opinions or ~~judgment~~judgement of the Company and its management about future events. ~~These~~While Company management believes such statements ~~are not historical facts but instead~~to be reasonable, future events and predictions are subject to ~~numerous~~circumstances that are not within the control of the Company and its management. Actual results may differ materially from those included in the forward-looking statements due to a number of factors, including, without limitation, the effects of and changes in: general economic and market conditions, including the effects of declines in real estate values, an increase in unemployment levels and general economic contraction as a result of COVID-19 or other pandemics; fluctuations in interest rates, deposits, loan demand, and asset quality; assumptions that underlie the Company’s allowance for loan losses; the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (e.g., COVID-19 or other pandemics), and of governmental and societal responses thereto; the performance of vendors or other parties with which the Company does business; competition; technology; laws, regulations and guidance; accounting principles or guidelines; performance of assets under management; and other factors impacting financial services businesses. Many of these factors and additional risks and uncertainties are described in the Company’s Form 10-K for the year ended December 31, 2019 (the Company’s 2019 Form 10-K) 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~~other reports filed from time to time by the Company with the Securities and Exchange Commission. These statements speak only as of the date ~~on which such statements are made. Our actual results~~made, 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~~does not undertake to update ~~or revise~~any forward-looking statements ~~in order~~ to reflect ~~new information~~changes or ~~subsequent~~ events that may occur after this release.

The COVID-19 pandemic has caused, and will likely continue to cause, economic and social disruption, significantly affecting many industries, including many of our clients. Significant uncertainty exists regarding the magnitude of the impact and duration of this pandemic. Following are brief descriptions of areas within our Company that have been or ~~changes in expectations.~~may be impacted.

~~Factors that could cause our actual results to differ materially from those in the forward-looking~~Financial Condition and Results of Operations

The Company’s consolidated financial statements include ~~but are not limited to,~~estimates and assumptions made by management which affect the ~~following: inflation, interest rates, market~~reported amounts of assets and ~~monetary fluctuations; geopolitical developments~~liabilities, including ~~acts~~the level 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~~losses (ALLL) that is established. While the Company has not yet experienced any charge-offs directly related to COVID-19, the ALLL calculation and ~~assumptions associated~~resulting provision for loan losses are impacted by changes in economic conditions. As of March 31, 2020 and June 30, 2020, the Company downgraded the economic qualitative factors within its ALLL model in light of the effects of COVID-19 on the economy. If economic conditions continue to worsen, the Company could experience further increases in the required ALLL and record additional provision for loan loss expense. It is possible that asset quality metrics could decline in the future if the effects of COVID-19 are sustained.

While most industries have been adversely impacted by COVID-19, the Company has exposures on its balance sheet as of June 30, 2020 in the following categories of loans that are considered to have higher risk of significant impact:

Note that the loan balances and percentages above do not include Small Business Administration (SBA) Paycheck Protection Program (PPP) loans made to entities within such categories.

Interest income could be reduced due to the economic impact of COVID-19. In accordance with ~~mergers~~guidance from regulators, we are working with borrowers who have been adversely affected by COVID-19 to defer principal only, or principal and ~~acquisitions~~interest payments for a 90- to 180-day period. While interest will continue to accrue to income, in accordance with accounting principles generally accepted in the United States (“GAAP”), if the Company ultimately incurs a credit loss on these deferred payments, interest income would need to be reversed and ~~other expansion activities; other risks~~therefore, interest income in future periods could be negatively affected. Since the beginning of the pandemic, the Company has accommodated 169 deferrals on outstanding loan balances of $56.8 million (of which 131 deferrals on outstanding loan balances of $1.8 million were related to student loans). In accordance with interagency guidance issued in March 2020, these short-term deferrals are not considered troubled debt restructurings.

Within the second quarter of 2020, the Company devoted significant resources to accept PPP applications, a program designed to provide a direct incentive for small businesses to keep employees on their payroll. In total, the Company has closed 574 loans representing $86.9 million in funding, with average origination fees of 3.4%, assisting many nonprofits and ~~uncertainties described~~local businesses through this program. Loans funded through the PPP are fully guaranteed by the U.S. government. The Company performed the required due diligence pursuant to the established SBA criteria; nonetheless if a determination was made that certain loans did not meet the criteria established for the program, the Company may be required to establish additional ALLL through provision for loan loss expense which will negatively impact net income.

Throughout the onset of this pandemic, the Company has maintained its high standards of credit quality on organic loan funding to limit credit risk exposure.

As of June 30, 2020, capital ratios of the Company were in excess of regulatory requirements. While currently included in the category of “well capitalized” by bank regulators, a prolonged economic recession could adversely impact reported and regulatory capital ratios.

The Company maintains access to multiple sources of liquidity. Management has also revisited its capital and liquidity stress tests, as well as capital and liquidity contingency plans to validate how the Company can react effectively to the economic downturn caused by this pandemic and to gauge the amount of SBA PPP loans the Company can and should accept.

As of June 30, 2020, the goodwill on our balance sheet was not deemed to be impaired. However, management may determine that goodwill is required to be evaluated for impairment in the future due to the presence of a triggering event, which may have a negative impact on the Company’s results of operations.

The Company began internal social distancing in mid-March, as well as distancing from ~~time~~the public by keeping our drive-thru services available, and encouraging customers to ~~time in press releases and other public filings;~~conduct transactions at ATMs, through online banking and the mobile app. The Company also increased consumer and business mobile deposit limits to encourage customers to make deposits remotely from the safety of their home or business. The Company implemented a schedule whereby the majority of staff members are working remotely at any given time, allowing the remaining essential staff to create more distance between each other within the offices. We increased the number of staff in the client service center to assist more customers by telephone. The client service center was also moved to a larger location to allow the team members to be physically separated in accordance with social distancing guidelines. In addition, the Company enhanced disinfecting procedures to include hospital-grade cleaning solution, increased the frequency of cleaning and issued personal protective equipment, including N-95 and disposable face masks, gloves and thermometers, to employees, along with specific instructions for use, to enhance their safety. Management provides frequent email communications to customers and employees regarding updates on COVID-19, helpful tips and status of Company initiatives, as well as warning customers of potential scams during this pandemic. Beginning mid-July, the Company took steps to resume normal branch activities with specific guidelines in place to continue protecting our customers and employees.

The Company’s ~~performance~~preparedness resulted in ~~managing~~minimal impact to the ~~risks involved in any~~Company’s operations as a result of COVID-19. Business continuity planning allowed for successful deployment of the ~~foregoing. The foregoing list~~majority of ~~important factors is not exclusive,~~our employees to work in a remote environment. No material operational or internal control risks have been identified to date, and the Company ~~will not update any forward-looking statement, whether written or oral, that may be made from time to time.~~has enhanced fraud-related controls.

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 ~~2018~~2019 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies since December 31, ~~2018.~~2019.

The total assets of the Company as of June 30, ~~2019~~2020 were ~~$633.8~~$799.6 million. This is ~~an $11.0~~a $97.0 million ~~decrease~~increase from the ~~$644.8~~$702.6 million total assets reported at December 31, ~~2018~~2019 and a ~~$20.9~~$165.8 million ~~decrease~~increase from the ~~$654.7~~$633.8 million reported at June 30, ~~2018.~~2019. A ~~$15.4~~$92.9 million ~~decrease~~increase in gross loans, ~~since December 31, 2018~~primarily from the origination of $86.9 million in PPP loans, was the major reason for the ~~decrease~~increase in assets since year-end.

The Company had overnight federal funds sold of $24.8 million as of June 30, 2020, compared to $4.2 million as of December 31, 2019 and $12.3 million as of June 30, ~~2019, compared to $7.1 million as of December 31, 2018 and $18.3 million as of June 30, 2018.~~2019. 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 June 30, ~~2019~~2020 totaled ~~$58.5~~$104.5 million, a decrease of ~~$4.5~~$11.2 million compared with the ~~$63.0~~$115.7 million reported at December 31, ~~2018~~2019 and ~~a decrease~~an increase of ~~$8.2~~$46.0 million from the ~~$66.7~~$58.5 million reported at June 30, ~~2018.~~2019. Management proactively manages the mix of earning assets and cost of funds to maximize the earning capacity of the Company. During June of 2019, management sold approximately $10.4 million of securities, realizing a gain of $64 thousand, to reposition the portfolio for higher yield. Approximately $6.9 million had been reinvested into higher yielding securities as of June 30, 2019, and the remaining $3.5 million in purchases settle in July and August. At June 30, ~~2019~~2020 and ~~June 30, 2018,~~December 31, 2019, the investment securities holdings represented ~~9.2%~~13.1% and ~~10.2%~~16.5% of the Company’s total assets, respectively.

The Company’s investment securities portfolio included restricted securities totaling $1.7 million as of June 30, 2020, December 31, 2019, and ~~December 31, 2018, compared to $3.2 million as of~~ June 30, ~~2018.~~2019. 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 orand the Federal Home Loan Bank of ~~Atlanta. The decrease compared to June 30, 2018 was due to the decrease in the Company’s short-term borrowing initiated with the FHLB-A from the second quarter of 2018 to the second quarter of 2019.~~Atlanta, respectively. Stock ownership in the bank holding company for Community

Bankers’ Bank provides the ~~Bank~~Company 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 June 30, ~~2019,~~2020, the unrestricted securities portfolio totaled ~~$56.8~~$102.8 million. The following table summarizes the Company's available for sale securities by type as of June 30, ~~2019,~~2020, December 31, ~~2018,~~2019, and June 30, ~~2018~~2019 (dollars in thousands):

The securities are held primarily for earnings, liquidity, and asset/liability management purposes and are 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 June 30, ~~2019,~~2020, total loans were ~~$521.8~~$632.4 million, compared to ~~$537.2~~$539.5 million as of December 31, ~~2018~~2019 and ~~$535.0~~$521.8 million at June 30, ~~2018.~~2019. Loans as a percentage of total assets at June 30, ~~2019~~2020 were ~~82.3%~~79.1%, compared to ~~81.7%~~82.3% as of June 30, ~~2018.~~2019. Loans as a percentage of deposits at June 30, ~~2019~~2020 were ~~94.3%~~88.5%, compared to ~~99.7%~~94.3% as of June 30, ~~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.~~2019.

The following table summarizes the Company's loan portfolio by type of loan as of June 30, ~~2019,~~2020, December 31, ~~2018,~~2019, and June 30, ~~2018~~2019 (dollars in thousands):

Loan balances ~~declined $15.4~~increased $92.9 million, or ~~2.9%~~17.2%, since December 31, ~~2018~~2019 and ~~declined $13.2~~increased $110.6 million, or ~~2.5%~~21.2%, from June 30, ~~2018. Over~~2019. The primary reason for the ~~one-year period,~~increase since year-end was the ~~loan fluctuation consisted~~origination of ~~$36.6~~$86.9 million in new funding from organic loan growth and $28.0 million in net growth in purchased loans, offset by $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. SBA PPP loans.

The purchase of loans is considered a secondary strategy, which allows the Company to supplement organic loan growth. Purchased loans with balances outstanding of ~~$115.6~~$108.2 million as of June 30, ~~2019~~2020 were comprised of:

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

Non-accrual loans totaled ~~$390~~$11 thousand at June 30, ~~2019,~~2020, compared to the ~~$615~~$299 thousand and ~~$447~~$390 thousand reported at December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively. The December 31, 2019 non-accrual balance included a loan which was foreclosed upon during the second quarter of 2020, with the Company being made whole on the loan with the proceeds from a third-party bidder without the Company’s taking title to the property. The June 30, 2019 non-accrual balance included $363 thousand of student loan balances for which the Company has received payment from the liquidation process in the fourth quarter of 2019.

The Company had loans in its portfolio totaling ~~$617 thousand, $895~~$1.1 million, $771 thousand and ~~$143~~$617 thousand, as of June 30, ~~2019,~~2020, December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively, that were ninety or more days past due, ~~which were~~with all such loans still accruing interest as the Company ~~deems~~deemed them to be collectible. Each of these balances includes a government guaranteed loan of approximately $548 thousand. The past due balance as of June 30, 2020 included one mortgage loan of $437 thousand covered by a formal forbearance agreement. As of June 30, 2020, a total of seven loans were 90 days or more past due and still accruing interest, of which five were student loans totaling $92 thousand.

At June 30, ~~2019 and December 31, 2018,~~2020, the Company had loans classified as impaired loans in the amount of ~~$2.6~~$2.1 million, compared to ~~$2.9~~$2.5 million at December 31, 2019 and $2.6 million at June 30, ~~2018.~~2019. Based on regulatory guidance on Student Lending, the Company has classified 6872 of its purchased student loans as TDRs for a total of ~~$1.2~~$1.1 million as of June 30, ~~2019.~~2020. 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. Management has evaluated these loans individually for impairment and included any ~~potential~~probable 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 June 30, 2019, December 31, 2018, and June 30, 2018~~ appears below (dollars in thousands):

The Allowance for Loan Losses as a percentage of assets was 0.78% as of June 30, 2020 and December 31, 2019, compared to 0.92% as of June 30, 2019. The percentage remained flat as compared to year-end, as the increase in the necessary allowance on most of the Company’s loans due to worsening economic qualitative factors was offset by the SBA-guaranteed PPP loans not needing an allowance. Note that the allowance for loan losses as a percentage of total loans, excluding PPP loans, was 0.90% as of June 30, 2020. The decline in the recorded percentage compared to the same quarter in the prior year was primarily due to a shared national credit with a higher loan loss allowance, which was later sold in the third quarter of 2019, and the impact of the PPP loans.

Provisions for loan losses totaling ~~$620 thousand~~$1.1 million and ~~$605~~$620 thousand were recorded in the ~~first~~ six months ofended June 30, 2020 and 2019, ~~and 2018,~~ respectively. The following is a summary of the changes in the allowance for loan losses for the six months ended June 30, ~~2019~~2020 and ~~June 30, 2018~~2019 (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~~probable losses inherent in the portfolio. Management believes the allowance for loan losses was adequately provided for as of June 30, ~~2019.~~2020 and acknowledges that the allowance for loan losses may increase throughout the year as economic conditions may continue to deteriorate for the foreseeable future.

The Company’s premises and equipment, net of depreciation, as of June 30, ~~2019~~2020 totaled ~~$6.6~~$5.7 million compared to ~~$7.0~~$6.1 million as of December 31, ~~2018~~2019 and ~~$7.1~~$6.6 million as of June 30, ~~2018.~~2019. 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 June 30, ~~2019,~~2020, the Company ~~and its subsidiaries~~ occupied five full-service banking facilities in the cities of Charlottesville and Winchester, as well as the county of Albemarle in Virginia. The Company also operates a drive-through location at 301 East Water Street, Charlottesville, Virginia. The ~~Bank closed its Orange,~~Company entered into a lease for branch and office space in Richmond, Virginia during the first quarter of 2020 and anticipates opening the office ~~effective April 13, 2018; expanded messenger service continues to be available to the customers within and surrounding Orange, Virginia.~~by year-end absent delays as a result of COVID-19.

The ~~multi-story~~five-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 Investment Services~~both Masonry Capital and ~~Masonry Capital.~~Sturman Wealth Advisors. VNB Trust & Estate ~~Services’ main office~~Services is located at 112 Third Street, SE, Charlottesville, Virginia, which is part of the same leased space that the Company uses to operate the drive-through location at 301 East Water Street, 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~~As of June 30, 2020, $3.9 million of ~~the increase~~right-of-use assets and $4.0 million of lease liabilities are included in ~~each of~~ Other Assets and Other Liabilities, ~~resulted from~~respectively, in accordance with the Company’s implementation of ASU 2016-02 “Leases” (Topic 842). in the first quarter of 2019 and subsequent leasing activities. 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, money market, and savings accounts as well as time deposits. These deposits have been provided predominantly by individuals, businesses and charitable organizations in the Charlottesville/Albemarle, Richmond and Winchester areas.

Total deposits as of June 30, ~~2019~~2020 were ~~$553.5~~$714.2 million, ~~down $19.0~~an increase of $93.0 million compared to the balances of ~~$572.5~~$621.2 million at December 31, ~~2018, yet up $16.8~~2019, and an increase of $160.7 million compared to the ~~$536.7~~$553.5 million total as of June 30, ~~2018.~~2019. The primary reason for the increase since year-end is due to increased balances in PPP customer accounts.

Noninterest-bearing demand deposits on June 30, ~~2019~~2020 were ~~$158.2~~$197.2 million, representing ~~28.6%~~27.6% of total deposits. Interest-bearing transaction, money market, and savings accounts totaled ~~$273.4~~$420.4 million, and represented ~~49.4%~~58.9% of total deposits at June 30, ~~2019.~~2020. Collectively, noninterest-bearing and interest-bearing transaction and money market accounts represented ~~78.0%~~86.5% of total deposit accounts at June 30, ~~2019.~~2020. These account types are an excellent source of low-cost funding for the Company.

The Company ~~implemented~~also offers an insured cash sweep (“ICS^®”) deposit ~~products during the third quarter of 2018.~~products. ICS^®deposit balances of ~~$16.0~~$30.6 million and ~~$24.4~~$68.7 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.~~2020. As of December 31, ~~2018,~~2019, ICS^®deposit balances of ~~$15.8~~$19.3 million and ~~$21.0~~$53.6 million are included in the interest checking accounts and the money market and savings deposit account balances, respectively. All ICS accounts consist of reciprocal balances for the Company’s customers.

The remaining ~~22.0%~~13.5% of total deposits consisted of certificates of deposit and other time deposit accounts totaling ~~$122.0~~$96.6 million at June 30, ~~2019.~~2020. 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 ~~$25.1~~$8.5 million as of June 30, ~~2019,~~2020, all of which were reciprocal balances for the ~~Bank’s~~Company’s customers.

Short-term borrowings, consisting primarily of 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.

Repurchase agreements, also referred to as securities sold under agreement to repurchase, were available to non-individual accountholders on an overnight term through the Company’s investment sweep product. Under the agreements to repurchase, invested funds were fully collateralized by security instruments that 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 June 30, 2018 were $13.4 million.~~

The Company has a collateral dependent line of credit with the FHLB of Atlanta. As of June 30, 2020, December 31, 2019, and ~~December 31, 2018,~~June 30, 2019, the Company had no outstanding balances from FHLB advances. ~~As of June 30, 2018, the Company had outstanding FHLB advances of $35.0 million.~~

Additional borrowing arrangements maintained by the ~~Bank~~Company include formal federal funds lines with four major regional correspondent ~~banks.~~banks and the Federal Reserve discount window. The Company had no outstanding balances on these lines or facilities as of June 30, ~~2019,~~2020, December 31, ~~2018~~2019 or June 30, ~~2018.~~2019.

The following table displays the changes in shareholders' equity for the Company from December 31, ~~2018~~2019 to June 30, ~~2019~~2020 (dollars in thousands):

~~The~~For the calendar year 2019 and beyond, the 2.5% capital conservation buffer, which was phased in over a four year period under 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 2019, this 2.5% buffer effectively results in the minimum (i) common equity Tier 1 capital ratio of 7.00% of risk-weighted assets; (ii) Tier 1 capital ratio of 8.50% of risk-weighted assets; and (iii) total capital ratio of 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 2019 Form ~~10-K Report for December 31, 2018.~~10-K.

Using the ~~new~~current capital requirements, the Company’s capital ratios remain well above the levels designated by bank regulators as "well capitalized" at June 30, ~~2019. Under the current risk-based capital guidelines of federal regulatory authorities, the~~2020. The Company’s common equity Tier 1 capital ratio and Tier 1 capital ratio are both at ~~14.71%~~14.63% of its risk-weighted assets and are 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 ~~15.68%~~15.56% of its risk-weighted assets and leverage ratio of ~~11.51%~~9.84% of total assets, which are both in excess of the well-capitalized minimum 10.00% and 5.00% ~~level~~levels, respectively, designated by bank regulators under “well capitalized” capital guidelines.

On September 17, 2019 the Federal Deposit Insurance Corporation finalized a rule that introduces an optional simplified measure of capital adequacy for qualifying community banking organizations, referred to as, the community bank leverage ratio (CBLR) framework, as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.

In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts into the CBLR framework and meets

all requirements under the framework will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The CBLR framework was made available for community banking organizations to use in their March 31, 2020 Call Report. The Company has decided not to opt into the CBLR framework.

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 income for the three months ended June 30, ~~2019~~2020 was $2.1 million, a ~~15.5% increase~~$27 thousand or 1.3% decrease compared to ~~the $1.8 million~~net income reported for the three months ended June 30, ~~2018.~~2019. Net income per diluted share was ~~$0.79~~$0.77 for the quarter ended June 30, ~~2019~~2020 compared to $.68 per diluted share for the same quarter in the prior year, each adjusted to reflect the 5% Stock Dividend. The increase in net income for the second quarter of 2019, when compared to the same period of 2018, was driven by a $765 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 by $237 thousand and earnings per share, diluted and adjusted for the 5% Stock Dividend, by $0.09, in the 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 six months of 2019 was $3.4 million, a 27.4% decrease compared to the $4.6 million reported for the 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$0.79 per diluted share for the same quarter in the prior year, as adjusted to reflect the 5% Stock ~~Dividend.~~Dividend issued in July 2019. The decrease in net income for the ~~first six~~three months ~~of 2019,~~ended June 30, 2020, when compared to the same period of ~~2018,~~2019, was ~~driven by~~attributable to the combination of: i) a ~~$544~~$442 thousand increase in provision for loan losses, largely as a result of worsening economic factors associated with the COVID-19 pandemic; ii) a $294 thousand increase in net interest income, primarily due to lower cost of funds; iii) a $74 thousand decrease in ~~royalty~~noninterest income, as explained in the Noninterest income section below; iv) a ~~$694~~$281 thousand decrease in noninterest expense, as explained in the Noninterest expense section below, and v) an $86 thousand increase in ~~salaries and employee benefits and~~provision for income taxes.

Net income for the six months ended June 30, 2020 was $3.5 million, a ~~$300~~$131 thousand ~~loss accrual included~~or 3.9% increase compared to net income reported for the six months ended June 30, 2019. Net income per diluted share was $1.29 for the six months ended June 30, 2020, compared to $1.25 per diluted share for the same period in ~~other~~the prior year, as adjusted to reflect the 5% Stock Dividend. The increase in net income for the first six month of 2020, when compared to the same period in 2019, was attributable to the combination of: i) a $523 thousand increase in provision for loan losses largely as a result of worsening economic factors associated with the COVID-19 pandemic; ii) a $101 thousand increase in net interest income, primarily due to lower cost of funds incurred in the second quarter of the current year; iii) a $536 thousand increase in noninterest income, as explained in the Noninterest income section below; iv) a $149 thousand decrease in noninterest expense, as ~~noted above, offset by~~explained in the Noninterest expense section below, and v) a ~~$355~~$132 thousand increase in ~~earnings from the proceeds of bank owned life insurance.~~provision for income taxes.

Net interest income (FTE) for the three months ended June 30, ~~2019~~2020 was ~~$5.5~~$5.8 million, a ~~4.1% decrease~~$299 thousand or 5.5% increase compared to net interest income (FTE) of ~~$5.7~~$5.5 million for the three months ended June 30, ~~2018.~~2019. Net interest income (FTE) was ~~negatively~~positively impacted by the ~~effect of higher~~decrease in rates paid on deposit ~~balances, increasing~~accounts, which decreased interest expense by ~~$482~~$364 thousand, ~~compared to~~offset by the ~~effect~~increased volume of ~~higher rates earned on loans,~~deposits, which ~~positively impacted net~~increased interest ~~income~~expense by ~~$242~~$49 thousand. The ~~lower~~increased volume of ~~borrowing positively impacted net interest income by $180 thousand for~~loans, increasing from an average of $524.4 million in the second quarter of 2019 ~~as compared~~ to $618.1 million in the second quarter of ~~2018.~~2020, positively impacted interest income by $1.0 million; however, the lower rate earned on loans, declining from 4.67% to 4.01% for the periods noted, negatively impacted interest income by $952 thousand, nearly offsetting the positive impact of the increase in volume.

Net interest income (FTE) for the six months ended June 30, 2020 was $11.2 million, a $104 thousand or 0.9% increase compared to net interest income (FTE) of $11.1 million for the six months ended June 30, 2019. Net interest income (FTE) was positively impacted by the increase in the volume of the securities portfolio, which increased from an average of $62.9 million in the first six months of 2019 ~~was $11.1~~to $91.5 million ~~a 3.2% decrease compared to net interest income of $11.4 million for~~in the first six months of ~~2018. Net~~2020, increasing interest income ~~was negatively impacted~~ by ~~the effect of higher~~$292 thousand. The decline in rates paid on ~~deposit balances, increasing~~securities slightly offset the impact of the volume increase, declining from an average yield of 2.40% to 2.18% for the periods noted, impacting interest ~~expense~~income negatively by ~~$929 thousand, compared~~$48 thousand. The increase in the volume of loans, up from an average of $528.9 million in the first six months of 2019 to $577.0 million in first six months of 2020, positively impacted interest income by $1.1 million; however, the ~~effect of higher rates~~lower rate earned on loans, ~~which positively~~declining from 4.65% to 4.19% for the periods noted, negatively impacted ~~net~~ interest income by ~~$532 thousand. The lower volume~~$1.2 million, offsetting the positive impact of ~~borrowing positively impacted net interest income by $267 thousand for~~ the ~~second quarter of 2019 as compared to the second quarter of 2018.~~increase in volume.

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 ~~3.67%~~3.12% for the ~~quarter~~three months ended June 30, ~~2019~~2020 was ~~eleven~~55 basis points lower than the ~~3.78%~~3.67% for the ~~quarter~~three months ended June 30, ~~2018.~~2019. The net interest margin (FTE) of 3.16% for the six months ended June 30, 2020 was 56 basis points lower than the 3.72% for the six months ended June 30, ~~2019 was nine basis points lower than the 3.81% for the quarter ended June 30, 2018.~~2019. 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)~~Interest expense decreased $315 thousand for the three months ended June 30, ~~2019 was $165 thousand higher than~~2020 compared to the same period in the prior ~~year.~~year, due predominantly to rate decreases. The ~~increased yield~~rate paid on ~~loans was~~interest-bearing deposits averaged 62 basis points in the ~~major contributor~~three months ended June 30, 2020, compared to ~~the increased interest income. This shift resulted in an earning asset yield, as computed on a tax-equivalent~~106 basis ~~of 4.38% on average earning asset balances of $599.8 million~~points for the three months ended June 30, 2019. ~~The earning asset yield, as computed on a tax-equivalent basis, was 4.22% on average earning asset~~Average balances of ~~$607.1~~interest-bearing deposits increased from $397.1 million ~~for~~in the three months ended June 30, ~~2018.~~2019 to $487.3 million in the three months ended June 30, 2020. Average balances of borrowed funds, from fed funds sold,

decreased from $3.8 million in the three months ended June 30, 2019 to zero in the three months ended June 30, 2020, causing a decrease in interest expense on borrowed funds.

~~Total interest income (FTE)~~Interest expense decreased $33 thousand for the six months ended June 30, ~~2019 was $500 thousand higher than~~2020, compared to the same period in the prior ~~year.~~year, due predominantly to the lack of borrowing expense, as noted above. The increased ~~yield on loans was the major contributor to the~~volume of deposits increased interest ~~income. This shift resulted~~expense by $206 thousand, while the decrease in rates paid on deposit accounts decreased interest expense by $150 thousand, netting to an ~~earning asset yield, as computed on a tax-equivalent basis,~~overall impact of ~~4.39% on average earning asset~~increasing net interest income by $56 thousand. Average balances of ~~$599.8~~borrowed funds, from fed funds sold, decreased from $6.9 million in the six months ended June 30, 2019 to zero in the six months ended June 30, 2020, causing a decrease in interest expense on borrowed funds. The lack of borrowed funds during the first six months of 2020 had a positive impact on net interest income in the amount of $89 thousand. The rate paid on interest-bearing deposits averaged 83 basis points in the six months ended June 30, 2020, compared to 98 basis points 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~~Average balances of ~~$604.8~~interest-bearing deposits increased from $388.6 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$473.9 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.ended June 30, 2020. A table showing the mix of no cost and ~~low cost~~low-cost deposit accounts is shown under “Financial Condition - Deposits” earlier in this report.

The following tables detail the average balance sheet, including an analysis of net interest income (FTE) for earning assets and ~~interest bearing~~interest-bearing liabilities, for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. These tables also include a rate/volume analysis for these same periods (dollars in thousands).

Consolidated Average Balance Sheet ~~And~~and Analysis of Net Interest Income

	For the three months ended
	June 30, 2020								June 30, 2019								Change in Interest Income/ Expense
	Average			Interest		Average			Average			Interest		Average			Change Due to : ⁴						Total
	Balance			Income		Yield/Cost			Balance			Income		Yield/Cost			Volume			Rate			Increase/
(dollars in thousands)				Expense								Expense											(Decrease)
ASSETS
Interest Earning Assets:
Securities
Taxable Securities	$	53,953		$	253		1.88	%	$	49,814		$	277		2.22	%	$	22		$	(46	)	$	(24	)
Tax Exempt Securities ¹		14,793			117		3.16	%		12,715			96		3.02	%		16			5			21
Total Securities ¹		68,746			370		2.15	%		62,529			373		2.39	%		38			(41	)		(3	)
Total Loans		618,096			6,156		4.01	%		524,424			6,105		4.67	%		1,003			(952	)		51
Fed Funds Sold		57,920			10		0.07	%		12,885			74		2.30	%		62			(126	)		(64	)
Total Earning Assets		744,762			6,536		3.53	%		599,838			6,552		4.38	%		1,103			(1,119	)		(16	)
Less: Allowance for Loan Losses		(4,788	)							(4,951	)
Total Non-Earning Assets		46,543								44,452
Total Assets	$	786,517							$	639,339

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$	131,333		$	26		0.08	%	$	100,983		$	47		0.19	%	$	11		$	(32	)	$	(21	)
Money Market and Savings Deposits		257,174			365		0.57	%		169,128			416		0.99	%		166			(217	)		(51	)
Time Deposits		98,762			365		1.49	%		126,993			586		1.85	%		(117	)		(104	)		(221	)
Total Interest-Bearing Deposits		487,269			756		0.62	%		397,104			1,049		1.06	%		60			(353	)		(293	)
Other borrowed funds		—			—		—			3,800			22		2.32	%		(11	)		(11	)		(22	)
Total Interest-Bearing Liabilities		487,269			756		0.62	%		400,904			1,071		1.07	%		49			(364	)		(315	)
Non-Interest-Bearing Liabilities:
Demand deposits		216,747								159,425
Other liabilities		3,577								5,421
Total Liabilities		707,593								565,750
Shareholders' Equity		78,924								73,589
Total Liabilities & Shareholders' Equity	$	786,517							$	639,339
Net Interest Income (FTE)				$	5,780							$	5,481				$	1,054		$	(755	)	$	299
Interest Rate Spread ²							2.91	%							3.31	%
Interest Expense as a Percentage of Average Earning Assets							0.41	%							0.72	%
Net Interest Margin (FTE) ³							3.12	%							3.67	%

Consolidated Average Balance Sheet ~~And~~and Analysis of Net Interest Income

	For the six months ended
	June 30, 2020								June 30, 2019								Change in Interest Income/ Expense
	Average			Interest		Average			Average			Interest		Average			Change Due to : ⁴						Total
	Balance			Income		Yield/Cost			Balance			Income		Yield/Cost			Volume			Rate			Increase/
(dollars in thousands)				Expense								Expense											(Decrease)
ASSETS
Interest Earning Assets:
Securities
Taxable Securities	$	78,370		$	786		2.01	%	$	50,046		$	555		2.22	%	$	288		$	(57	)	$	231
Tax Exempt Securities ⁽¹⁾		13,109			212		3.23	%		12,824			199		3.10	%		4			9			13
Total Securities ⁽¹⁾		91,479			998		2.18	%		62,870			754		2.40	%		292			(48	)		244
Total Loans		576,952			12,027		4.19	%		528,854			12,202		4.65	%		1,058			(1,233	)		(175	)
Fed Funds Sold		43,409			95		0.44	%		8,077			93		2.32	%		129			(127	)		2
Total Earning Assets		711,840			13,120		3.71	%		599,801			13,049		4.39	%		1,479			(1,408	)		71
Less: Allowance for Loan Losses		(4,523	)							(4,928	)
Total Non-Earning Assets		45,650								42,074
Total Assets	$	752,967							$	636,947

LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Interest Bearing Deposits:
Interest Checking	$	127,026		$	57		0.09	%	$	101,944		$	96		0.19	%	$	20		$	(59	)	$	(39	)
Money Market and Savings Deposits		243,036			1,029		0.85	%		165,339			748		0.91	%		332			(51	)		281
Time Deposits		103,851			859		1.66	%		121,327			1,045		1.74	%		(146	)		(40	)		(186	)
Total Interest-Bearing Deposits		473,913			1,945		0.83	%		388,610			1,889		0.98	%		206			(150	)		56
Other borrowed funds		—			—		0.00	%		6,908			89		2.60	%		(45	)		(44	)		(89	)
Total Interest-Bearing Liabilities		473,913			1,945		0.83	%		395,518			1,978		1.01	%		161			(194	)		(33	)
Non-Interest-Bearing Liabilities:
Demand deposits		197,312								165,322
Other liabilities		3,507								3,337
Total Liabilities		674,732								564,177
Shareholders' Equity		78,235								72,770
Total Liabilities & Shareholders' Equity	$	752,967							$	636,947
Net Interest Income (FTE)				$	11,175							$	11,071				$	1,318		$	(1,214	)	$	104
Interest Rate Spread ⁽²⁾							2.88	%							3.37	%
Interest Expense as a Percentage of Average Earning Assets							0.55	%							0.67	%
Net Interest Margin (FTE) ³							3.16	%							3.72	%

A provision for loan losses of $378 thousand was recognized in the second quarter of 2020 primarily driven by further deterioration in the economic outlook resulting from the impact of COVID-19. A recovery of loan ~~losses~~loss provision 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.2019. A provision for loan losses of $1.1 million was recognized in the first six months of 2020, compared to $620 thousand ~~was recorded~~recognized in the first six months of 2019, ~~compared~~and such increase was also primarily due to ~~$605 thousand recorded for~~ the ~~first six months~~deterioration in the economic outlook resulting from the impact of ~~2018.~~ COVID-19.

The period-end allowance for loan losses as a percentage of total loans ~~at June 30, 2019~~ was ~~0.92%, compared to 0.91% as of December 31, 2018 and 0.88%~~0.78% as of June 30, ~~2018.~~ 2020 and December 31, 2019, compared to 0.92% as of June 30, 2019. The percentage remained flat as compared to year-end, as the increase in the necessary allowance on most of the Company’s loans due to worsening economic qualitative factors was offset by the SBA-guaranteed PPP loans not needing an allowance. Note that the allowance for loan losses as a percentage of total loans, excluding PPP loans, would have been 0.90% as of June 30, 2020. The decline in the percentage from the second quarter of 2019 to year-end 2019 was related to the sale of a shared national credit with a higher loan loss allowance.

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 June 30, ~~2019.~~2020. While we have not experienced any charge-offs related to COVID-19, our ALLL calculation, provision for loan losses, asset quality and collateral values may be significantly impacted by deterioration in economic conditions. We have downgraded the qualitative factors pertaining to economic conditions within our ALLL methodology. Should economic conditions worsen, we could experience further increases in our required ALLL and record additional provision for loan loss exposure.

The components of noninterest income for the three months ended June 30, ~~2019~~2020 and ~~2018~~2019 are shown below (dollars in thousands):

Noninterest income for the ~~quarter~~three months ended June 30, ~~2019~~2020 of ~~$1.7~~$1.6 million was ~~$393~~$74 thousand or ~~30.1% higher~~4.4% lower than the amount recorded for the ~~quarter~~three months ended June 30, ~~2018. This increase was largely~~2019. Noninterest income declined due to fluctuations in several categories. Earnings from the ~~increase in earnings from~~proceeds of bank owned life insurance ~~due to~~declined by $357 thousand, as the result of a death benefit received ~~as a result~~in the second quarter of 2019. Trust income declined $174 thousand due to restructuring of the ~~death~~entities and market conditions. In addition, deposit account fees and debit/credit card and ATM fees declined in total by $104 thousand due to suppressed customer activity. Those declines were offset by $526 thousand increase in gains on sales of ~~a former employee.~~securities, which was used to provide liquidity for PPP funding, and an $86 thousand increase in loan swap fee income.

The components of noninterest income for the six months ended June 30, ~~2019~~2020 and ~~2018~~2019 are shown below (dollars in thousands):

Noninterest income for the six months ended June 30, ~~2019~~2020 of ~~$2.8~~$3.3 million was ~~$262~~$536 thousand or ~~8.7% lower~~19.4% higher than the amount recorded for the six months ended June 30, ~~2018. This decrease was~~2019. Noninterest income increased due to fluctuations in several categories. Loan swap fee income increased $587 thousand and gains on sales of securities increased $579 thousand over the ~~lack~~periods noted. Earnings from the proceeds of performance fee royalty income in the first quarter of 2019, compared to $518 thousand in the first quarter of 2018. Royalty income is collected periodically from SRCM Holdings, LLC, as described in Note 1 – Summary of Significant Accounting Policies, found in the Notes to the Consolidated Financial Statements within the Company’s Form 10-K for the year ended December 31, 2018.

~~The decrease was offset by the increased earnings from~~ bank owned life insurance ~~during the second quarter of 2019, as noted previously.~~declined by $360 thousand, and trust income declined $211 thousand. Deposit account fees and debit/credit card and ATM fees declined in total by $106 thousand due to suppressed customer activity.

The components of noninterest expense for the three months ended June 30, ~~2019~~2020 and ~~2018~~2019 are shown below (dollars in thousands):

Noninterest expense for the quarter ended June 30, 2020 of $4.4 million was $281 thousand or 6.0% lower than the quarter ended June 30, 2019. During the second quarter of 2019, of $4.7 million was $658 thousand higher than the 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 was accrued in connection with a settlement of claims related to pending and threatened legal proceedings. ~~For more information regarding this accrual, please refer~~Other noninterest expense increased $110 thousand period over period, primarily due to increased expense of stock grants and cash compensation for directors.

The components of noninterest expense for the six months ended June 30, 2020 and 2019 are shown below (dollars in thousands):

Noninterest expense for the six months ended June 30, 2020 of $8.9 million was $149 thousand or 1.6% lower than the six months ended June 30, 2019. Other noninterest expense increased $172 thousand period over period, primarily due to increased expense of stock grants and cash compensation for directors. As noted above, during the first six months of 2019, $300 thousand was accrued in connection with a settlement of claims related to pending and threatened legal proceedings. Marketing, advertising and promotion expenses declined $110 thousand from the first six months of 2019 to the ~~earlier discussion~~first six months of ~~Commitments and Contingent Liabilities~~2020 due to concerted efforts to reduce expenses in ~~Note 11 of the Notes to Consolidated Financial Statements.~~2020. 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~~efficiency ratio (FTE) of ~~noninterest expense~~59.5% for the three months ended June 30, 2020 compared favorably to the 65.2% for the same quarter of 2019, due primarily to the increase in net interest income. The efficiency rations (FTE) of 61.8% for the six months ended June 30, ~~2019 and 2018 are shown below (dollars in thousands):~~

~~Noninterest expense~~2020 also compared favorably to the 65.8% for the ~~first six months~~same period 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~~combination of ~~$300 thousand as noted above.~~

~~The efficiency ratio (FTE)~~ increased ~~to 65.2% for the second quarter of 2019 from 57.3% for the same quarter of 2018, due to the increase in noninterest expense. The improved asset mix and higher yields on earning assets should enhance~~ net interest ~~income; however,~~income and increased noninterest ~~expense will continue to increase as the Company positions itself for growth and enters into new markets.~~income. 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~~six months ended June 30, ~~2019~~2020 and ~~June 30, 2018,~~2019, the Company provided ~~$425~~$843 thousand and ~~$439~~$711 thousand for Federal income taxes, respectively, resulting in an effective income tax rate of ~~16.7%~~19.4% and 19.3%, respectively. For the six months ended June 30, 2019 and June 30, 2018, the Company provided $711 thousand and $1.1 million for Federal income taxes, respectively, resulting in an effective income tax rate of 17.5% ~~and 19.7%~~, respectively. The effective income tax rates differed from the U.S. statutory rate of 21% primarily due to the effect of tax-exempt income from life insurance policies and municipal ~~bonds.~~bonds, and the effective rate for the six months ended June 30, 2019 was lower than the current year, as the proceeds from a bank-owned life insurance death benefit received during that period were tax-exempt.

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 June 30, ~~2019~~2020 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.

June 30, 2019			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Land and land development	$	28	$	88	$	-	$	29	$	-
1-4 family residential mortgages, first lien, owner occupied		-		-		-		40		-
1-4 family residential mortgages, junior lien		122		122				124		3
Commercial non-owner occupied real estate		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		1,591		1,591		51		1,597		37
Total impaired loans with a valuation allowance		1,591		1,591		51		1,597		37
Total impaired loans	$	2,644	$	2,704	$	51	$	2,703	$	64

December 31, 2018			Unpaid				Average		Interest
	Recorded		Principal		Associated		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired loans without a valuation allowance:
Land and land development	$	32	$	90	$	-	$	37	$	-
1-4 family residential mortgages, first lien, owner occupied		82		127		-		90		-
1-4 family residential mortgages, junior lien		127		127				248		15
Commercial non-owner occupied real estate		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		1,602		1,602		90		1,387		86
Total impaired loans with a valuation allowance		1,602		1,602		90		1,387		86
Total impaired loans	$	2,766	$	2,869	$	90	$	2,709	$	152

December 31, 2019	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
Impaired loans without a valuation allowance:
Land and land development	$	279	$	324	$	-	$	67	$	13
1-4 family residential mortgages, first lien, owner occupied		-		-		-		20		2
1-4 family residential mortgages, junior lien		117		117		-		122		6
Commercial and industrial - organic		20		20		-		3		1
Commercial non-owner occupied real estate		879		879		-		900		48
Total impaired loans without a valuation allowance		1,295		1,340		-		1,112		70

Impaired loans with a valuation allowance
Student loans purchased		1,184		1,184		21		1,549		86
Total impaired loans with a valuation allowance		1,184		1,184		21		1,549		86
Total impaired loans	$	2,479	$	2,524	$	21	$	2,661	$	156

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

	For six months ended					For six months ended
	June 30, 2019					June 30, 2018
		Pre-		Post-			Pre-		Post-
		Modification		Modification			Modification		Modification
	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Balance		Balance		of Loans	Balance		Balance
Student loans purchased	12	$	133	$	133	7	$	120	$	120
Total loans modified during the period	12	$	133	$	133	7	$	120	$	120

	2005 Plan			2014 Plan			2005 Plan			2014 Plan
Aggregate shares issuable		253,575			275,625			253,575			275,625
Options or shares issued, net of forfeited and expired options		(59,870	)		(80,055	)
Options issued, net of forfeited and expired options								(59,870	)		(122,047	)
Unrestricted stock issued								-			(11,535	)
Restricted stock grants issued								-			(26,268	)
Cancelled due to Plan expiration		(193,705	)		-			(193,705	)		-
Remaining available for grant		-			195,570			-			115,775

Grants issued and outstanding:
Total vested and unvested shares		1,379			67,415			1,379			105,404
Fully vested shares		1,379			13,182			1,379			13,722
Exercise price range	$	13.69 to		$	27.39 to		$13.69 to $13.69			$26.00 to $42.62
	$	13.69		$	42.62

	June 30, 2020
	Number of Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at January 1, 2020		80,783	$	40.76
Issued		26,000		26.00
Exercised		—		—
Expired		—		—
Outstanding at June 30, 2020		106,783	$	37.17	$	16

Options exercisable at June 30, 2020		28,356	$	40.53	$	16

	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

	For the three months ended					For the six months ended
	June 30, 2019			June 30, 2018		June 30, 2019		June 30, 2018
Interest and dividend income:
Loans, including fees	$	6,105		$	5,935	$	12,202	$	11,649
Federal funds sold		74			39		93		74
Investment securities:
Taxable		246			271		498		549
Tax exempt		76			86		157		171
Dividends		31			33		57		61
Total interest and dividend income		6,532			6,364		13,007		12,504

Interest expense:
Demand and savings deposits		463			264		844		496
Certificates and other time deposits		586			262		1,045		402
Repurchase agreements and other borrowings		22			146		89		218
Total interest expense		1,071			672		1,978		1,116
Net interest income		5,461			5,692		11,029		11,388
Provision for (recovery of) loan losses		(64	)		701		620		605
Net interest income after provision for (recovery of) loan losses		5,525			4,991		10,409		10,783

Noninterest income:
Trust income		402			427		749		841
Advisory and brokerage income		156			142		292		282
Royalty income		4			34		8		552
Deposit account fees		192			236		373		483
Debit/credit card and ATM fees		189			204		346		391
Earnings/increase in value of bank owned life insurance		466			111		576		220
Fees on mortgage sales		56			46		86		82
Gains on sales of securities		64			-		64		-
Losses on sales of other assets		-			-		-		(33	)
Other		171			107		265		203
Total noninterest income		1,700			1,307		2,759		3,021

Noninterest expense:
Salaries and employee benefits		2,321			1,982		4,667		3,973
Net occupancy		444			449		923		930
Equipment		114			118		231		245
Data processing		330			295		646		547
Other		1,476			1,183		2,629		2,349
Total noninterest expense		4,685			4,027		9,096		8,044

Income before income taxes		2,540			2,271		4,072		5,760
Provision for income taxes		425			439		711		1,132
Net income	$	2,115		$	1,832	$	3,361	$	4,628
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

								Accumulated
								Other
	Common		Capital		Retained			Comprehensive
	Stock *		Surplus *		Earnings			Income (Loss)			Total
Balance, December 31, 2017	$	6,027	$	22,038	$	37,923		$	(883	)		65,105
Stock options exercised		16		128		-			-			144
Stock option expense		-		1		-			-			1
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		-		-		1,246			-			1,246
Other comprehensive income		-		-		-			754			754
Balance, March 31, 2019	$	6,400	$	27,522	$	39,126		$	(523	)	$	72,525
Stock option expense		-		23		-			-			23
Stock dividend distributable **		320		4,593		(4,913	)		-			-
Cash dividends declared ($0.30 per share)		-		-		(806	)		-			(806	)
Net income		-		-		2,115			-			2,115
Other comprehensive income		-		-		-			486			486
Balance, June 30, 2019	$	6,720	$	32,138	$	35,522		$	(37	)	$	74,343

June 30, 2019	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	19,500	$	-	$	(39	)	$	19,461
Mortgage-backed securities/CMOs		26,611		23		(169	)		26,465
Municipal bonds		10,785		143		(6	)		10,922
Total Securities Available for Sale	$	56,896	$	166	$	(214	)	$	56,848

December 31, 2018	Amortized		Gross Unrealized		Gross Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. Government agencies	$	19,500	$	-	$	(526	)	$	18,974
Mortgage-backed securities/CMOs		25,901		1		(839	)		25,063
Municipal bonds		17,608		12		(265	)		17,355
Total Securities Available for Sale	$	63,009	$	13	$	(1,630	)	$	61,392

June 30, 2019
	Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	-	$	-		$	11,961	$	(39	)	$	11,961	$	(39	)
Mortgage-backed/CMOs		4,041		(7	)		19,374		(162	)		23,415		(169	)
Municipal bonds		1,048		(5	)		503		(1	)		1,551		(6	)
	$	5,089	$	(12	)	$	31,838	$	(202	)	$	36,927	$	(214	)
December 31, 2018
	Less than 12 Months					12 Months or more					Total
			Unrealized					Unrealized					Unrealized
	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
U.S. Government agencies	$	-	$	-		$	18,974	$	(526	)	$	18,974	$	(526	)
Mortgage-backed/CMOs		-		-			24,657		(839	)		24,657		(839	)
Municipal bonds		4,983		(34	)		10,722		(231	)		15,705		(265	)
	$	4,983	$	(34	)	$	54,353	$	(1,596	)	$	59,336	$	(1,630	)

Troubled debt restructurings (TDRs)	June 30, 2019			December 31, 2018
	No. of	Recorded		No. of	Recorded
	Loans	Investment		Loans	Investment
Performing TDRs
1-4 family residential mortgages, junior lien	-	$	-	1	$	127
Commercial non-owner occupied real estate	1		903	1		923
Student loans purchased	68		1,229	65		1,157
Total performing TDRs	69	$	2,132	67	$	2,207

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

	For three months ended						For three months ended
	June 30, 2020						June 30, 2019
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
Student loans purchased		6	$	49	$	49		10	$	78	$	78
Total loans modified during the period		6	$	49	$	49		10	$	78	$	78

	For the six months ended						For the six months ended
	June 30, 2020						June 30, 2019
	Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		Number of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
Student loans purchased		11	$	109	$	109		12	$	133	$	133
Total loans modified during the period		11	$	109	$	109		12	$	133	$	133


Loan Classes by Segments

Commercial loan segment:
	Commercial and industrial - organic
	Commercial and industrial - Paycheck Protection Program (“PPP”)
	Commercial and industrial - government guaranteed¹
	Commercial and industrial - syndicated

Real estate construction and land loan segment:
	Residential construction
	Commercial construction
	Land and land development

Real estate mortgage loan segment:
	1-4 family residential, first lien, investment
	1-4 family residential, first lien, owner occupied
	1-4 family residential, junior lien
	Home equity lines of credit, first lien
	Home equity lines of credit, junior lien
	Farm
	Multifamily
	Commercial owner occupied
	Commercial non-owner occupied

Consumer loan segment:
	Consumer revolving credit
	Consumer all other credit
	Student loans purchased

									Special		Sub-
June 30, 2019	Excellent		Good		Pass		Watch		Mention		standard		TOTAL
Commercial
Commercial and industrial - organic	$	2,457	$	20,638	$	15,672	$	176	$	-	$	433	$	39,376
Commercial and industrial - government guaranteed		35,143		-		-		-		-		-		35,143
Commercial and industrial - syndicated		-		-		9,560		-		-		2,531		12,091
Real estate construction
Residential construction		-		-		1,021		-		-		-		1,021
Commercial construction		-		-		3,663		-		-		-		3,663
Land and land development		-		-		8,675		484		-		477		9,636
Real estate mortgages
1-4 family residential, first lien, investment		-		-		36,600		3,827		114		266		40,807
1-4 family residential, first lien, owner occupied		-		-		15,181		1,060		9		54		16,304
1-4 family residential, junior lien		-		-		2,357		39		20		478		2,894
1-4 family residential, first lien - purchased		-		-		18,451		-		-		-		18,451
Home equity lines of credit, first lien		-		-		7,866		338		-		340		8,544
Home equity lines of credit, junior lien		-		-		9,291		99		-		82		9,472
Farm		-		-		7,652		328		-		1,318		9,298
Multifamily		-		-		24,432		-		-		-		24,432
Commercial owner occupied		-		-		86,398		6,828		-		2,060		95,286
Commercial non-owner occupied		-		-		113,143		2,684		-		1,063		116,890
Consumer
Consumer revolving credit		75		23,786		469		11		-		-		24,341
Consumer all other credit		245		3,430		492		2		-		27		4,196
Student loans purchased		-		-		47,392		2,109		347		70		49,918
Total Loans	$	37,920	$	47,854	$	408,315	$	17,985	$	490	$	9,199	$	521,763

									Special		Sub-
December 31, 2018	Excellent		Good		Pass		Watch		Mention		standard		TOTAL
Commercial
Commercial and industrial - organic	$	3,692	$	23,381	$	13,993	$	264	$	28	$	168	$	41,526
Commercial and industrial - government guaranteed		31,367		-		-		-		-		-		31,367
Commercial and industrial - syndicated		-		-		9,588		-		-		2,546		12,134
Real estate construction
Residential construction		-		-		1,552		-		-		-		1,552
Commercial construction		-		-		5,078		-		-		-		5,078
Land and land development		-		-		9,888		501		-		505		10,894
Real estate mortgages
1-4 family residential, first lien, investment		-		-		36,314		3,607		117		273		40,311
1-4 family residential, first lien, owner occupied		-		-		15,540		1,087		11		137		16,775
1-4 family residential, junior lien		-		-		2,573		58		22		516		3,169
1-4 family residential, first lien - purchased		-		-		18,647		-		-		-		18,647
Home equity lines of credit, first lien		-		-		7,911		414		-		-		8,325
Home equity lines of credit, junior lien		-		-		10,704		97		-		111		10,912
Farm		-		-		8,719		339		-		1,339		10,397
Multifamily		-		-		27,328		-		-		-		27,328
Commercial owner occupied		-		-		86,868		6,932		-		-		93,800
Commercial non-owner occupied		-		-		120,720		1,519		-		975		123,214
Consumer
Consumer revolving credit		44		20,852		644		-		-		-		21,540
Consumer all other credit		263		4,699		535		4		-		29		5,530
Student loans purchased		-		-		51,494		2,401		431		365		54,691
Total Loans	$	35,366	$	48,932	$	428,096	$	17,223	$	609	$	6,964	$	537,190

As of and for the period ended December 31, 2019
	Commercial Loans			Real Estate Construction and Land			Real Estate Mortgages		Consumer Loans			Total
Allowance for Loan Losses:
Balance as of beginning of year	$	811		$	119		$	2,611	$	1,350		$	4,891
Charge-offs		(482	)		-			-		(1,777	)		(2,259	)
Recoveries		51			1			14		136			202
Provision for (recovery of) loan losses		(78	)		(11	)		59		1,405			1,375
Ending Balance	$	302		$	109		$	2,684	$	1,114		$	4,209

Ending Balance:
Individually evaluated for impairment	$	-		$	-		$	-	$	21		$	21
Collectively evaluated for impairment		302			109			2,684		1,093			4,188
Loans:
Individually evaluated for impairment	$	20		$	279		$	996	$	1,184		$	2,479
Collectively evaluated for impairment		80,568			16,861			370,240		69,385			537,054
Ending Balance	$	80,588		$	17,140		$	371,236	$	70,569		$	539,533

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
	Due		Due		Due		Due		Current		Loans		Accruing
Commercial loans
Commercial and industrial - organic	$	172	$	-	$	-	$	172	$	39,204	$	39,376	$	-
Commercial and industrial - government guaranteed		-		-		548		548		34,595		35,143		548
Commercial and industrial - syndicated		-		-		-		-		12,091		12,091		-
Real estate construction and land
Residential construction		-		-		-		-		1,021		1,021		-
Commercial construction		-		-		-		-		3,663		3,663		-
Land and land development		-		15		-		15		9,621		9,636		-
Real estate mortgages
1-4 family residential, first lien, investment		-		-		-		-		40,807		40,807		-
1-4 family residential, first lien, owner occupied		-		-		-		-		16,304		16,304		-
1-4 family residential, junior lien		-		-		-		-		2,894		2,894		-
1-4 family residential - purchased	.			-		-		-		18,451		18,451		-
Home equity lines of credit, first lien		-		-		-		-		8,544		8,544		-
Home equity lines of credit, junior lien		-		-		-		-		9,472		9,472		-
Farm		-		-		-		-		9,298		9,298		-
Multifamily		-		-		-		-		24,432		24,432		-
Commercial owner occupied		-		-		-		-		95,286		95,286		-
Commercial non-owner occupied		3,750		-		-		3,750		113,140		116,890		-
Consumer loans
Consumer revolving credit		-		-		-		-		24,341		24,341		-
Consumer all other credit		-		24		-		24		4,172		4,196		-
Student loans purchased		538		407		432		1,377		48,541		49,918		69
Total Loans	$	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

Past Due Aging as of June 30, 2020	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing
Commercial loans
Commercial and industrial - organic	$	45	$	421	$	-	$	466	$	36,993	$	37,459	$	-
Commercial and industrial - Paycheck Protection Program		-		-		-		-		84,244		84,244		-
Commercial and industrial - government guaranteed		-		-		548		548		33,411		33,959		548
Commercial and industrial - syndicated		-		-		-		-		6,374		6,374		-
Real estate construction and land
Residential construction		-		-		-		-		3,208		3,208		-
Commercial construction		-		-		-		-		16,010		16,010		-
Land and land development		-		12		-		12		7,270		7,282		-
Real estate mortgages
1-4 family residential, first lien, investment		-		681		-		681		54,499		55,180		-
1-4 family residential, first lien, owner occupied		-		-		-		-		16,766		16,766		-
1-4 family residential, junior lien		-		-		-		-		2,254		2,254		-
1-4 family residential - purchased		-		384		437		821		26,229		27,050		437
Home equity lines of credit, first lien		-		-		-		-		9,862		9,862		-
Home equity lines of credit, junior lien		-		-		-		-		9,990		9,990		-
Farm		-		-		-		-		7,949		7,949		-
Multifamily		-		-		-		-		32,330		32,330		-
Commercial owner occupied		-		-		-		-		97,267		97,267		-
Commercial non-owner occupied		-		-		-		-		121,823		121,823		-
Consumer loans
Consumer revolving credit		-		20		-		20		18,415		18,435		-
Consumer all other credit		-		-		-		-		4,209		4,209		-
Student loans purchased		123		64		92		279		40,464		40,743		92
Total Loans	$	168	$	1,582	$	1,077	$	2,827	$	629,567	$	632,394	$	1,077

Past Due Aging as of December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing
Commercial loans
Commercial and industrial - organic	$	604	$	20	$	-	$	624	$	38,219	$	38,843	$	-
Commercial and industrial - government guaranteed		-		-		548		548		34,799		35,347		548
Commercial and industrial - syndicated		-		-		-		-		6,398		6,398		-
Real estate construction and land
Residential construction		-		-		-		-		2,197		2,197		-
Commercial construction		-		-		-		-		6,880		6,880		-
Land and land development		1		-		280		281		7,782		8,063		14
Real estate mortgages
1-4 family residential, first lien, investment		188		-		-		188		43,911		44,099		-
1-4 family residential, first lien, owner occupied		-		123		-		123		20,548		20,671		-
1-4 family residential, junior lien		-		-		-		-		2,520		2,520		-
1-4 family residential - purchased		501		158		-		659		32,769		33,428		-
Home equity lines of credit, first lien		-		-		-		-		10,268		10,268		-
Home equity lines of credit, junior lien		-		-		-		-		9,671		9,671		-
Farm		-		-		-		-		8,808		8,808		-
Multifamily		-		-		-		-		27,093		27,093		-
Commercial owner occupied		-		-		-		-		96,117		96,117		-
Commercial non-owner occupied		0		-		-		0		118,561		118,561		-
Consumer loans
Consumer revolving credit		20		-		-		20		20,061		20,081		-
Consumer all other credit		43		0		-		43		5,698		5,741		-
Student loans purchased		697		218		209		1,124		43,623		44,747		209
Total Loans	$	2,054	$	519	$	1,037	$	3,610	$	535,923	$	539,533	$	771

Three Months Ended	June 30, 2019					June 30, 2018						June 30, 2020						June 30, 2019
			Weighted	Per				Weighted	Per
			Average	Share				Average	Share
	Net Income		Shares	Amount		Net Income		Shares	Amount			Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount
Basic net income per share	$	2,115	2,688,005	$	0.79	$	1,832	2,666,120	$	0.69		$	2,088		2,710,019	$	0.77	$	2,115		2,688,005	$	0.79
Effect of dilutive stock options		-	960		-		-	22,225		(0.01	)		-		998		-		-		960		-
Diluted net income per share	$	2,115	2,688,965	$	0.79	$	1,832	2,688,345	$	0.68		$	2,088	$	2,711,017	$	0.77	$	2,115	$	2,688,965	$	0.79

Six Months Ended	June 30, 2019					June 30, 2018						June 30, 2020						June 30, 2019
			Weighted	Per				Weighted	Per			Net Income		Weighted Average Shares		Per Share Amount		Net Income		Weighted Average Shares		Per Share Amount
			Average	Share				Average	Share
	Net Income		Shares	Amount		Net Income		Shares	Amount
Basic net income per share	$	3,361	2,683,122	$	1.25	$	4,628	2,663,842	$	1.74		$	3,492		2,701,411	$	1.29	$	3,361		2,683,122	$	1.25
Effect of dilutive stock options		-	4,269		-		-	21,862		(0.02	)		-		900		-		-		4,269		-
Diluted net income per share	$	3,361	2,687,391	$	1.25	$	4,628	2,685,704	$	1.72		$	3,492	$	2,702,311	$	1.29	$	3,361	$	2,687,391	$	1.25

	June 30, 2019
			Weighted Average			Aggregate
	Number of Options		Exercise Price			Intrinsic Value
Outstanding at January 1, 2019	86,611		$	36.21
Issued	420			36.19
Exercised	(5,975	)		(17.04	)	$	120
Expired	(12,262	)		16.56
Outstanding at June 30, 2019	68,794		$	41.37		$	43

Options exercisable at June 30, 2019	14,561		$	39.49		$	33

	For the six months ended
	June 30, ~~2019~~2020
Expected volatility¹	~~16.88~~	24.33	%
Expected dividends²	~~3.24~~	4.75	%
Expected term (in years)³	~~6.50~~	6.50
Risk-free rate⁴	~~1.83~~	0.72	%

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

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

	4
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.

	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

	June 30, 2020
	Number of Shares		Weighted Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Nonvested as of January 1, 2020		4,000	$	36.00	$	101
Issued		22,268		25.34	562
Vested		—		—
Nonvested at June 30, 2020		26,268	$	28.78	$	663

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

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

			Fair Value Measurements at June 30, 2020 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	9,037	$	-	$	9,037	$	-
Mortgage-backed securities/CMOs		58,402		-		58,402		-
Municipal bonds		35,333		-		35,333		-
Total securities available for sale	$	102,772	$	-	$	102,772	$	-

			Fair Value Measurements at December 31, 2019 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Government agencies	$	14,952	$	-	$	14,952	$	-
Corporate bonds		7,469		-		7,469		-
Mortgage-backed securities/CMOs		71,732		-		71,732		-
Municipal bonds		19,888		-		19,888		-
Total securities available for sale	$	114,041	$	-	$	114,041	$	-

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

Liabilities
Demand deposits and interest-bearing transaction, money market, and savings accounts	$	431,526	$	-	$	431,526	$	-	$	431,526
Certificates of deposit		121,993		-		122,730		-		122,730
Accrued interest payable		317		-		317		-		317

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

Liabilities
Demand deposits and interest-bearing transaction and money market accounts	$	464,002	$	-	$	464,002	$	-	$	464,002
Certificates of deposit		108,531		-		108,323		-		108,323
Accrued interest payable		243		-		243		-		243


●	~~VNB Investment Services~~-•	Sturman Wealth Advisors – Sturman Wealth Advisors, formerly known as 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.~~2019.


●	•	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